IRS RELEASES TEMPORARY REGS IN ORDER TO OVERRIDE NONRECOGNITION RULES RELATED TO CONTRIBUTIONS OF §721(C) PROPERTY TO PARTNERSHIPS WITH FOREIGN PARTNERS

01-23-2017

On January 19, 2017, the IRS finally released temporary regulations (“TD 9814 Regs”), first brought to the public’s attention in Notice 2015-54 (Aug. 6, 2015), which override the §721(a) nonrecognition of gain rules for contributions of §721(c) appreciated property to a partnership, in exchange for an interest in such partnership, if the partnership has certain “related” foreign partners (partnerships may have cause to breathe easy, however, as the TD 9814 Regs define "related" as the U.S. transferor and foreign partner(s), together, having an 80% or more interest in the partnership's capital, profits, deductions, or losses, as opposed to the 50% threshold originally proposed in Notice 2015-54).

Taxpayers have frequently sought to contribute §721(c) appreciated property to partnerships with foreign partners in order to effectively allocate the built-up gain from, or income stemming from, such appreciated property to the foreign partners who are not subject to U.S. income tax.  The Service, arguably, does in fact already have tools to combat such practices: (i) §704(c) of the Code is used to prevent the shifting of “tax items” among partners; and (ii) §482 of the Code gives the Service broad authority to make allocations that properly reflect the economics of a controlled transaction.  Taxpayers, however, by utilizing a §704(c) method other than the remedial method and/or valuation techniques that are likely inconsistent with the arm's-length standard, have purported to shift appreciated gain and income from appreciated property in a manner that is in fact consistent with Code §§ 704(b), 704(c), and 482.

The TD 9814 Regs, consequently, propose to override nonrecognition treatment on contributions of appreciated property to partnerships (i) with related foreign partners; and (ii) with substantial related-party ownership, unless, however, “certain requirements are satisfied” (e.g., the Gain Deferral Method is used, the de minimis $1mm exception, as it relates to the sum of all property with built-in gain that is contributed to the partnership during the year, applies, or another proposed exception is met).  With the announcement of these rules, the IRS clearly intends for the Code to treat contributions of appreciated property to a partnership in a manner similar to how the Code treats contributions of appreciated property to a foreign corporation (e.g., Code §367).  

​And, as always, before the adoption of these temporary regulations the IRS will accept and consider timely submissions of comments and concerns that are related to the TD 9814 Regs.