Update: Transfer of Property to Partnerships with Foreign Partners
In Notice 2015-54, the IRS announced that they are going to issue regulations under Section 721(c) to ensure that when a U.S. person transfers certain property to a partnership (domestic or foreign) that has foreign partners related to the U.S. person, income or gain attributable to the property will be taken into account by the U.S. person either immediately or periodically. The IRS also intends to issue regulations under Section 482 and 6662 applicable to controlled transactions involving partnerships to ensure appropriate valuation of such transactions.
Code Section 721(a) provides a general rule that no gain or loss is recognized to a partnership or to any of its partners in the case of a contribution to the partnership in exchange for an interest in the partnership. Before their repeal by the Taxpayer Relief Act of 1997, Code Section 1491 through 1494 placed an excise tax on certain transfers of appreciated property by a U.S. person to a foreign partnership. This excise tax rate was generally 35% of the amount of inherent gain on the property.
Congress recognized that taxpayers could use a partnership to shift gain to a foreign person, and the 1997 Act allowed Section 721(c) to override the application of the nonrecognition provision of Section 721(a). Code Section 721(c) states that the Secretary may provide regulations that subsection (a) shall not apply to gain realized on the transfer of property to a partnership if such gain, when recognized, will be includible in the gross income of a person other than a United States person. The same Act enacted Code Section 367(d), which provides the Secretary regulatory authority to apply the rules of Section 367(d)(3) to transfers of intangible property to partnerships in circumstances consistent with Section 367(d). Section 367(d)(3) states that the Secretary may provide regulations under paragraph (2) that also apply to the transfer of intangible property by a United States person to partnership in circumstances consistent with the purposes of this subsection. Section 367(d) applies to the transfer of intangible property, but only to foreign corporations. The IRS intends to issue regulations for Section 721(c) describing the additional reporting requirements for a U.S. transferor for each taxable year that it applies.
The IRS also intends to issue regulations under Section 482, which states that in any case of two or more organization, trades or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, or allowances between or among such organizations, trades or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent the evasion or taxes or clearly reflect the income of any of such organizations, trades or businesses. In the case of any transfer (or license) of intangible property, the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.
Regulations already provide that the IRS may make allocations between or among the members of a controlled group if one of the taxpayers has not reported its true taxable income. The arm’s length standard is applied in every case to make sure that the results of the transaction are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances. The IRS and the Treasury Department intend to provide specified methods for controlled transaction based on the specific methods provided in Reg. Section 1.482-7(g).
The Treasury and the IRS are also considering issuing regulations under Reg. Section 1.6662-6(d) to require additional documentation for certain controlled transactions involving partnerships. They may require information such as documentation of projected returns for property contributed to a partnership and projected partnership allocations.
Author: Sara Palovick, CPA | [email protected]
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