United States: Treasury Issues Notice Of Upcoming Regulations Pertaining To Transfers Of Certain Property To Partnerships With Foreign Related Partners

Last Updated: August 20 2015
Article by Kristin Konschnik, Mitchell R. Kops and Eric Roose

On 6 August 2015, the US Department of the Treasury issued Notice 2015-54 (the 'Notice') outlining its intent to issue regulations under Internal Revenue Code ('IRC') Section 721(c). These new regulations are designed to ensure that when a US person transfers certain appreciated property to a partnership with foreign partners related to the US transferor, income or gain attributable to that will be allocated to the US transferor rather than to the foreign partner who may not be subject to any US tax.

By promulgating such regulations, Treasury is attempting to, in effect, replicate the effects of IRC Section 367 (which prevents US persons from avoiding US tax by transferring appreciated property to foreign corporations) in a partnership context. IRC Section 721(a) provides that a contribution of property to a partnership, in exchange for an ownership interest in such partnership, is a tax-free transaction. However, Section 721(c) reserves the right of Treasury to provide regulations to nullify tax-free treatment in certain transactions involving partnerships with non-US partners.

Broadly, the new regulations would make IRC Section 721(a) non-recognition treatment inapplicable in cases where:

  1. a US transferor contributes certain BIG property (referred to as '721(c) Property,' described below) with a combined built-in gain in excess of $1 million,
  2. to a partnership in which (i) a foreign partner related to the US transferor holds a direct or indirect interest in the partnership, and (ii) the US transferor and any related parties (whether domestic or foreign) hold more than a 50% ownership interest in the partnership (a '721(c) Partnership'), and
  3. unless the 721(c) Partnership follows a specific gain allocation procedure (the "Gain Deferral Method," described below).

721(c) Property is any type of BIG property except (i) cash equivalents, (ii) securities (see footnote 1), and (iii) any tangible BIG property with a built-in gain of $20,000 or less. By excluding securities from the definition of 721(c) Property, Treasury is clearly targeting the contribution of other types of assets—namely interests in intellectual property, real estate, and highly-appreciated tangible assets.

To apply the Gain Deferral Method, the 721(c) Partnership must do the following:

  1. The partnership must adopt the remedial allocation method under the IRC Section 704(c) regulations with respect to all 721(c) Property contributed to the partnership under the same 'plan' (i.e., in the same or related transactions).
  2. After applying (i) above, during any year in which there is remaining built-in gain with respect to an item of 721(c) property, the partnership must allocate each partner's distributive share of income under IRC Section 704(b) with respect to the 721(c) Property in the same proportion.
  3. Certain new reporting requirements must be satisfied. (see footnote 2)
  4. The US transferor must recognize built-in gain with respect to his contributed 721(c) property upon the occurrence of an 'acceleration event'—essentially, any transaction that would otherwise disrupt Treasury's intended application of the Gain Deferral Method.
  5. The Gain Deferral Method must be adopted with respect to any subsequently contributed 721(c) Property by the US transferor (and any other related US transferors) for 5 years following the first contribution of 721(c) Property.

Importantly, the new regulations would also apply to so-called 'tiered' partnership structures where, for example, a US transferor contributes an interest in a partnership that is holding BIG property ('P1') to newly-formed partnership ('P2'). The Notices makes clear that Treasury would 'look through' P1 and therefore treat the US transferor as directly contributing the BIG property to P2. As a result, assuming this transaction met the other criteria for inclusion under the new regulations, P2 would need to follow the Gain Deferral Method in order for the US transferor to avoid gain recognition.

The new regulations, once approved and finalized, would be effective as to any transfers occurring on or after 6 August 2015, and to any transfers occurring before 6 August 2015, resulting from an entity-classification election filed on or after 6 August 2015, and effective on or before 6 August 2015.

The new regulations described in the Notice represent a bold step by Treasury to combat the prevalent practice of shifting built-in gains from US transferors to related non-US taxpayers who are not subject to US tax. For taxpayers who may be impacted by the new regulations, careful and intricate tax planning by highly-qualified US tax counsel will be required to ensure that gains to US transferors are not triggered or accelerated.


1. As defined in IRC Section 475(c)(2), to include: stock, interests in publicly traded partnerships or trusts, debt instruments, notional principal contracts, and many types of derivatives and hedges.

2. These requirements are detailed in the Notice and will include, among other things, additional reporting under Schedule O of Form 8865, Return of US Persons With Respect to Certain Foreign Partnerships.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Kristin Konschnik
Mitchell R. Kops
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.