Rev. Rul. 2007-40 — Rev. Rul. 2007-40

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Section 707.B-Transactions between partner and partnership.

26 CFR 1.707-1: Transactions between partner and partnership.

Rev. Rul. 2007-40

ISSUE

Is a transfer of partnership property to a partner in satisfaction of a guaranteed
payment under section 707(c) a sale or exchange under section 1001, or a distribution
under section 731?
FACTS
Partnership
purchased Blackacre for $500x. A, a partner in Partnership, is
entitled to a guaranteed payment under section 707(c) of $800x. Subsequently, when
the fair market value of Blackacre is $800x and Partnership's adjusted basis in
Blackacre is $500x, Partnership transfers Blackacre to A in satisfaction of the
guaranteed payment to A.

LAW AND ANALYSIS
Section 731(b) provides that no gain or loss shall be recognized to a partnership
on a distribution to a partner of property, including money.

Section 707(c) provides that, to the extent determined without regard to the
income of the partnership, payments to a partner for services or for the use of capital
are considered as made to one who is not a member of the partnership, but only for the
purposes of § 61(a) (relating to gross income) and, subject to § 263, for purposes of
§ 162(a) (relating to trade or business expenses).
Section 61(a)(3) provides the general ru le that gross income includes gains
derived from dealings in property. In addition, section 1001(a) provides that the gain
from the sale or other disposition of property shall be the excess of the amount realized
over the adjusted basis provided in section 1011 for determining gain, and the loss shall
be the excess of the adjusted basis over the amount realized.
Section 1001(b) further provides, in part, that the amount realized from the sale
or other disposition of property shall be the sum of any money received plus the fair
market value of the property (other than money) received.
A taxpayer that conveys appreciated or depr eciated property in satisfaction of an
obligation, or in exchange for the performance of services, recognizes gain or loss equal
to the difference between the basis in the distributed property and the property's fair
market value. See
, e.g., International Freighting Corp., Inc. v. Commissioner, 135 F.2d
310 (2d Cir. 1943), United States v. General Shoe Corp., 282 F.2d 9 (6th Cir. 1960).
A transfer of partnership property in sati sfaction of a partnership's obligation to
make a guaranteed payment under section 707(c) is a sale or exchange under section
1001. Because the transfer is a sale or exchange under section 1001, it is not a
distribution within the meaning of section 731. Accordingly, the nonrecognition rule in

section 731(b) does not apply to the transfer.
Partnership realizes a $300x gain when Partnership transfers Blackacre in
satisfaction of its section 707(c) guaranteed payment to A, the difference between the
adjusted basis of the property ($500x) to the partnership and the property's fair market
value ($800x).
HOLDING
A transfer of partnership property to a partner in satisfaction of a guaranteed
payment under section 707(c) is a sale or exchange under section 1001, and not a
distribution under section 731.
DRAFTING INFORMATION
The principal author of this revenue ruling is Jason T. Smyczek of the Office of
the Associate Chief Counsel (Passthroughs and Special Industries). For further
information regarding this revenue ruling contact Mr. Smyczek at (202) 622-3050 (not a
toll free call).