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Tax Law

Property Transfers to Partnerships; Controlled Transactions Tied to Partnerships

Notice 2015-54, 2015 IRB LEXIS 335 (Aug. 6, 2015), announces the future issuance of regulations under IRC Section 721(c) to ensure that, when certain property is transferred by a U.S. person to a partnership with foreign partners that are related to the transferor, the transferor will take into account, either immediately or periodically, the income or gain that is attributable to the property. [Notice 2015-54, 2015 IRB LEXIS 335]. In addition, the notice announces the government’s intention to issue regulations under IRC Sections 482 and 6662 that will apply to controlled transactions that involve partnerships to ensure such transactions are appropriately valued. [Id].

Section 4 of the notice describes regulations to be issued that will address certain transfers of property to partnerships with related foreign partners.

Section 4.01 of the notice provides definitions for the following terms: 

  • U.S. Transferor
  • Built-in Gain
  • Section 721(c) Property
  • Excluded Property
  • Section 721(c) Partnership
  • Related Person
  • Related Foreign Person
  • Direct or Indirect Partner
  • Gain Deferral Method
  • Acceleration Event

Section 4.02 of the notice provides the general rule for current gain recognition. As discussed in the notice, under IRC Section 721(a), there is no gain or loss recognition to a partnership or to any of its partners when property is contributed to the partnership in exchange for an interest in the partnership. [Id]. Section 4.02 of the notice states that the regulations will provide that IRC Section 721(a) “will not apply when a U.S. Transferor contributes an item of Section 721(c) Property (or portion thereof) to a Section 721(c) Partnership, unless the Gain Deferral Method . . . is applied with respect to the Section 721(c) Property”. [Id].

The notice further states that included in the regulations will be a de minimis rule. The de minimis rule will provide that IRC Section 721(a) (if otherwise applicable) will continue to apply if during the U.S. Transferor’s taxable year the following apply: First, the sum of the Built-in-Gain with respect to all Section 721(c) Property contributed in that year to the Section 721(c) Partnership by the U.S. Transferor and all other U.S. Transferors that are related persons does not exceed $1 million. Second, the Section 721(c) Partnership is not applying the Gain Deferral Method with respect to a prior contribution of Section 721(c) Property by the U.S. Transferor or another U.S. Transferor that is a related person. [Id]. The notice states that the de minimis rule will apply regardless of whether the requirements of the Gain Deferral Method are satisfied. [Id].

The five requirements for applying the Gain Deferral Method are described in Section 4.03 of the notice. [See Section 4.03 of the notice].

Section 4.04 of the notice states that the rules in the notice will apply to transactions involving tiered partnerships in a manner consistent with the purpose of the rules, which are found in Section 3 of the notice. [Id].

Section 4.05 of the notice provides rules with respect to an Acceleration Event, which is any transaction that would either reduce the amount of Built-in Gain that would be recognized by a U.S. Transferor under the Gain Deferral Method if the transaction had not occurred or any transaction that could defer the recognition of the Built-in Gain. [Id].

Section 4.06 of the notice describes the reporting requirements for the U.S. Transferor of Section 721(c) property. The notice states: “If a Section 721(c) partnership is a foreign partnership, a U.S. Transferor (or a domestic partnership in which a U.S. Transferor is a Direct or Indirect Partner) must fulfill any reporting requirements imposed under sections 6038, 6038B, and 6046A and the existing regulations thereunder with respect to the contribution of the Section 721(c) property to the Section 721(c) Partnership.” [Id]. The notice further states that for taxable years beginning in 2015, the Service intends to modify Schedule O, Transfer of Property to a Foreign Partnership, of Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships) or its instructions to require supplemental information for contributions of Section 721(c) property to Section 721(c) partnerships. [Id]. The notice also notes that regulations detailing additional reporting requirements for a U.S. Transferor for each taxable year in which the Gain Deferral Method applies will also be issued. [Id].

Examples of application of the rules are provided in Section 4.07 of the notice.

An anti-abuse rule is provided in Section 4.08 of the notice. Under the rule, if a U.S. Transferor engages in a transaction or series of transactions to avoid the rules in the notice, the transaction or series of transactions may be disregarded or “the arrangement may be recharacterized (including disregarding an intermediate entity) in accordance with its substance.” [Id].

Section 5 of the notice states that regulations regarding controlled transactions involving partnerships will be issued. [Id]. Section 5.01 provides that regulations will be issued on the application, to controlled transactions involving partnerships, of certain rules in Section 1.482-7 that currently apply to cost sharing arrangements. [Id]. Specifically, regulations will be issued that provide specific methods for such controlled transactions based on the specified methods in Section1.482-7(g). [Id]. In addition, regulations will be issued that will provide periodic adjustment rules based on the principles of Section 1.482-7(i)(6) for controlled transactions involving partnerships. [Id].

Section 5.02 discusses the application of current law to transactions described in the notice. Section 5.02 states that Section 482 and related penalties are applicable to controlled transactions involving partnerships, including the transactions described in the notice. [Id]. In addition, Section 5.02 provides that the “principles, methods, comparability, and reliability considerations” in Section 1.482-7, as adjusted for the differences between controlled transactions and cost sharing arrangements, are relevant to controlled transactions for purposes of the best method analysis under Section 1.482-1(c). Section 5.02 discusses the application of other existing rules to the transactions described in the notice. [See Section 5.02 of the notice].

Section 6 of the notice discusses the effective dates of regulations described in the notice. [See Section 6 of the notice].