Proposed Regulations on Disguised Payments for Services Issued Last Summer by Treasury Still Attracting Attention and Concern From Service Partners, Including Private Equity and Funds Managers (June 21, 2016)

Last Summer the Service issued a set of proposed regulations with respect to Section 707(a)(2)(A). This provision involves an arrangement where: (i) involving a partner who provides services (or transfers property) to a partnership; (ii) there is a related direct or indirect allocation and distribution to that partner; and (iii) the performance of the services (or transfer of property) and the allocation and distribution, when viewed together, are in substance compensation for the performance of services (or payment made in exchange for the property) as if the partner was acting other than in his capacity as a party. In such case the distribution will be treated as compensation income to the partner-service provider. The purpose of the disguised services rule is to prevent partners from converting ordinary income into capital gains. As to the partnership, the compensation payments may be required to be capitalized.