A Financial Analysis of Disguised Sales of Partnership Interests

Abstract

This article examines the issues that arise in identifying disguised sales of partnership interests, and it explores whether a financial analysis can help in distinguishing disguised sales from recapitalizations. The article examines law that considers both property and financial transactions that raise disguised-sale considerations. It shows that when property is part of a transaction existing case law and rulings provide helpful guidance for determining whether the transaction might be recast as a disguised sale of a partnership interest. The article also shows that, by contrast, existing authority proves mostly unhelpful in determining whether finance transactions are disguised sales of a partnership interest. The article presents a financial analysis that illustrates the difficulty of identifying disguised sales but also shows how a sale of an interest differs from a recapitalization. The analysis provides a general framework for considering the question of disguised sales of partnership interests, but it does not appear to provide a definitive model for analyzing all financing transactions that might be recast as disguised sales of interests in partnerships.

Keywords: section 1031, drop-and-swap, disguised sale of partnership interest