Real Estate & Passthrough Finance Techniques Corner: New Taxpayer Favorable LTRs Allow Gain on Sale of Partnership Assets to be Offset by Disallowed Loss on Earlier Sale of Partnership Interest

On Mar 25, 2016, the IRS published three substantially identical private letter rulings (LTR) that address the application of Code Sec. 267(d) following a related-party sale of a partnership interest in which a loss is disallowed by Code Sec. 707(b)(1)(A). Without revealing any client confidences, this column will discuss the LTRs and the policy considerations that led the IRS to rule favorably. Different provisions of subchapter K of the Code adopt either an aggregate or entity theory of partnership taxation. While it is clear that the flush language of Code Sec. 707(b)(1) and Code Sec. 267(d) must apply in some manner to gain recognized after the disallowed loss, it is unclear whether these provisions should be applied based on the aggregate theory or entity theory of partnership taxation. The authors applaud the IRS for appropriately applying the aggregate theory of taxation in the LTRs and allowing gains on sale of the partnership's assets to be offset by loss disallowed on the earlier sale of the partnership interest.