Proposed Rules Under Section 707 Governing Disguised Compensation For Services

The proposed Department of Treasury regulations under IRC section 707(a)(2)(A) set forth standards to determine when a payment arrangement to a partner shall be treated as disguised compensation. Section 707(a) generally governs payments to partners who render services to a partnership other than in a partner capacity. Additionally, the rules will affect standards under section 704(b) to reflect the principle that a payment must be subject to significant entrepreneurial risk in order to be considered a distributive share. Section 704(b) most importantly provides for pass-through treatment of capital gains and other tax-favored items from the partnership to its partners. As a result of the foregoing, the rules include changes to the scope of section 707(c) governing guaranteed payments. These rules would become effective on the date the final regulations are published.