1. (a) Partner not acting in capacity as partner

   1. (1) In general If a partner engages in a transaction with a partnership other than in his capacity as a member of such partnership, the transaction shall, except as otherwise provided in this section, be considered as occurring between the partnership and one who is not a partner.

   2. (2) Treatment of payments to partners for property or services Except as provided by the Secretary—

      1. (A) Treatment of certain services and transfers of property If—

         1. (i) a partner performs services for a partnership or transfers property to a partnership,
         2. (ii) there is a related direct or indirect allocation and distribution to such partner, and
         3. (iii) the performance of such services (or such transfer) and the allocation and distribution, when viewed together, are properly characterized as a transaction occurring between the partnership and a partner acting other than in his capacity as a member of the partnership,

         such allocation and distribution shall be treated as a transaction described in paragraph (1).

      2. (B) Treatment of certain property transfers If—

         1. (i) there is a direct or indirect transfer of money or other property by a partner to a partnership,
         2. (ii) there is a related direct or indirect transfer of money or other property by the partnership to such partner (or another partner), and
         3. (iii) the transfers described in clauses (i) and (ii), when viewed together, are properly characterized as a sale or exchange of property,

         such transfers shall be treated either as a transaction described in paragraph (1) or as a transaction between 2 or more partners acting other than in their capacity as members of the partnership.

2. (b) Certain sales or exchanges of property with respect to controlled partnerships

   1. (1) Losses disallowed No deduction shall be allowed in respect of losses from sales or exchanges of property (other than an interest in the partnership), directly or indirectly, between—

      1. (A) a partnership and a person owning, directly or indirectly, more than 50 percent of the capital interest, or the profits interest, in such partnership, or
      2. (B) two partnerships in which the same persons own, directly or indirectly, more than 50 percent of the capital interests or profits interests.

      In the case of a subsequent sale or exchange by a transferee described in this paragraph, section 267(d) shall be applicable as if the loss were disallowed under section 267(a)(1). For purposes of section 267(a)(2), partnerships described in subparagraph (B) of this paragraph shall be treated as persons specified in section 267(b).

   2. (2) Gains treated as ordinary income In the case of a sale or exchange, directly or indirectly, of property, which in the hands of the transferee, is property other than a capital asset as defined in section 1221—

      1. (A) between a partnership and a person owning, directly or indirectly, more than 50 percent of the capital interest, or profits interest, in such partnership, or
      2. (B) between two partnerships in which the same persons own, directly or indirectly, more than 50 percent of the capital interests or profits interests,

      any gain recognized shall be considered as ordinary income.

   3. (3) Ownership of a capital or profits interest For purposes of paragraphs (1) and (2) of this subsection, the ownership of a capital or profits interest in a partnership shall be determined in accordance with the rules for constructive ownership of stock provided in section 267(c) other than paragraph (3) of such section.
3. (c) Guaranteed payments To the extent determined without regard to the income of the partnership, payments to a partner for services or the use of capital shall be considered as made to one who is not a member of the partnership, but only for the purposes of section 61(a) (relating to gross income) and, subject to section 263, for purposes of section 162(a) (relating to trade or business expenses).

(Aug. 16, 1954, ch. 736, 68A Stat. 243; Pub. L. 94–455, title II, § 213(b)(3), title XIX, § 1901(b)(3)(C), Oct. 4, 1976, 90 Stat. 1547, 1792; Pub. L. 98–369, div. A, title I, § 73(a), July 18, 1984, 98 Stat. 591; Pub. L. 99–514, title VI, § 642(a)(2), title XVIII, §§ 1805(b), 1812(c)(3)(A), (B), Oct. 22, 1986, 100 Stat. 2284, 2810, 2834; Pub. L. 119–21, title VII, § 70602(a), July 4, 2025, 139 Stat. 284.)

Editorial Notes

Amendments

2025—Subsec. (a)(2). Pub. L. 119–21 substituted “Except as provided” for “Under regulations prescribed” in introductory provisions.

1986—Subsec. (a)(2)(B)(iii). Pub. L. 99–514, § 1805(b), substituted “sale or exchange of property” for “sale of property”.

Subsec. (b)(1). Pub. L. 99–514, § 1812(c)(3)(B), inserted at end “For purposes of section 267(a)(2), partnerships described in subparagraph (B) of this paragraph shall be treated as persons specified in section 267(b).”

Subsec. (b)(1)(A). Pub. L. 99–514, § 1812(c)(3)(A), substituted “a person” for “a partner”.

Subsec. (b)(2)(A). Pub. L. 99–514, § 1812(c)(3)(A), substituted “a person” for “a partner”.

Pub. L. 99–514, § 642(a)(2), substituted “50 percent” for “80 percent”.

Subsec. (b)(2)(B). Pub. L. 99–514, § 642(a)(2), substituted “50 percent” for “80 percent”.

1984—Subsec. (a). Pub. L. 98–369 designated existing provisions as par. (1) and added par. (2).

1976—Subsec. (b)(2). Pub. L. 94–455, § 1901(b)(3)(C), substituted “as ordinary income” for “as gain from the sale or exchange of property other than a capital asset”.

Subsec. (c). Pub. L. 94–455, § 213(b)(3), substituted “and, subject to section 263, for purposes of section 162(a)” for “and section 162(a)”.

Statutory Notes and Related Subsidiaries

Effective Date of 2025 Amendment

Pub. L. 119–21, title VII, § 70602(b), July 4, 2025, 139 Stat. 284, provided that:

“The amendment made by this section [amending this section] shall apply to services performed, and property transferred, after the date of the enactment of this Act [

July 4, 2025].”

Effective Date of 1986 Amendment

Amendment by section 642(a)(2) of Pub. L. 99–514 applicable to sales after Oct. 22, 1986, in taxable years ending after such date, but not applicable to sales made after Aug. 14, 1986, which are made pursuant to a binding contract in effect on Aug. 14, 1986, and at all times thereafter, see section 642(c) of Pub. L. 99–514, set out as a note under section 1239 of this title.

Amendment by sections 1805(b) and 1812(c)(3)(B) of Pub. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title.

Pub. L. 99–514, title XVIII, § 1812(c)(3)(A), Oct. 22, 1986, 100 Stat. 2834, provided that the amendment made by that section is effective with respect to sales or exchanges after Sept. 27, 1985.

Effective Date of 1984 Amendment

Pub. L. 98–369, div. A, title I, § 73(b), July 18, 1984, 98 Stat. 592, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that:

1. “(1) In general.— The amendment made by subsection (a) [amending this section] shall apply—

   1. “(A) in the case of arrangements described in section 707(a)(2)(A) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as amended by subsection (a)), to services performed or property transferred after February 29, 1984, and
   2. “(B) in the case of transfers described in section 707(a)(2)(B) of such Code (as so amended), to property transferred after March 31, 1984.
2. “(2) Binding contract exception.— The amendment made by subsection (a) shall not apply to a transfer of property described in section 707(a)(2)(B)(i) if such transfer is pursuant to a binding contract in effect on March 31, 1984, and at all times thereafter before the transfer.

3. “(3) Exception for certain transfers.— The amendment made by subsection (a) shall not apply to a transfer of property described in section 707(a)(2)(B)(i) that is made before December 31, 1984, if—

   1. “(A) such transfer was proposed in a written private offering memorandum circulated before February 28, 1984;
   2. “(B) the out-of-pocket costs incurred with respect to such offering exceeded $250,000 as of February 28, 1984;
   3. “(C) the encumbrances placed on such property in anticipation of such transfer all constitute obligations for which neither the partnership nor any partner is liable; and
   4. “(D) the transferor of such property is the sole general partner of the partnership.”

Effective Date of 1976 Amendment

Amendment by section 213(b)(3) of Pub. L. 94–455 applicable in the case of partnership taxable years beginning after Dec. 31, 1975, see section 213(f)(1) of Pub. L. 94–455, set out as an Effective Date note under section 709 of this title.

Amendment by section 1901(b)(3)(C) of Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title.

Rule of Construction

Pub. L. 119–21, title VII, § 70602(c), July 4, 2025, 139 Stat. 284, provided that:

“Nothing in this section [amending this section and enacting provisions set out as a note above], or the amendments made by this section, shall be construed to create any inference with respect to the proper treatment under section 707(a) of the Internal Revenue Code of 1986 with respect to payments from a partnership to a partner for services performed, or property transferred, on or before the date of the enactment of this Act [

July 4, 2025].”

Plan Amendments Not Required Until January 1, 1989

For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.