United States: Temporary And Final Rules Focus On Transfers Of Property By US Persons To Partnerships With Related Foreign Partners

The IRS and Treasury Department recently issued temporary regulations (T.D. 9814) and, by cross-reference, proposed regulations (REG-127203-15), concerning certain transfers of appreciated property by U.S. persons to partnerships having one or more foreign partners related to the transferor.

The temporary regulations generally adopt, with some modifications, the rules that were described in Notice 2015-54, which announced the government's intention to issue regulations under Section 721(c) to ensure that when a U.S. person transfers certain property to a partnership that has foreign partners, income or gain attributable to the property would be taken into account by the transferor either immediately or periodically. The notice also announced forthcoming amendments to Treas. Reg. Sec. 1.482-7 regarding the application of certain rules (currently applicable to cost sharing arrangements) to controlled transactions involving partnerships.  The new guidance does not include guidance under Section 482.

This guidance may significantly affect certain taxpayers considering transfers of appreciated assets, particularly intangibles, to partnerships (foreign or domestic) with foreign related partners. Taxpayers considering such transfers should carefully evaluate the applicability and impact of these temporary regulations.

Background of Notice 2015-54

Under Notice 2015-54, Section 721(a) will not apply, and immediate gain recognition is required, when a U.S. person (a U.S. Transferor) transfers certain property (defined in the notice as Section 721(c) Property) to a foreign or domestic partnership (a Section 721(c) Partnership), unless the requirements of a new method concerning partnership allocations (the Gain Deferral Method) are met. For a summary of the notice, click here.

Though the temporary regulations generally incorporate the rules in the notice, there are several significant changes that are noteworthy and require a taxpayer to carefully consider the regulations' impact.

Significant changes in the temporary regulations

Regarding ownership thresholds, under the temporary regulations, the definition of a Section 721(c) partnership now contains a higher ownership threshold (80% or more) than in the notice (more than 50%). Under the temporary regulations, a partnership is a Section 721(c) Partnership if there is a contribution of Section 721(c) Property to the partnership and, after the contribution and all transactions related to the contribution (1) a related foreign person with respect to the U.S. transferor is a direct or indirect partner in the partnership, and (2) the U.S. transferor and related persons own 80 percent or more of the interests in partnership capital, profits, deductions or losses.

Regarding technical terminations, under the temporary regulations, a technical termination of a partnership under Section 708(b)(1)(B) will not cause a partnership that is not a Section 721(c) Partnership to become a Section 721(c) Partnership. Similarly, a recapitalization, or other change in form, identity or place of organization, will not cause a partnership to become a Section 721(c) Partnership.

For purposes of determining if a lower tier partnership (to which an upper-tier partnership that has a U.S. transferor as a direct or indirect partner contributes property) is a Section 721(c) Partnership, the U.S. transferor will be treated as contributing to the lower-tier partnership its share of the property actually contributed by the upper-tier partnership to the lower-tier partnership. Absent application of the gain deferral method by the lower-tier partnership to the entire property, and by the upper-tier partnership to the partnership interest in the lower-tier partnership, the upper-tier partnership will recognize the entire built-in gain in the Section 721(c).

Gain deferral method

The temporary regulations include numerous changes to the gain deferral method, with a notable one being that should be applied on a property-by-property basis. Accordingly, a Section 721(c) Partnership may choose not to apply the gain deferral method to all of its Section 721(c) Property. Importantly, the requirements for applying the gain deferral method are modified in the regulations as follows:

  1. The Section 721(c) Partnership adopts the remedial allocation method and allocates Section 704(b) items of income, gain, loss and deduction with respect to the Section 721(c) Property in a manner that satisfies the consistent allocation method
  2. The U.S. transferor recognizes gain equal to the remaining built-in gain with respect to the Section 721(c) Property upon an acceleration event or an amount of gain equal to a portion of the remaining built-in gain upon a partial acceleration event or certain transfers to foreign corporations described in Section 367
  3. Procedural and reporting requirements are satisfied
  4. The U.S. transferor extends the period of limitations on assessment of tax
  5. The rules for tiered partnerships are satisfied if either the Section 721(c) Property is an interest in a partnership or the Section 721(c) Property is described in a partnership look-through rule in the temporary regulations

The temporary regulations address comments concerning application of the consistent allocation method. For example, certain regulatory allocations are deemed to satisfy the consistent allocation method, as long as the allocation in question is an allocation of income, or gain to the U.S. transferor or an allocation of deduction or loss to a partner other than the U.S. transferor.

Regarding the extension of the period of limitations, in addition to the U.S. transferor being required to extend the period of limitations on all items related to property subject to the gain deferral method through the end of the eighth full tax year following the contribution, a U.S. transferor also must extend the period of limitations for gain recognized under Section 721(c) with respect to any Section 721(c) Property contributed to the Section 721(c) Partnership through the end of the fifth tax year following the contribution if the property is contributed within five full years after a gain deferral contribution (defined in the temporary regulations as a contribution of Section 721(c) Property to a Section 721(c) Partnership with respect to which the gain is deferred under the gain deferral method).

The temporary regulations include specific provisions for applying the remedial allocation method in the case of property giving rise to effectively connected income and intangibles described in Section 197(f)(9) (i.e., anti-churning property).

The temporary regulations also address acceleration of the built-in gain on Section 721(c) Property. Failure to comply with one of the requirements of the gain deferral method as applied to a Section 721(c) Property is an acceleration event only with respect to that property (reflecting a property-by-property application). Acceleration will not occur solely as a result of a failure to comply with a procedural or reporting requirement so long as the failure is not willful and relief is sought. The temporary regulations set forth various exceptions to acceleration, which exceptions relate to events (e.g., certain incorporations of a Section 721(c) Partnership or certain distributions of Section 721(c) Property) that cause the gain deferral method to no longer apply, or where a successor event (e.g., a technical termination of a Section 721(c) Partnership, a domestic corporation becomes a successor U.S. transferor or a partnership becomes a successor Section 721(c) Partnership) allows for the continued application of the gain deferral method. Additionally, the regulations provide for partial acceleration events.

The temporary regulations also address the application of the gain deferral method to tiered partnership situations, employing two general principles in applying the gain deferral method to tiered partnerships. First, if the Section 721(c) Property is an interest in a partnership, the contribution of that partnership interest, and not the indirect contribution of the underlying property of the lower-tier partnership, to a Section 721(c) Partnership is subject to Section 721(c), and the gain deferral method applies to the contribution of the interest. Second, the gain deferral method must also be adopted at all levels in the ownership chain.

The temporary regulations provide more detailed reporting rules than in the notice, which had described regulations that would be issued requiring reporting of a gain deferral contribution and annual reporting with respect to the Section 721(c) Property to which the gain deferral method applies. Notably, with regard to reporting and procedural requirements for the year of the gain deferral contribution, the temporary regulations implement rules described in the notice in a manner consistent with the approach in regulations under Sections 367(a) and 6038B that were issued in 2014 (T.D. 9704).

Effective date

The temporary regulations' applicability date generally relates back to the issuance of the notice, which itself was generally effective for transfers made on or after Aug. 6, 2015. The notice also applied to certain transfers made prior to that date if the transfer resulted from an entity classification election made under Treas. Reg. Sec. 301.7701-3 that was filed on or after Aug. 6, 2015, and that was effective on or before that date.  

Additionally, the new rules, including any substantive changes to the rules described in the notice, apply to contributions occurring on or after Jan. 18, 2017, or to contributions occurring before Jan. 18, 2017, resulting from an entity classification election made under Treas. Reg. Sec. 301.7701-3 that was filed on or after Jan. 18, 2017. Taxpayers may elect to apply the new rules and substantive changes to the rules described in the notice to a contribution occurring on or after the general applicability date. The temporary regulations expire on Jan. 17, 2020. These temporary regulations, having been issued and published prior to the freeze on regulations imposed by the new Trump administration, are not subject any required withdrawal or review.

Outlook

The temporary regulations reflect recognition that the notice, with its "more than 50%" test for a Section 721(c) Partnership, potentially captured an overly broad group of partnership situations. The higher level test (80%) is welcome relief. However, even the new test could include situations in which the foreign related partner's ownership is relatively small. Thus, the temporary regulations could be applicable to a fairly wide range of situations. Given the potential coverage of the guidance, it is important to evaluate in each property contribution situation whether the temporary regulations might apply.

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.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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.

Disclaimer

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.

Registration

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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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.