I Don’t Even Recognize You! Partnership Disguised Sales

Sometimes things aren’t what they seem. Take disguised sales in partnerships and other flow-through entities. A disguised sale occurs when a partner supposedly contributes property with a built-in gain to a partnership and then immediately, or a short time thereafter, receives a related distribution. The outright sale of the property would normally result in the taxation of the built-in gain while the alleged contribution and distribution are presumably tax-free. The transaction could be recharacterized as taxable on audit to avoid the apparent abuse.

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