[Federal Register Volume 82, Number 12 (Thursday, January 19, 2017)]
[Rules and Regulations]
[Pages 7582-7611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01049]



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Vol. 82

Thursday,

No. 12

January 19, 2017

Part XVIII





 Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





 Transfers of Certain Property by U.S. Persons to Partnerships With 
Related Foreign Partners; Final and Temporary Rules

  Federal Register / Vol. 82 , No. 12 / Thursday, January 19, 2017 / 
Rules and Regulations  

[[Page 7582]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9814]
RIN 1545-BM95


Transfers of Certain Property by U.S. Persons to Partnerships 
With Related Foreign Partners

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains temporary regulations that address 
transfers of appreciated property by United States persons (U.S. 
persons) to partnerships with foreign partners related to the 
transferor. The regulations override the rules providing for 
nonrecognition of gain on a contribution of property to a partnership 
in exchange for an interest in the partnership under section 721(a) of 
the Internal Revenue Code (Code) pursuant to section 721(c) unless the 
partnership adopts the remedial method and certain other requirements 
are satisfied. The document also contains regulations under sections 
197, 704, and 6038B that apply to certain transfers described in 
section 721. The regulations affect U.S. partners in domestic or 
foreign partnerships. The text of the temporary regulations also serves 
as the text of the proposed regulations set forth in the notice of 
proposed rulemaking on this subject in the Proposed Rules section of 
this issue of the Federal Register. The final regulations revise and 
add cross-references to coordinate the application of the temporary 
regulations.

DATES: Effective Date: These regulations are effective on January 18, 
2017.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.197-2T(l)(5)(i), 1.704-1T(f), 1.704-3T(g)(1), 1.721(c)-1T(e), 
1.721(c)-2T(e), 1.721(c)-3T(e), 1.721(c)-4T(d), 1.721(c)-5T(g), 
1.721(c)-6T(g), and 1.6038B-2T(j)(4)(i).

FOR FURTHER INFORMATION CONTACT: Concerning the temporary regulations, 
Ryan A. Bowen, (202) 317-6937; concerning submissions of comments or 
requests for a public hearing, Regina Johnson, (202) 317-6901 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in the regulations is 
listed with the Office of Management and Budget under control numbers 
1545-1668 and 1545-0123 in accordance with the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information 
should be sent to the Office of Management and Budget, Attn: Desk 
Officer for the Department of the Treasury, Office of Information and 
Regulatory Affairs, Washington, DC 20503, with copies to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, 
SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of 
information should be received February 21, 2017.
    The collections of information are in Sec. Sec.  1.721(c)-6T and 
1.6038B-2T. The collections of information are mandatory. The likely 
respondents are domestic corporations. Burdens associated with these 
requirements will be reflected in the burden for Form 1065, U.S. Return 
of Partnership Income, and Form 8865, Return of U.S. Persons With 
Respect to Certain Foreign Partnerships. Estimates for completing these 
forms can be located in the form instructions.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number.

Background

I. Statutory Background

    Until they were repealed as part of the Taxpayer Relief Act of 1997 
(the 1997 Act), Public Law 105-34 (111 Stat. 788), section 1131, 
sections 1491 through 1494 imposed an excise tax on certain transfers 
of appreciated property by a U.S. person to a foreign partnership, 
which generally was 35 percent of the amount of gain inherent in the 
property. Congress believed that the imposition of enhanced information 
reporting obligations (including sections 6038, 6038B, and 6046A) with 
respect to foreign partnerships would eliminate the need for sections 
1491 through 1494. Staff of the Joint Committee on Taxation, General 
Explanation of Tax Legislation Enacted in 1997, Part Two: Taxpayer 
Relief Act of 1997 (H.R. 2014) (JCS-23-97) (Dec. 17, 1997), at 314-315.
    Notwithstanding these enhanced information reporting requirements, 
the 1997 Act granted the Secretary regulatory authority in section 
721(c) to override the application of the nonrecognition provision of 
section 721(a) to gain realized on the transfer of property to a 
partnership (domestic or foreign) if the gain, when recognized, would 
be includible in the gross income of a person other than a U.S. person. 
In the 1997 Act, Congress also enacted section 367(d)(3), which 
provides the Secretary regulatory authority to apply the rules of 
section 367(d)(2) to transfers of intangible property to partnerships 
in circumstances consistent with the purposes of section 367(d). 
Regulations have never been issued pursuant to section 721(c) or 
section 367(d)(3).
    Congress enacted section 367 (and its predecessor) in order to 
prevent U.S. persons from avoiding U.S. tax by transferring appreciated 
property to foreign corporations using nonrecognition transactions. 
Staff of the Joint Committee on Taxation, General Explanation of the 
Revenue Provisions of the Deficit Reduction Act of 1984 (H.R. 4170, 
98th Congress; Pub. L. 98-369) (JCS-41-84) (Dec. 31, 1984), at 427. The 
outbound transfer of intangible property raises additional issues that 
Congress also sought to address. Specifically, section 367(d) was 
enacted to prevent U.S. persons from transferring intangibles offshore 
in order to achieve deferral of U.S. tax on the profits generated by 
the intangibles. H.R. Rep. No. 98-432, 98th Cong., 2d Sess., at 1311-15 
(1984). Under section 367(d), a U.S. person that transfers intangible 
property (within the meaning of section 936(h)(3)(B)) to a foreign 
corporation in an exchange described in section 351 or section 361 is 
treated as having sold such property in exchange for payments that are 
contingent upon the productivity, use, or disposition of such property, 
and receiving amounts that reasonably reflect the amounts that would 
have been received annually in the form of such payments over the 
useful life of the property, or, in the case of a disposition following 
the transfer (whether direct or indirect), at the time of the 
disposition. Section 367(d)(2)(A). The amounts taken into account must 
be commensurate with the income attributable to the intangible 
property. Id.
    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 of property to the partnership in exchange for an interest 
in the partnership. Because section 367 applies only to the transfer of 
property to a foreign corporation, absent regulations under section 
721(c) or section 367(d)(3), a U.S. person generally does not recognize 
gain on the contribution of appreciated property to a partnership with 
foreign partners.
    Section 704(c)(1)(A) requires partnerships to allocate income, 
gain, loss, and deduction with respect to property contributed by a 
partner to the partnership so as to take into account any variation 
between the adjusted tax

[[Page 7583]]

basis of the property and its fair market value at the time of 
contribution.

II. Regulatory Background

    Section 1.704-3(a)(1) provides that the purpose of section 704(c) 
is to prevent the shifting of tax consequences among partners with 
respect to pre-contribution gain or loss (forward section 704(c) 
layer). In addition, partnerships may, but are not required to, revalue 
partnership property pursuant to Sec.  1.704-1(b)(2)(iv)(f) or (s) upon 
the occurrence of enumerated events, such as the entry of a new partner 
by contribution, giving rise to a reverse section 704(c) layer. Section 
1.704-3(a)(6)(i) provides that the principles of Sec.  1.704-3 apply to 
allocations with respect to these reverse section 704(c) layers 
(reverse section 704(c) allocations).
    Section 704(c) allocations must be made using any reasonable method 
consistent with the purpose of section 704(c). Section 1.704-3(a)(1). 
Section 1.704-3 describes three methods of making section 704(c) 
allocations that are generally reasonable, including the remedial 
allocation method. Id. Under the remedial allocation method, a 
partnership may eliminate distortions caused by the ceiling rule (as 
described in Sec.  1.704-3(b)(1)) by making remedial allocations of 
income, gain, loss, or deduction to the noncontributing partners equal 
to the full amount of the limitation caused by the ceiling rule, and 
offsetting those allocations with remedial allocations of income, gain, 
loss, or deduction to the contributing partner. See Sec.  1.704-
3(d)(1); see also T.D. 8585 (59 FR 66724). Under Sec.  1.704-3(a)(10), 
an allocation method (or combination of methods) is not reasonable if 
the contribution of property (or event that results in reverse section 
704(c) allocations) and the corresponding allocation of tax items with 
respect to the property are made with a view to shifting the tax 
consequences of built-in gain or loss among the partners in a manner 
that substantially reduces the present value of the partners' aggregate 
tax liability. However, Sec.  1.704-3(d)(5)(ii) provides that, in 
exercising its authority under Sec.  1.704-3(a)(10), the IRS will not 
require a partnership to use the remedial allocation method.

III. Reasons for Exercising Regulatory Authority

    The Treasury Department and the IRS are aware that certain 
taxpayers purport to be able to contribute, consistently with sections 
704(b), 704(c), and 482, property to a partnership that allocates the 
income or gain from the contributed property to related foreign 
partners that are not subject to U.S. tax. Many of these taxpayers 
choose a section 704(c) method other than the remedial method or use 
valuation techniques that are inconsistent with the arm's length 
standard. In 1997, Congress recognized that taxpayers might use a 
partnership to shift gain to a foreign person and consequently enacted 
sections 721(c) and 367(d)(3). Based on the experience of the IRS with 
the taxpayer positions described above, the Treasury Department and the 
IRS have determined that it is appropriate to exercise the regulatory 
authority granted in section 721(c) to override the application of 
section 721(a) to gain realized on the transfer of property to a 
partnership (domestic or foreign) in certain circumstances in which the 
gain, when recognized, ultimately would be includible in the gross 
income of a foreign person. Although Congress also provided specific 
authority in section 367(d)(3) to address transfers of intangible 
property to partnerships, the Treasury Department and the IRS have 
concluded that acting pursuant to section 721(c) is more appropriate 
because the transactions at issue are not limited to transfers of 
intangible property.

IV. Notice 2015-54

    On August 6, 2015, the Department of the Treasury (Treasury 
Department) and the IRS issued Notice 2015-54, 2015-34 I.R.B. 210 (the 
notice), which describes regulations to be issued under section 721(c) 
that would ensure that, when a U.S. person transfers certain property 
to a partnership that has foreign partners related to the U.S. person, 
income or gain attributable to the appreciation in the property at the 
time of the contribution will be taken into account by the transferor 
either immediately or over time. Comments were received on the notice 
and will be included in the administrative record for the notice of 
proposed rulemaking on this subject in the Proposed Rules section of 
this issue of the Federal Register (REG-127203-15). The Treasury 
Department and the IRS have considered all the submitted comments. The 
significant comments are discussed in the Explanation of Provisions 
section of this preamble.
    The notice states that future regulations generally will override 
the application of section 721(a) to gain realized on the transfer of 
property to a partnership (domestic or foreign) in certain 
circumstances in which the gain, when recognized, ultimately would be 
includable in the gross income of a related foreign person. The notice 
further states that future regulations will allow for the continued 
application of section 721(a) to transfers to partnerships with related 
foreign partners when certain requirements intended to protect the U.S. 
tax base are satisfied. The notice described these requirements, in 
addition to others, as the ``gain deferral method.''
    The requirements of the gain deferral method described in the 
notice are that (i) the section 721(c) partnership adopts the remedial 
allocation method for built-in gain with respect to all section 721(c) 
property contributed to the partnership pursuant to the same plan by 
the U.S. transferor and all U.S. transferors that are related persons; 
(ii) the section 721(c) partnership makes consistent allocations of all 
section 704(b) items with respect to an item of section 721(c) property 
(the consistent allocation method); (iii) certain reporting 
requirements are satisfied; (iv) the U.S. transferor recognizes any 
remaining built-in gain with respect to section 721(c) property upon an 
acceleration event; and (v) the gain deferral method is adopted for all 
section 721(c) property subsequently contributed to the section 721(c) 
partnership by the U.S. transferor and all other U.S. transferors that 
are related persons until the earlier of two dates: the date that no 
built-in gain remains with respect to any section 721(c) property to 
which the gain deferral method first applied, or the date that is 60 
months after the date of the initial contribution of section 721(c) 
property to which the gain deferral method first applied (unified 
application requirement). See Part III of the Explanations of 
Provisions section of this preamble for the definitions of ``section 
721(c) partnership,'' ``section 721(c) property,'' ``U.S. transferor'' 
and other commonly used terms.
    The notice generally provides that the regulations will define an 
acceleration event as any transaction that either (i) would reduce the 
amount of remaining built-in gain that a U.S. transferor would 
recognize under the gain deferral method if the transaction had not 
occurred, or (ii) could defer the recognition of the built-in gain. The 
notice also describes several situations that the regulations will not 
treat as acceleration events.
    The notice states that the regulations will apply to transactions 
involving tiered partnerships in a manner that is consistent with the 
purpose of the regulations. As examples, the notice provides that the 
regulations will treat a contribution of section 721(c) property by a 
partnership (in which a U.S. transferor is a direct or indirect 
partner) to a lower-tier partnership, or a

[[Page 7584]]

contribution by a U.S. transferor of an interest in a partnership that 
owns section 721(c) property to an upper-tier partnership, as though 
the U.S. transferor contributed its share of the section 721(c) 
property directly.
    The notice provides that the regulations described therein will 
apply to contributions occurring on or after August 6, 2015, and to 
contributions occurring before August 6, 2015, resulting from an entity 
classification election made under Sec.  301.7701-3 that is filed on or 
after August 6, 2015, and that is effective on or before August 6, 
2015. The notice provides, however, that the reporting requirements 
will not apply to taxable years that end before the date of publication 
of regulations described in the notice.
    The notice also announced the intent to issue regulations under 
sections 482 and 6662 to ensure the appropriate valuation of controlled 
transactions involving partnerships. These regulations are not 
contained in this Treasury decision and will appear in future 
regulations. Section 482 continues to apply to controlled transactions 
(within the meaning of Sec.  1.482-1(i)(8)) that are also subject to 
these regulations. An adjustment pursuant to section 482 does not 
prevent the application of these regulations.

Explanation of Provisions

I. Comments Regarding Statutory Authority for Regulations

    Comments questioned whether the regulations described in the notice 
are within the scope of the grant of authority in section 721(c). 
Specifically, comments asserted that pre-contribution gain could not be 
taxed under section 721(c) until it is recognized in a sale or exchange 
by the partnership. The Treasury Department and the IRS disagree with 
these comments for several reasons.
    First, as explained in the notice, Congress added the broad grant 
of regulatory authority in section 721(c) in the 1997 Act to address 
transactions in which property is contributed to partnerships in order 
to inappropriately shift gain offshore as a replacement for the 
repealed excise tax on transfers to foreign partnerships in sections 
1491 through 1494.
    Second, section 721(c) provides authority to tax the gain when the 
property is contributed if the gain ``will be includible'' in a foreign 
person's income; it is not a rule (like section 704(c)(1)(B)) that 
requires the ``wait-and-see'' approach suggested by the comments. The 
comments fail to acknowledge that neither the traditional method nor 
the traditional method with curative allocations will necessarily 
ensure that a contributing partner will bear all the tax consequences 
of pre-contribution gain. A contributing partner exchanges a share of 
the property it contributes for a share of the property the other 
partners contribute. Economically, a contribution is a current value-
for-value exchange. The purpose of section 704(c) is to prevent the 
shifting of tax consequences among partners with respect to pre-
contribution built-in gain or loss in contributed property. The 
regulations under section 704(c) provide three generally reasonable 
methods under which partnerships may allocate items with respect to 
contributed property so as to take into account the tax consequences of 
pre-contribution gain or loss--the traditional method, the traditional 
method with curative allocations, and the remedial allocation method. 
None of the methods are mandatory, and taxpayers may choose any of them 
(or another reasonable method) on a property-by-property and section 
704(c) layer-by-layer basis. In the case of a contribution of 
depreciable or amortizable property with pre-contribution gain, under 
all three methods, book cost recovery deductions reduce the pre-
contribution gain in the property (the gain that must be allocated back 
to the contributor) over the course of the recovery period for the 
property. Under the traditional method, tax cost recovery deductions 
(which are based on tax basis in the property) are, to the extent 
available, allocated first to the noncontributing partner up to its 
allocated book cost recovery deductions. If the noncontributing 
partner's book cost recovery deductions exceed its tax cost recovery 
deductions, the noncontributing partner will be overtaxed on its 
investment in the partnership property. The traditional method does not 
make up for shortfalls in available tax deductions, and if the 
partnership uses the traditional method with curative allocations, 
those shortfalls are cured only if there are other tax items available 
with which to cure. Because book cost recovery deductions reduce the 
built-in gain in the property regardless of whether the noncontributing 
partner has received all of the tax cost recovery deductions to which 
it is economically entitled or whether the contributing partner has 
received taxable income (or fewer tax deductions) commensurate with the 
pre-contribution gain in its property, neither the traditional method 
nor the traditional method with curative allocations prevents a shift 
of the tax consequences of pre-contribution gain to the noncontributing 
partner when tax basis or other tax items are insufficient to reflect 
the economics of the noncontributing partner. When this shift occurs, 
the contributing partner generally will not bear the tax consequences 
of the pre-contribution gain until, at the earliest, its partnership 
interest is liquidated or sold. In this way, the contribution of 
property to a partnership applying either of these two methods can 
result in a tax-advantaged exchange with respect to the contributing 
partner. When the noncontributing partner is foreign, this situation is 
the appropriate target for the temporary regulations.
    Finally, the regulations under section 704(c) give wide latitude to 
taxpayers regarding how and when partners may choose to recognize pre-
contribution gain. Subject to anti-abuse rules, taxpayers are allowed 
to adopt the traditional method and the traditional method with 
curative allocations despite those methods' inability to prevent a 
shift of the tax consequences of pre-contribution gain in all cases. 
This latitude raises more concern in the case of related partners, one 
or more of whom are foreign, given their likely overall alignment of 
tax interests, which would not necessarily exist among unrelated 
partners. As explained in Part II of the Background section of this 
preamble, the remedial allocation method is the only method that 
reliably and consistently ensures that the tax consequences of pre-
contribution gain from contributed property are properly borne by the 
contributing partner. This feature of the remedial method is 
particularly relevant to the Congressional concerns about the erosion 
of the U.S. tax base that led to the enactment of section 721(c), and 
thus the remedial method is the method that is most appropriate for 
appreciated property that is contributed to a partnership controlled by 
the U.S. transferor and one or more related foreign partners. For these 
reasons, the Treasury Department and the IRS have determined that these 
regulations are within the scope of the grant of authority in section 
721(c).

II. Overview of the Temporary Regulations

    The temporary regulations adopt the rules that were described in 
the notice, with certain modifications, in part, in response to 
comments received.
    Section 1.721(c)-1T provides definitions and rules of general 
application for purposes of all sections of the temporary regulations. 
Section

[[Page 7585]]

1.721(c)-2T provides the general operative rules that override section 
721(a) nonrecognition upon a contribution of section 721(c) property to 
a partnership. Section 1.721(c)-3T describes the gain deferral method, 
which, if adopted, avoids the immediate recognition of gain upon a 
contribution of section 721(c) property. Section 1.721(c)-4T provides 
rules regarding events that accelerate the recognition of gain that 
previously was deferred under the gain deferral method. Section 
1.721(c)-5T identifies exceptions to the acceleration events provided 
in Sec.  1.721(c)-4T, the result of which, generally, is that the gain 
deferral method either ends (termination events) or continues to apply 
without immediate gain recognition (successor events) or continues to 
apply with partial gain recognition (partial acceleration events). 
Section 1.721(c)-6T provides procedural and reporting requirements. 
Section 1.721(c)-7T provides examples illustrating the application of 
the temporary regulations.

III. General Scope of the Temporary Regulations

    The temporary regulations apply on a property-by-property basis. 
Accordingly, as discussed in Paragraph b of Part VI of the Explanations 
of Provisions section of this preamble, the temporary regulations do 
not include the unified application requirement announced in the 
notice.
    The temporary regulations apply to all contributions, actual or 
deemed, of property to a partnership, including, for example, a 
contribution of property that occurs as a result of (i) a partnership 
merger, consolidation, or division in the assets-over form, (ii) a 
change in entity classification that occurs pursuant to Sec.  301.7701-
3, or (iii) a transaction described in Rev. Rul. 99-5, 1999-1 C.B. 434 
(change from a disregarded entity to a partnership). However, in 
response to a comment, the temporary regulations provide that a 
contribution in a technical termination of a partnership described in 
section 708(b)(1)(B) (technical termination) will not, by itself, cause 
a partnership to become a section 721(c) partnership subject to the 
temporary regulations. For further discussion, see Part IV of the 
Explanation of Provisions section of this preamble. However, the 
temporary regulations do apply to a technical termination of a section 
721(c) partnership applying the gain deferral method. In this regard, 
see Part V and Paragraph c of Part VIII of the Explanation of 
Provisions section of this preamble, concerning the general rule of 
gain recognition and successor events, respectively.
    The temporary regulations provide that a mere change in identity, 
form, or place of organization of a partnership or a recapitalization 
of a partnership will not cause the partnership to become a section 
721(c) partnership. See Sec.  1.721(c)-1T(c).
    Finally, as announced in the notice, the temporary regulations 
contain rules for transactions involving tiered partnerships, as well 
as a general anti-abuse rule (see Sec.  1.721(c)-1T(d)) that applies 
for purposes of all sections of the temporary regulations.

IV. Definitions: Section 721(c) Partnership, Section 721(c) Property, 
U.S. Transferor, and Other Terms

    The notice states that future regulations would provide that a 
partnership is a section 721(c) partnership if a U.S. transferor 
contributes section 721(c) property to the partnership, and, after the 
contribution and any transactions related to the contribution, (i) a 
related foreign person is a direct or indirect partner, and (ii) the 
U.S. transferor and related persons own (directly or indirectly) more 
than 50 percent of the interests in partnership capital, profits, 
deductions, or losses.
    A comment requested that the definition of section 721(c) 
partnership be revised to exclude partnerships when the interests held 
by related foreign persons are small and an unrelated third-party with 
a material adverse tax position to the U.S. transferor holds a 
meaningful interest in the partnership. According to the comment, these 
two factors would sufficiently mitigate the potential for the abuse 
that the notice is intended to address. While these factors may reduce 
the ability of a U.S. transferor to shift gain or income outside the 
United States, the Treasury Department and the IRS have concluded that 
these factors alone are insufficient to prevent the erosion of the U.S. 
tax base that section 721(c) was enacted to address. In particular, the 
Treasury Department and the IRS are concerned that even a small 
ownership interest held by a related foreign person may be used for a 
meaningful shift of gain or income outside the United States. 
Furthermore, the Treasury Department and the IRS have determined that 
such a rule would necessitate additional rules to address small 
interests that later become large either in absolute or relative terms. 
In this regard, the Treasury Department and the IRS have determined 
that both a general anti-abuse rule and a more targeted rule that would 
require periodic retesting of the size of a related foreign person's 
interest would be difficult to administer. Accordingly, this comment 
has not been adopted. The Treasury Department and the IRS, however, 
acknowledge that the higher the overall level of related ownership in 
the partnership, the more likely the arrangement among the partners 
will reflect tax considerations. After considering this comment and 
other comments that requested a higher level of related-party ownership 
in the definition of a section 721(c) partnership, the temporary 
regulations increase the threshold from a ``more than 50 percent'' test 
to an ``80 percent or more'' test (ownership requirement). See Sec.  
1.721(c)-1T(b)(14)(i) for the general definition of a section 721(c) 
partnership. The temporary regulations also provide rules that deem 
certain controlled partnerships in a tiered-partnership structure to be 
section 721(c) partnerships in order to apply the gain deferral method. 
See Sec.  1.721(c)-1T(b)(14)(ii).
    The temporary regulations define section 721(c) property as 
property, other than excluded property, with built-in gain that is 
contributed to a partnership by a U.S. transferor. See Sec.  1.721(c)-
1T(b)(15)(i) for the general definition of section 721(c) property. The 
notice incorporated the requirement that a U.S. transferor make the 
contribution in the definition of a section 721(c) partnership rather 
than in the definition of section 721(c) property. This adjustment to 
the definitions is intended to be a non-substantive change. The 
temporary regulations provide that if a U.S. transferor is treated as 
contributing its share of an item of property, the entire item of 
property is section 721(c) property. In addition, the temporary 
regulations provide rules that deem certain property of a tiered 
partnership to be section 721(c) property. See Sec.  1.721(c)-
1T(b)(15)(ii). When an interest in a partnership is contributed, the 
partnership interest, if it is not excluded property, is the section 
721(c) property.
    The temporary regulations define excluded property as (i) a cash 
equivalent; (ii) a security within the meaning of section 475(c)(2), 
without regard to section 475(c)(4); (iii) an item of tangible property 
with built-in gain that does not exceed $20,000 or with an adjusted tax 
basis in excess of book value (built-in loss); and (iv) an interest in 
a partnership that holds (directly, or indirectly through interests in 
one or more partnerships that are not excluded property under this 
clause (iv)) property of which 90 percent or more of the value consists 
of property described in clauses (i) through (iii) (partnership 
interest

[[Page 7586]]

exclusion). See Sec.  1.721(c)-1T(b)(6). The notice announced the first 
three categories of excluded property. However, the temporary 
regulations include tangible property with a built-in loss in the third 
exclusion so that such property is excluded property for purposes of 
the partnership interest exclusion. The Treasury Department and the IRS 
determined that it was appropriate to add the partnership interest 
exclusion so that the temporary regulations do not apply to transfers 
of partnership interests when only a small portion of the partnership's 
property is section 721(c) property. If a partnership interest fails 
the 90-percent threshold test for the partnership interest exclusion 
and does not qualify under the second exclusion for securities, the 
interest is section 721(c) property.
    Comments recommended that property that gives rise to income 
effectively connected with a U.S. trade or business (ECI property) be 
excluded from the definition of section 721(c) property, because the 
income will be subject to U.S. tax even if it is allocated to a related 
foreign person. The Treasury Department and the IRS agree with the 
reasoning behind this comment, and have determined that the temporary 
regulations should also address the situation when the property ceases 
to be ECI property and still has built-in gain. Accordingly, the 
temporary regulations continue to include ECI property in the 
definition of section 721(c) property but modify the application of the 
gain deferral method to ECI property, as discussed in Paragraph c of 
Part VI of the Explanation of Provisions section of this preamble.
    Another comment similarly suggested that the definition of section 
721(c) property exclude property the gain on which would be subject to 
U.S. tax under subpart F of the Code. The Treasury Department and IRS 
have declined to adopt such a rule, which would depend on a ``wait and 
see'' approach and would import the recognition rules of subpart F, 
including an earnings and profits requirement, rather than the more 
direct approach of section 721(c).
    The temporary regulations define built-in gain with respect to an 
item of property contributed to a partnership as the excess of the book 
value of the property over the partnership's adjusted tax basis in the 
property upon the contribution, determined without regard to the 
application of the gain recognition rule of Sec.  1.721(c)-2T(b). See 
Sec.  1.721(c)-1T(b)(2). The temporary regulations clarify the 
definition provided in the notice in two respects. First, the notice 
states that built-in gain would be determined with respect to the 
contributing partner's adjusted tax basis in the property at the time 
of the contribution, whereas the temporary regulations provide that 
built-in gain is determined with respect to the partnership's adjusted 
tax basis in the property. The revision was made in order to more 
precisely describe the amount of gain that may be shifted to a related 
foreign partner. Second, the temporary regulations clarify that built-
in gain is determined without regard to the application of the gain 
recognition rule under Sec.  1.721(c)-2T(b).
    The temporary regulations include a new term, ``remaining built-in 
gain.'' Section 1.721(c)-1T(b)(13)(i) generally defines remaining 
built-in gain, with respect to an item of section 721(c) property that 
is subject to the gain deferral method, as the built-in gain, reduced 
by decreases in the difference between the property's book value and 
adjusted tax basis. However, subsequent increases or decreases to the 
property's book value due to a revaluation other than a revaluation 
required under these temporary regulations for tiered partnerships are 
not taken into account in determining remaining built-in gain. The 
temporary regulations provide rules for determining remaining built-in 
gain in the case of tiered partnerships. See Sec.  1.721(c)-
1T(b)(13)(ii).
    Consistent with the notice, Sec.  1.721(c)-1T(b)(18)(i) of the 
temporary regulations generally defines a U.S. transferor as a U.S. 
person (within the meaning of section 7701(a)(30)) other than a 
domestic partnership. The temporary regulations also provide a rule 
that deems certain tiered partnerships to be a U.S. transferor solely 
for purposes of applying the consistent allocation method. See Sec.  
1.721(c)-1T(b)(18)(ii).
    Finally, the temporary regulations, consistent with the notice, 
define (i) a related person as a person that is related (within the 
meaning of section 267(b) or section 707(b)(1)) to a U.S. transferor; 
(ii) a related foreign person as a person that is a related person 
(other than a partnership) that is not a U.S. person; and (iii) a 
direct or indirect partner as a person (other than a partnership) that 
owns an interest in a partnership directly or indirectly through one or 
more partnerships. See Sec.  1.721(c)-1T(b)(12), (b)(11), and (b)(5), 
respectively.

V. General Rule of Gain Recognition Upon a Contribution of Section 
721(c) Property to a Section 721(c) Partnership

    Section 1.721(c)-2T provides the general operative rules that 
override section 721(a) nonrecognition of gain upon a contribution of 
section 721(c) property to a partnership. Section 1.721(c)-2T(b) 
provides the general rule that nonrecognition under section 721(a) will 
not apply to gain realized upon a contribution of section 721(c) 
property to a section 721(c) partnership. In contrast to the 
regulations described in the notice, Sec.  1.721(c)-2T(b) provides that 
this general rule does not apply--and therefore that nonrecognition 
under section 721(a) continues to apply--to a direct contribution of 
section 721(c) property by an ``unrelated'' U.S. transferor (in other 
words, a U.S. transferor that does not, together with related persons 
with respect to it, satisfy the ownership requirement). The carve-out 
is consistent with the intent of the temporary regulations to address 
the shifting of income among related persons. Because this carve-out 
for an unrelated U.S. transferor is limited to direct contributions of 
section 721(c) property, it does not apply to a contribution that 
occurs pursuant to the partnership look-through rule in Sec.  1.721(c)-
2T(d)(1) (as discussed elsewhere in this Part V).
    Section 1.721(c)-2T(c) provides a de minimis exception to the 
general rule. The temporary regulations modify the de minimis exception 
described in the notice--which focused on contributions made by a U.S. 
transferor (and all related U.S. transferors) during the U.S. 
transferor's taxable year--to focus instead on contributions during the 
partnership's taxable year, in order to align the rule with the 
reporting required under Sec.  1.721(c)-6T. Under the de minimis 
exception in the temporary regulations, contributions of section 721(c) 
property will not be subject to immediate gain recognition if the sum 
of all built-in gain for all section 721(c) property contributed to a 
section 721(c) partnership during the partnership's taxable year does 
not exceed $1 million.
    Section 1.721(c)-2T(d)(1) provides a look-through rule for 
identifying a section 721(c) partnership when an upper-tier partnership 
in which a U.S. transferor is a direct or indirect partner contributes 
property to a lower-tier partnership. For purposes of determining if 
the lower-tier partnership 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. If the lower-tier 
partnership is a section 721(c) 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

[[Page 7587]]

built-in gain in the section 721(c) property under the general gain 
recognition rule, because the entire property will be section 721(c) 
property (see the general definition of section 721(c) property in 
Sec.  1.721(c)-1T(b)(15)(i)).
    Section 1.721(c)-2T(d)(2) provides that the partnership look-
through rule will not apply to a deemed contribution by an ``old'' 
partnership to a ``new'' partnership that occurs as a result of a 
technical termination of the old partnership. Thus, a technical 
termination will not cause a non-section 721(c) partnership, in which a 
U.S. transferor is a direct or indirect partner, to become a section 
721(c) partnership subject to these temporary regulations. If, however, 
a partnership is a section 721(c) partnership subject to the temporary 
regulations immediately before its technical termination, the technical 
termination would be a successor event (rather than an acceleration 
event) only if the new partnership continues the gain deferral method 
with respect to the section 721(c) property that was subject to the 
gain deferral method in the terminated partnership. In this regard, see 
Sec.  1.721(c)-5T(c)(4) (defining a successor event to include certain 
technical terminations).

VI. Gain Deferral Method

a. In General

    Section 1.721(c)-3T describes the gain deferral method, which 
generally must be applied in order to avoid the immediate recognition 
of gain upon a contribution of section 721(c) property to a section 
721(c) partnership. Section 1.721(c)-3T(b) provides the five general 
requirements for applying the gain deferral method to an item of 
section 721(c) property: (i) 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; 
(ii) 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; (iii) 
procedural and reporting requirements are satisfied; (iv) the U.S. 
transferor extends the period of limitations on assessment of tax (as 
discussed in Part X of the Explanation of Provisions section of this 
preamble); and (v) 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 the partnership look-
through rule in Sec.  1.721(c)-2T(d)(1).

b. Application of the Gain Deferral Method on a Property-by-Property 
Basis

    Comments questioned the necessity for the unified application 
requirement announced in the notice. The unified application 
requirement was intended to prevent taxpayers from disaggregating the 
contribution of separate but related business property and choosing to 
recognize gain upon contribution for some property and to apply the 
gain deferral method for other property, in an attempt to minimize the 
reported cumulative value for all contributed property or to minimize 
the reported value of property for which the gain deferral method was 
not adopted. This concern arises, in part, because the IRS may not be 
able to make an adjustment for the correct amount of gain with respect 
to property that is not subject to the gain deferral method due to the 
expiration of the period of limitations on the assessment of tax. While 
the Treasury Department and the IRS continue to be concerned that 
taxpayers will attempt to disaggregate related business property in 
order to undervalue their contributions, the temporary regulations 
adopt a more targeted approach to address these comments. Accordingly, 
the temporary regulations do not include the unified application 
requirement and instead apply on a property-by-property basis.
    As described in the notice, in order to apply the gain deferral 
method with respect to a contribution of section 721(c) property to a 
section 721(c) partnership, the temporary regulations require the U.S. 
transferor to extend the period of limitations on assessment of tax on 
all items related to the property with respect to which the gain 
deferral method applies through the close of the eighth full taxable 
year following the contribution. To address the concerns that motivated 
the uniform application requirement, the temporary regulations require 
a U.S. transferor to extend the period of limitations on assessment of 
tax on the gain recognized under the general rule with respect to any 
section 721(c) property that is contributed to the partnership for 
which the gain deferral method will not be applied through the close of 
the fifth full taxable year following the contribution of such 
property, if the property is contributed within five full taxable years 
after a gain deferral contribution, defined in Sec.  1.721(c)-1T(b)(7) 
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. See Sec. Sec.  1.721(c)-3T(b)(4) and 1.721(c)-
6T(b)(5)(iii), discussed in Part X of the Explanation of Provisions 
section of this preamble. Additionally, it should be noted that Sec.  
1.482-1T(f)(2)(i)(B) provides that separate transactions must be 
aggregated for purposes of determining the arm's length pricing of such 
transactions under section 482, including for purposes of an analysis 
under multiple provisions of the Code or regulations, if the 
transactions are so interrelated that an aggregate analysis provides 
the most reliable measure of the arm's length result.

c. Application of the Gain Deferral Method to ECI Property

    As discussed in Part IV of the Explanation of Provisions section of 
this preamble, the temporary regulations do not adopt the comment 
recommending that ECI property be excluded from the definition of 
section 721(c) property. Instead, the temporary regulations continue to 
provide that a contribution of section 721(c) property that is ECI 
property is subject to immediate gain recognition if the gain deferral 
method is not applied. However, in response to the comment, the 
temporary regulations modify the gain deferral method such that ECI 
property is not subject to the remedial allocation method or the 
consistent allocation method. This special exception for ECI property 
applies for as long as, beginning on the date of the contribution and 
ending when there is no remaining built-in gain with respect to the 
property, all distributive shares of income and gain with respect to 
the property for all direct and indirect partners that are related 
foreign persons will be subject to taxation as effectively connected 
with a trade or business within the United States (under section 871 or 
882), and neither the section 721(c) partnership nor a direct or 
indirect partner that is a related foreign person claims benefits under 
an income tax treaty that would exempt the income or gain from tax or 
reduce the rate of taxation to which the income or gain is subject. See 
Sec.  1.721(c)-3T(b)(1)(ii).
    All the other requirements of the gain deferral method apply with 
respect to ECI property. Thus, a U.S. transferor must recognize gain 
upon an acceleration event with respect to ECI property, including when 
property ceases to be ECI property, and satisfy the procedural and 
reporting requirements with respect to ECI property. See Sec.  
1.721(c)-6T(b)(2)(iii), (b)(3)(vii), and (c)(1).

[[Page 7588]]

    A comment also requested an exclusion for property subject to tax 
under section 897 (relating to U.S. real property interests) from the 
definition of section 721(c) property. The temporary regulations do not 
adopt this comment because the special rules for ECI property 
appropriately address the concerns expressed regarding U.S. real 
property interests.

d. Application of the Gain Deferral Method to Anti-Churning Property

    Comments requested guidance on how the requirement to use the 
remedial allocation method interacts with the section 197 anti-churning 
rules. In general, section 197(f)(9) prohibits the amortization of 
goodwill and going concern value that was nonamortizable before the 
enactment of section 197 (section 197(f)(9) intangible property), and 
that prohibition continues if the property is transferred to a related 
person. Under Sec.  1.197-2(h)(12)(vii)(B), when section 197(f)(9) 
intangible property is contributed to a partnership, a noncontributing 
partner generally may receive remedial allocations of amortization with 
respect to the property. A noncontributing partner that is related to 
the contributing partner, however, may not receive such remedial 
allocations.
    One comment requested that a U.S. transferor not be required to 
include remedial income with respect to section 197(f)(9) intangible 
property when the gain deferral method is being applied. The temporary 
regulations do not adopt this comment. The Treasury Department and the 
IRS are concerned that providing favorable treatment for section 721(c) 
property belonging to a particular class would incentivize taxpayers to 
attribute excessive value to that class of property while 
simultaneously undervaluing related but separate section 721(c) 
property that remains subject to all of the requirements of the gain 
deferral method. This concern is especially pronounced in the case of 
section 197(f)(9) intangible property, which is often difficult to 
value separately from other identifiable intangible property. In this 
regard, see the preamble of the notice of proposed rulemaking (REG-
139483-13) containing proposed regulations under section 367, published 
in the Federal Register on September 16, 2015 (80 FR 55568). See also 
the preamble to T.D. 9803, which finalized those proposed regulations, 
published in the Federal Register on December 16, 2016 (81 FR 91012).
    Another comment recommended that regulations implementing the gain 
deferral method require the partnership to amortize the section 
197(f)(9) intangible and allocate remedial items of amortization to a 
related foreign partner and corresponding remedial items of income to 
the contributing partner. The Treasury Department and the IRS have 
determined that changing Sec.  1.197-2(h)(12)(vii)(B) to permit 
remedial allocations of amortization to related partners, or 
distinguishing between domestic and related foreign partners, would be 
contrary to section 197(f)(9) and therefore do not adopt this comment. 
In lieu of providing that remedial allocations may be made to a related 
partner, the temporary regulations provide a special non-amortizable 
tax basis adjustment to the property. This special adjustment is made 
solely with respect to the related partner. The Treasury Department and 
the IRS have determined that allowing this tax basis adjustment is 
consistent with the policy of the section 197 anti-churning rules.
    More specifically, the temporary regulations revise the remedial 
allocation method in Sec.  1.704-3(d) as to related partners when a 
section 721(c) partnership is applying the gain deferral method with 
respect to section 197(f)(9) intangible property. The revised rule 
requires the partnership to amortize the portion of the partnership's 
book value in the section 197(f)(9) intangible property that exceeds 
its adjusted tax basis in the property. Accordingly, the allocation of 
book amortization to a noncontributing partner will result in a ceiling 
rule limitation to the extent of this allocation of book amortization. 
If a noncontributing partner is a related person with respect to the 
U.S. transferor, the temporary regulations provide that, solely with 
respect to the related noncontributing partner, the partnership must 
increase the adjusted tax basis of the property by the amount of the 
difference between the book allocation of the item to the related 
person and the tax allocation of the same item to the related person 
and allocate remedial income in the same amount to the U.S. transferor. 
See Sec.  1.704-3T(d)(5)(iii)(C).
    The rules governing the tax consequences of the special tax basis 
adjustment are modeled on Sec.  1.743-1 and proposed regulations under 
section 704(c)(1)(C) that are contained in a notice of proposed 
rulemaking (REG-144468-05) published in the Federal Register (79 FR 
3042) on January 16, 2014. The adjustment to the tax basis of section 
197(f)(9) intangible property will be recovered by the related partner 
only upon a sale or exchange of the property by the partnership. 
Generally, a transfer by the noncontributing related partner of all or 
a portion of its interest in the partnership will eliminate the tax 
basis adjustment attributable to the interest such that the transferee 
will not succeed to the tax basis adjustment. However, if the interest 
is transferred in a substituted basis transaction, the transferee will 
succeed to the transferor's tax basis adjustment and the adjustment 
will be taken into account in computing and allocating any adjustment 
to the basis of the section 197(f)(9) intangible property under 
sections 743(b) and 755. These rules must be applied together with the 
general rules under section 197 and subchapter K of the Code. In 
resolving any uncertainty that arises in the implementation of these 
rules, it would be reasonable for taxpayers to apply principles similar 
to those contained in Sec.  1.743-1, the proposed regulations under 
section 704(c)(1)(C), and any Code sections or regulations that 
reference those rules.
    The Treasury Department and the IRS request comments on the 
following issues, and on any other issues relevant to a section 721(c) 
partnership's application of the remedial allocation method to section 
197(f)(9) intangible property: (i) The application of the method to 
members of a consolidated group; (ii) the treatment of a tax basis 
adjustment when the adjusted section 197(f)(9) intangible property is 
transferred (a) in a like-kind exchange described in section 1031, (b) 
to a lower-tier partnership, (c) in a transaction described in section 
351, (d) in a technical termination, or (e) in an installment sale; 
(iii) the treatment of a tax basis adjustment when the section 
197(f)(9) intangible property is distributed to the related person for 
whom the adjustment was made or to another partner in a current or 
liquidating distribution; and (iv) any rules that are necessary to 
ensure that the tax basis adjustment does not become amortizable in 
contravention of the anti-churning rules.

e. Consistent Allocation Method

1. In General
    Section 1.721(c)-3T(c)(1) describes the consistent allocation 
method, which, like the gain deferral method, applies on a property-by-
property basis. The consistent allocation method requires a section 
721(c) partnership to allocate the same percentage of each book item of 
income, gain, deduction, and loss ``with respect to the section 721(c) 
property'' to the U.S. transferor. Comments questioned the necessity of 
the requirement to apply the consistent allocation method. Some 
comments

[[Page 7589]]

asserted that the requirement is unnecessary because the built-in gain 
in section 721(c) property will be preserved in the difference between 
the book and tax capital accounts of a U.S. transferor. The Treasury 
Department and the IRS have determined that remedial allocations alone 
are insufficient to ensure that built-in gain with respect to section 
721(c) property will be subject to U.S. tax. The consistent allocation 
method is intended to prevent a U.S. transferor from rendering the 
remedial allocation method ineffective by, for example, having the 
partnership allocate a higher percentage share of book depreciation to 
the U.S. transferor (which would reduce the U.S. transferor's remedial 
income inclusion) than the U.S. transferor's percentage share of income 
or gain with respect to the property, which would result in shifting 
the gain (and taxable income) to related foreign persons that are 
direct or indirect partners in the partnership. Therefore the temporary 
regulations do not adopt this comment. The temporary regulations 
provide rules (discussed in Paragraph e.2 of this Part VI) to determine 
the amount of income, gain, deduction, and loss that is considered to 
be ``with respect to section 721(c) property'' under the gain deferral 
method.
    According to another comment, the consistent allocation method is 
both over-inclusive, in that situations in which a U.S. transferor is 
allocated greater income than its share of deductions would violate the 
rule, and under-inclusive, because deductions allocated to a U.S. 
transferor that do not arise from section 721(c) property are beyond 
the scope of the rule. This comment proposed an alternative anti-abuse 
rule that would require that a minimum cumulative amount of income be 
allocated to a U.S. transferor. The Treasury Department and the IRS 
have concluded that the rule described in the comment would be 
difficult to administer. However, in response to comments, the 
temporary regulations provide exceptions (discussed in Paragraph e.3 of 
this Part VI) to the consistent allocation method for certain 
regulatory allocations and the allocations of creditable foreign tax 
expenditures.
2. Determining Book Items With Respect to Section 721(c) Property
    The notice did not describe how partnership items are determined to 
be ``with respect to section 721(c) property.'' The temporary 
regulations provide guidance for making this determination based on 
principles that will be familiar to many taxpayers.
i. Book Items of Income and Gain
    Section 1.721(c)-3T(c)(2) provides the rule for determining the 
extent to which partnership items of book income and gain are 
considered to be ``with respect to'' particular section 721(c) property 
for purposes of applying the consistent allocation method on a 
property-by-property basis. This rule provides that a section 721(c) 
partnership must attribute book income and gain to each property in a 
consistent manner using any reasonable method that takes into account 
all the facts and circumstances. The temporary regulations provide that 
all items of book income and gain attributable to each property will 
comprise a single class of gross income for purposes of determining the 
extent to which partnership items of deduction or loss are allocated 
and apportioned with respect to the section 721(c) property.
ii. Book Items of Deduction and Loss
    Section 1.721(c)-3T(c)(3) provides the rules for determining the 
extent to which partnership items of book deduction and loss are 
considered to be ``with respect to'' particular section 721(c) property 
for purposes of applying the consistent allocation method. A section 
721(c) partnership must use the principles of Sec. Sec.  1.861-8 and 
1.861-8T to allocate and apportion all of its items of deduction, 
except for interest expense and research and experimental expenditures 
(R&E), and loss to the class of gross income with respect to each 
section 721(c) property. The section 721(c) partnership may allocate 
and apportion its interest expense and R&E using any reasonable method, 
including, but not limited to, the methods described in Sec. Sec.  
1.861-9 and 1.861-9T (interest expense) and Sec.  1.861-17 (R&E).
3. Exceptions to the Consistent Allocation Method
    In response to comments, the temporary regulations provide 
exceptions from the requirement to apply the consistent allocation 
method with respect to certain book items of a section 721(c) 
partnership.
i. Regulatory Allocations
    The temporary regulations provide that a regulatory allocation (as 
defined in Sec.  1.721(c)-1T(b)(10)) of book income, gain, deduction, 
or loss with respect to section 721(c) property that otherwise would 
fail to satisfy the requirements of the consistent allocation method 
nevertheless will, in certain cases, be deemed to satisfy the 
requirements. Specifically, a regulatory allocation is deemed to 
satisfy the requirements of the consistent allocation method if the 
allocation is (i) an allocation of income or gain to the U.S. 
transferor (or a member of its consolidated group); or (ii) an 
allocation of deduction or loss to a partner other than the U.S. 
transferor (or a member of its consolidated group). In addition, if the 
allocation is not described in clause (i) or (ii) but the U.S. 
transferor receives less income or gain or more deductions or loss with 
respect to the section 721(c) property because of the regulatory 
allocation, the allocation is treated as described in Sec.  1.721(c)-
5T(d)(2) (generally requiring that a portion of remaining built-in gain 
be recognized, as discussed in Paragraph d.2 of Part VIII of the 
Explanation of Provisions section of this preamble). See Sec.  
1.721(c)-3T(c)(4)(i)(C). The Treasury Department and the IRS have 
determined that this special rule for regulatory allocations is 
appropriate because an allocation described in clause (i) or (ii) will 
not reduce the U.S. tax base and an allocation described in clause 
(iii) will result in the U.S. transferor recognizing gain that will 
offset the reduction in the U.S. tax base resulting from the regulatory 
allocation.
    The temporary regulations provide that a regulatory allocation is 
(i) an allocation pursuant to a minimum gain chargeback, as defined in 
Sec.  1.704-2(b)(2), (ii) a partner nonrecourse deduction, as 
determined in Sec.  1.704-2(i)(2), (iii) an allocation pursuant to a 
partner minimum gain chargeback, as described in Sec.  1.704-2(i)(4), 
(iv) an allocation pursuant to a qualified income offset, as defined in 
Sec.  1.704-1(b)(2)(ii)(d), (v) an allocation with respect to the 
exercise of a noncompensatory option described in Sec.  1.704-
1(b)(2)(iv)(s), and (vi) an allocation of partnership level ordinary 
income or loss described in Sec.  1.751-1(a)(3). The Treasury 
Department and the IRS have determined that relief is appropriate for 
these regulatory allocations because, in general, partners do not have 
discretion regarding their application and, when necessary, treating 
them as a partial acceleration event will result in the appropriate 
amount of gain being recognized for purposes of the gain deferral 
method. The Treasury Department and the IRS have determined that relief 
is not appropriate for a nonrecourse deduction, as defined in Sec.  
1.704-2(b)(1), because, unlike the other types of regulatory 
allocations, partners have significant discretion regarding the 
allocation of a nonrecourse deduction.
ii. Creditable Foreign Tax Expenditures
    The temporary regulations provide that allocations of creditable 
foreign tax expenditures (as defined in Sec.  1.704-

[[Page 7590]]

1(b)(4)(viii)(b)) (CFTEs) are not subject to the consistent allocation 
method. See Sec.  1.721(c)-3T(c)(4)(ii). The regulations governing the 
allocation of CFTEs take into account section 704(c) income and gain 
and are not based strictly on the allocation of book items. As a 
result, it would be difficult to apply the consistent allocation method 
with respect to CFTEs.

VII. Acceleration Events

a. Overview

    Section 1.721(c)-4T provides rules regarding acceleration events, 
which, like the gain deferral method, apply on a property-by-property 
basis. When an acceleration event occurs with respect to section 721(c) 
property, remaining built-in gain in the property must be recognized 
and the gain deferral method no longer applies. The temporary 
regulations provide exceptions to acceleration events that are 
discussed in Part VIII of the Explanation of Provisions section of this 
preamble.

b. Definition of an Acceleration Event

1. General Rules
    Subject to the exceptions described in Part VIII of the Explanation 
of Provisions section of this preamble, Sec.  1.721(c)-4T(b)(1) defines 
an acceleration event as any event that would reduce the amount of 
remaining built-in gain that a U.S. transferor would have recognized 
under the gain deferral method if the event had not occurred or that 
could defer the recognition of the remaining built-in gain. The 
temporary regulations clarify that an acceleration event includes the 
transfer of section 721(c) property via a contribution of the property 
itself or through a contribution of a partnership interest.
2. Failure To Comply With a Requirement of the Gain Deferral Method
    The rules described in the notice would have provided that a 
failure to comply with one of the requirements of the gain deferral 
method with respect to any section 721(c) property would cause an 
acceleration event for all section 721(c) property. Comments requested 
that the Treasury Department and the IRS eliminate this provision. 
Because the temporary regulations provide that the gain deferral method 
is applied on a property-by-property basis (in lieu of containing the 
unified application requirement), the temporary regulations adopt this 
comment.
    Under the temporary regulations, an acceleration event with respect 
to section 721(c) property occurs when any party fails to comply with a 
requirement of the gain deferral method with respect to that property. 
See Sec.  1.721(c)-4T(b)(2)(i). For example, if section 721(c) property 
is ECI property, an acceleration event occurs if a distributive share 
of income or gain from the property that is allocated to a direct or 
indirect partner that is a related foreign person is no longer subject 
to taxation as income effectively connected with a trade or business 
within the United States or if the section 721(c) partnership or a 
direct or indirect partner that is a related foreign person claims 
certain benefits under an income tax treaty with respect to the income 
(see Sec.  1.721(c)-3T(b)(1)(ii)).
    An acceleration event will not occur solely as a result of a 
failure to comply with a procedural or reporting requirement of the 
gain deferral method if that failure is not willful and relief is 
sought under the prescribed procedures. See Sec. Sec.  1.721(c)-
4T(b)(2)(ii) and 1.721(c)-6T(f).
3. Special Rule When Section 721(c) Property Is an Interest in a 
Partnership
    When section 721(c) property is an interest in a partnership, the 
temporary regulations provide that an acceleration event will not occur 
because of a reduction in remaining built-in gain in the partnership 
interest as a result of allocations of book items of deduction and loss 
or tax items of income and gain by that partnership. See Sec.  
1.721(c)-4T(b)(3).
4. Deemed Acceleration Event
    Under the temporary regulations, a U.S. transferor may 
affirmatively treat an acceleration event as having occurred with 
respect to section 721(c) property by recognizing the remaining built-
in gain with respect to that property and satisfying the reporting 
required by Sec.  1.721(c)-6T(b)(3)(iv). See Sec.  1.721(c)-4T(b)(4).

c. Consequences of an Acceleration Event

    Section 1.721(c)-4T(c) sets forth the consequences of an 
acceleration event. Specifically, the U.S. transferor must recognize 
gain in an amount equal to the remaining built-in gain that would have 
been allocated to the U.S. transferor if the section 721(c) partnership 
had sold the section 721(c) property immediately before the 
acceleration event for fair market value. Following the acceleration 
event, the section 721(c) property will no longer be subject to the 
gain deferral method.
    The U.S. transferor generally must make correlative adjustments to 
its basis in its partnership interest. See Sec.  1.721(c)-4T(c)(1). In 
addition, the section 721(c) partnership will increase its basis in the 
section 721(c) property by the amount of gain recognized by the U.S. 
transferor. This basis increase is made immediately before the 
acceleration event. See Sec.  1.721(c)-4T(c)(2). If the section 721(c) 
property remains in the partnership after the acceleration event, the 
increase in the basis of the section 721(c) property generally would be 
treated in the same manner as newly purchased property, including for 
purposes of determining the depreciation schedule if the property is 
depreciable property.

VIII. Acceleration Event Exceptions

a. In General

    Section 1.721(c)-5T identifies the following categories of 
exceptions to acceleration events, which, like acceleration events, 
apply on a property-by-property basis: (i) Termination events, in which 
case, the gain deferral method ceases to apply to the section 721(c) 
property; (ii) successor events, in which case, the gain deferral 
method continues to apply to the section 721(c) property but with 
respect to a successor U.S. transferor or a successor section 721(c) 
partnership, as applicable; (iii) partial acceleration events, in which 
case, a U.S. transferor recognizes an amount of gain that is less than 
the full amount of remaining built-in gain in the section 721(c) 
property and the gain deferral method continues to apply; (iv) 
transfers described in section 367 of section 721(c) property to a 
foreign corporation, in which case, the gain deferral method ceases to 
apply and a U.S. transferor recognizes an amount of gain equal to the 
remaining built-in gain attributable to the portion of the section 
721(c) property that is not subject to tax under section 367; and (v) 
fully taxable dispositions of a portion of an interest in a section 
721(c) partnership, in which case, the gain deferral method continues 
to apply for the retained portion of the interest.

b. Termination Events

1. In General
    Section 1.721(c)-5T(b) identifies the events that cause the gain 
deferral method to no longer apply. The Treasury Department and the IRS 
have determined that it is appropriate to terminate the application of 
the gain deferral method with respect to the affected section 721(c) 
property in these cases because the potential to shift gain or income 
to a related foreign person that is a direct or indirect partner in the 
section 721(c) partnership has been eliminated.

[[Page 7591]]

2. Transfers of Section 721(c) Property (Other Than a Partnership 
Interest) to a Domestic Corporation Described in Section 351
    The temporary regulations provide that a termination event occurs 
if a section 721(c) partnership transfers section 721(c) property other 
than a partnership interest to a domestic corporation in a transaction 
to which section 351 applies. See Sec.  1.721(c)-5T(b)(2).
3. Certain Incorporations of a Section 721(c) Partnership
    A comment questioned whether the rules described in the notice 
would exempt from the definition of an acceleration event certain 
transactions after which the partnership ceases to exist, such as those 
described in Rev. Rul. 84-111, 1984-2 C.B. 88 (describing three methods 
for incorporating a partnership). See Sec.  601.601(d)(2)(ii)(b). The 
temporary regulations provide that a termination event occurs upon an 
incorporation of a section 721(c) partnership into a domestic 
corporation by any method of incorporation other than a method 
involving an actual distribution of partnership property to the 
partners, followed by a contribution of that property to a corporation, 
provided that the section 721(c) partnership is liquidated as part of 
the incorporation transaction. See Sec.  1.721(c)-5T(b)(3).
4. Certain Distributions of Section 721(c) Property
    A comment questioned whether an acceleration event should occur as 
a result of a distribution of section 721(c) property to a partner 
other than a U.S. transferor outside of the seven-year period described 
in sections 704(c)(1)(B) and 737 (rules that address certain 
distributions of property within seven years of a contribution). While 
sections 704(c)(1)(B) and 737 also are intended to ensure that gain on 
contributed property is not inappropriately transferred to a partner 
other than the contributor, in the context of contributions to 
partnerships with related foreign partners, the Treasury Department and 
the IRS have determined that concerns about the erosion of the U.S. tax 
base remain as long as there is remaining built-in gain in the section 
721(c) property. Accordingly, the Treasury Department and the IRS have 
determined that it is inappropriate to provide a termination event 
exception for all distributions of section 721(c) property after seven 
years.
    The temporary regulations, however, provide that a termination 
event occurs if a section 721(c) partnership distributes section 721(c) 
property to the U.S. transferor. A termination event will also occur if 
a section 721(c) partnership distributes section 721(c) property to a 
member of a U.S. transferor's consolidated group and the distribution 
occurs more than seven years after the contribution. See Sec.  
1.721(c)-5T(b)(4).
5. Section 721(c) Partnership Ceases to Have a Related Foreign Person 
Partner
    In response to a comment, the temporary regulations generally 
provide that a termination event occurs when a section 721(c) 
partnership ceases to have any direct or indirect partners that are 
related foreign persons, provided there is no plan for a related 
foreign person to subsequently become a direct or indirect partner in 
the partnership (or a successor). See Sec.  1.721(c)-5T(b)(5). The no-
plan requirement applies independently of the general anti-abuse rule 
under Sec.  1.721(c)-1T(d). An acceleration event, however, occurs upon 
a distribution of section 721(c) property in redemption of a related 
foreign person's interest in a section 721(c) partnership.
6. Fully Taxable Dispositions of Section 721(c) Property or of an 
Entire Interest in a Section 721(c) Partnership
    The notice treated a taxable disposition of section 721(c) property 
by a section 721(c) partnership, or an indirect disposition of section 
721(c) property through a taxable disposition of an interest in a 
section 721(c) partnership interest, as an acceleration event. The 
Treasury Department and the IRS have determined that it is appropriate 
instead to treat a fully taxable disposition of section 721(c) property 
or of an entire interest in a section 721(c) partnership as a 
termination event because other sections of the Code require gain to be 
recognized.
    Accordingly, the temporary regulations provide that a termination 
event occurs if a section 721(c) partnership disposes of section 721(c) 
property in a transaction in which all gain or loss, if any, is 
recognized. See Sec.  1.721(c)-5T(b)(6). In addition, a termination 
event occurs if either a U.S. transferor or a partnership in which a 
U.S. transferor is a direct or indirect partner disposes of an entire 
interest in a section 721(c) partnership that owns section 721(c) 
property in a transaction in which all gain or loss, if any, is 
recognized. This rule does not apply if a U.S. transferor is a member 
of a consolidated group and the interest in the section 721(c) 
partnership is transferred to another member in an intercompany 
transaction (as defined in Sec.  1.1502-13(b)(1)). See Sec.  1.721(c)-
5T(b)(7). See, however, Paragraph c.2 of this Part VIII, which 
describes the rule in Sec.  1.721(c)-5T(c)(3) that provides that such a 
transaction may be a successor event.

c. Successor Events

1. In General
    Section 1.721(c)-5T(c) identifies the successor events that allow 
for the continued application of the gain deferral method. In each of 
these cases, it is appropriate to continue application of the gain 
deferral method (rather than accelerate gain recognition), because its 
application can be preserved in the hands of a successor U.S. 
transferor or a successor section 721(c) partnership, as applicable. 
If, however, the successor does not continue the gain deferral method, 
the event is an acceleration event. If only a portion of an interest in 
a partnership is transferred in a successor event, the principles of 
Sec.  1.704-3(a)(7) apply to determine the remaining built-in gain in 
section 721(c) property that is attributable to the portion of the 
interest that is transferred and the portion that is retained. See 
Sec.  1.721(c)-5T(c)(1).
2. A Domestic Corporation Becomes a Successor U.S. Transferor
    The temporary regulations provide that a successor event occurs if 
either a U.S. transferor or a partnership in which a U.S. transferor is 
a direct or indirect partner transfers (directly or indirectly through 
one or more partnerships) an interest in a section 721(c) partnership 
to a domestic corporation in a transaction to which section 351 or 381 
applies, and the gain deferral method is continued by treating the 
transferee domestic corporation as the U.S. transferor. See Sec.  
1.721(c)-5T(c)(2).
    In addition, a successor event occurs if a U.S. transferor that is 
a member of a consolidated group transfers (directly or indirectly 
through one or more partnerships) an interest in a section 721(c) 
partnership to another member in an intercompany transaction (as 
defined in Sec.  1.1502-13(b)(1)), and the gain deferral method is 
continued by treating the transferee member as the U.S. transferor. See 
Sec.  1.721(c)-5T(c)(3).
3. Technical Termination of a Section 721(c) Partnership
    In response to comments, the temporary regulations provide that a 
successor event occurs if there is a technical termination of a section 
721(c) partnership, and the gain deferral method is continued by 
treating the new

[[Page 7592]]

partnership as the section 721(c) partnership. See Sec.  1.721(c)-
5T(c)(4). Although a technical termination will cause the depreciation 
schedule to be reset with respect to any depreciable section 721(c) 
property of the terminated section 721(c) partnership, and thus defer 
the recognition of remaining built-in gain, the Treasury Department and 
the IRS have concluded that this should not cause an acceleration 
event. In this case, however, the general anti-abuse rule under Sec.  
1.721(c)-1T(d) may apply, depending on the facts relating to the 
technical termination.
4. A Partnership Becomes a Successor Section 721(c) Partnership
    The temporary regulations provide two other categories of successor 
events that involve successor section 721(c) partnerships. In each 
case, section 721(c) property is directly or indirectly contributed to 
a successor section 721(c) partnership and the gain deferral method is 
applied down the chain of ownership with the result that the remaining 
built-in gain will continue to be subject to U.S. tax.
    In the first category, a successor event occurs if (i) a section 
721(c) partnership contributes section 721(c) property to a lower-tier 
partnership that is a controlled partnership; (ii) the gain deferral 
method is applied both with respect to the section 721(c) partnership's 
interest in the lower-tier partnership and with respect to the section 
721(c) property in the hands of the lower-tier partnership; and (iii) 
the lower-tier partnership either is a section 721(c) partnership, or 
is a controlled partnership that fails the ownership requirement but is 
treated as a section 721(c) partnership. See Sec.  1.721(c)-
5T(c)(5)(i). In the case in which the lower-tier partnership is a 
controlled partnership but not a section 721(c) partnership, the 
Treasury Department and the IRS have determined that it is appropriate 
to allow the parties to continue to apply the gain deferral method to 
the section 721(c) property, rather than triggering an acceleration 
event, provided the parties treat the lower-tier partnership as a 
section 721(c) partnership for purposes of applying the gain deferral 
method.
    In the second category, a successor event occurs if (i) either a 
U.S. transferor or a partnership in which a U.S. transferor is a direct 
or indirect partner contributes (directly or indirectly through one or 
more partnerships) an interest in a section 721(c) partnership to an 
upper-tier partnership that is a controlled partnership; (ii) the gain 
deferral method is continued with respect to the section 721(c) 
property in the hands of the section 721(c) partnership; (iii) if the 
upper-tier partnership directly owns its interest in the section 721(c) 
partnership, the gain deferral method is applied with respect to the 
upper-tier partnership's interest in the section 721(c) partnership and 
the upper-tier partnership is, or is treated as, a section 721(c) 
partnership; and (iv) if the upper-tier partnership indirectly owns its 
interest in the section 721(c) partnership through one or more 
partnerships, the principles described in clause (iii) are applied with 
respect to the upper-tier partnership and each partnership through 
which the upper-tier partnership indirectly owns an interest in the 
section 721(c) partnership. See Sec.  1.721(c)-5T(c)(5)(ii).
    Both categories of successor events involve tiered partnerships. 
Therefore, pursuant to Sec.  1.721(c)-3T(b)(5), the rules for tiered 
partnerships (described in Sec.  1.721(c)-3T(d)) must be applied in 
order to satisfy the requirements to apply the gain deferral method as 
required under the rules described in the two preceding paragraphs.
    To illustrate, consider the following simplified example: In year 
1, USP, a domestic corporation, and CFC1, a wholly owned foreign 
subsidiary of USP, form PS1, a partnership, as equal partners. USP 
contributes section 721(c) property, asset A, a depreciable asset with 
a $10 million built-in gain (fair market value of $10 million and tax 
basis of zero) (USP contribution). PS1 is a section 721(c) partnership 
as a result of the USP contribution, and the gain deferral method is 
applied with respect to asset A. In year 2, PS1 and CFC1 form PS2, a 
partnership, as equal partners. PS1 contributes asset A to PS2 (PS1 
contribution) when asset A has remaining built-in gain of $8 million 
and a fair market value of $12 million (the tax basis is still zero). 
PS2 is a section 721(c) partnership as a result of the PS1 
contribution. The PS1 contribution will be a successor event with 
respect to asset A if PS2 applies the gain deferral method to asset A 
and PS1 applies the gain deferral method to its interest in PS2 as 
described in Sec.  1.721(c)-5T(c)(5)(i). The remaining built-in gain in 
asset A in the hands of PS2 will be $12 million (excess of book value 
of $12 million over PS2's adjusted tax basis of $0). If PS2 sells the 
property, PS2 will allocate $12 million to PS1, and PS1 will allocate 
$10 million of the gain to USP ($8 million of which would be allocated 
under Sec.  1.704-3(a)(9)).
    On the other hand, the PS1 contribution will be an acceleration 
event (rather than a successor event) with respect to asset A if either 
PS1 or PS2 does not apply the gain deferral method. In this case, USP 
will recognize $8 million of gain, which is the amount of the remaining 
built-in gain that would have been allocated to USP if PS1 had sold 
asset A immediately before the PS1 contribution for fair market value, 
and PS1 will increase its tax basis in asset A from $0 to $8 million. 
See Sec.  1.721(c)-4T(c). Furthermore, the PS1 contribution will be 
subject to the general gain recognition rule under Sec.  1.721(c)-2T(b) 
because PS2 is a section 721(c) partnership and asset A is section 
721(c) property. PS1's realized gain with respect to asset A that will 
not qualify for nonrecognition under section 721(a) is $4 million (fair 
market value of $12 million less adjusted tax basis of $8 million) and 
PS1 will allocate half of that gain to USP.

d. Partial Acceleration Events

1. In General
    Section 1.721(c)-5T(d) identifies the partial acceleration events, 
and, in each case, the amount of gain that a U.S. transferor must 
recognize. The basis adjustments in Sec.  1.721(c)-4T(c) that must be 
made by a U.S. transferor and a section 721(c) partnership upon a 
``full'' acceleration event also apply for a partial acceleration 
event, except in the case of a partial acceleration that occurs as a 
result of an adjustment under section 734 to section 721(c) property, 
as described in Paragraph d.3 of this Part VIII. If there is remaining 
built-in gain in the section 721(c) property immediately after the 
partial acceleration event, the gain deferral method must continue to 
apply following the partial acceleration event.
2. Regulatory Allocations
    Section 1.721(c)-3T(c)(4)(i)(C) provides that a regulatory 
allocation that results in an over-allocation of book deduction or loss 
to a U.S. transferor or an under-allocation of book income or gain to a 
U.S. transferor will nevertheless be treated as satisfying the 
consistent allocation method if gain is recognized. See the discussion 
in Paragraph e.3.i of Part VI of the Explanation of Provisions section 
of this preamble. In order for such a regulatory allocation to be 
deemed to satisfy the consistent allocation method, the U.S. transferor 
must recognize an amount of gain equal to the amount of the allocation 
that, had the regulatory allocation not occurred, would have been 
allocated to the U.S. transferor in the case of income or gain, or 
would not have been allocated to the U.S. transferor in the case of 
deduction or

[[Page 7593]]

loss. See Sec.  1.721(c)-5T(d)(2). However, the amount of gain 
recognized is limited to the amount of the remaining built-in gain that 
would have been allocated to the U.S. transferor upon a hypothetical 
sale by the section 721(c) partnership of that portion of the property 
immediately before the regulatory allocation is made for fair market 
value.
3. Distributions of Other Partnership Property to a Partner That Result 
in an Adjustment Under Section 734
    The temporary regulations provide that a partial acceleration event 
occurs if there is a distribution of other property by a section 721(c) 
partnership that results in a positive basis adjustment to section 
721(c) property under section 734. In these cases, the U.S. transferor 
must recognize an amount of gain equal to the positive basis adjustment 
to the section 721(c) property under section 734. However, the amount 
of gain recognized is limited to the amount of the remaining built-in 
gain that would have been allocated to the U.S. transferor upon a 
hypothetical sale by the section 721(c) partnership of that portion of 
the property immediately before the regulatory allocation is made for 
fair market value. Furthermore, if the property that triggered the 
section 734 adjustment was distributed to the U.S. transferor or a 
member of its consolidated group, the amount described in the preceding 
sentence is reduced (but not below zero) by the amount of gain 
recognized by the U.S. transferor (or the consolidated group member) 
under section 731(a). See Sec.  1.721(c)-5T(d)(3). The amount of gain 
recognized as a result of the acceleration event is not reduced by any 
step-down to distributed property described by section 734(b)(1)(B). 
The partnership will not increase its basis under Sec.  1.721(c)-
4T(c)(2) for the gain recognized by the U.S. transferor.

e. Section 367 Transfers of Section 721(c) Property to a Foreign 
Corporation

    Section 1.721(c)-5T(e) provides rules for certain direct and 
indirect transfers of section 721(c) property to a foreign corporation. 
These rules apply if a section 721(c) partnership transfers section 
721(c) property, or if a U.S. transferor or a partnership in which a 
U.S. transferor is a direct or indirect partner transfers (directly or 
indirectly through one or more partnerships) an interest in a section 
721(c) partnership, to a foreign corporation in a transaction described 
in section 367. In this case, the underlying section 721(c) property 
will no longer be subject to the gain deferral method. The Treasury 
Department and the IRS have determined that this result is appropriate 
because to the extent any U.S. transferor is treated as transferring 
the section 721(c) property to the foreign corporation for purposes of 
section 367, the tax consequences will be determined under section 367. 
In this regard, see Sec. Sec.  1.367(a)-1T(c)(3)(i) and (ii), 1.367(d)-
1T(d)(1), and 1.367(e)-2(b)(1)(iii) (in general, providing an aggregate 
treatment of partnerships for purposes of applying the outbound 
transfer provisions under section 367). Furthermore, for the remaining 
portion of the property (which is the portion attributable to non-U.S. 
persons and therefore not subject to tax under section 367), the U.S. 
transferor must recognize an amount of gain equal to the remaining 
built-in gain that would have been allocated to the U.S. transferor 
upon a hypothetical sale by the section 721(c) partnership of that 
portion of the property immediately before the transfer for fair market 
value. The basis adjustments in Sec.  1.721(c)-4T(c) that must be made 
by a U.S. transferor and a section 721(c) partnership upon a ``full'' 
acceleration event also apply in this case. If stock in the transferee 
foreign corporation is received by a section 721(c) partnership, the 
stock will not be subject to the gain deferral method.

f. Fully Taxable Dispositions of a Portion of an Interest in a Section 
721(c) Partnership

    Section 1.721(c)-5T(f) provides a special rule when there is a 
fully taxable disposition of a portion of an interest in a section 
721(c) partnership. Specifically, if a U.S. transferor or a partnership 
in which a U.S. transferor is a direct or indirect partner disposes of 
(directly or indirectly through one or more partnerships) a portion of 
an interest in a section 721(c) partnership in a transaction in which 
all gain or loss, if any, is recognized, an acceleration event will not 
occur with respect to the portion of the interest transferred. The gain 
deferral method will continue to apply with respect to the section 
721(c) property of the section 721(c) partnership. The principles of 
Sec.  1.704-3(a)(7) will apply to determine the remaining built-in gain 
in section 721(c) property that is attributable to the portion of the 
interest in a section 721(c) partnership that is retained. This rule 
does not apply to an intercompany transaction (as defined in Sec.  
1.1502-13(b)(1)). See Sec.  1.721-5T(c)(3). See also the discussion in 
Paragraph c.2 of this Part VIII.

IX. Tiered Partnerships Rules

a. Overview

    This Part IX discusses the application of the gain deferral method 
to tiered partnerships. The temporary regulations employ 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.
    These principles, however, raise various issues in applying the 
gain deferral method to tiered partnerships: (i) Not all partnerships 
in the ownership chain will necessarily be section 721(c) partnerships; 
(ii) when the book value of an interest in a partnership reflects 
appreciation in the property of the lower-tier partnership that has not 
yet been reflected in the book value of the property, there will be a 
discrepancy between the built-in gain in the partnership interest and 
the built-in gain in the underlying property; (iii) an upper-tier 
partnership's allocation of its distributive share of certain lower-
tier partnership items must comply with Sec.  1.704-3(a)(9) (concerning 
the application of section 704(c) to tiered partnerships) and with the 
consistent allocation method; and (iv) a partnership whose interest is 
section 721(c) property that is contributed to a section 721(c) 
partnership may have previously adopted a method other than the 
remedial allocation method with respect to its underlying section 
704(c) property.
    To address these issues, the temporary regulations specify 
requirements that must be satisfied, in addition to all the other 
requirements to apply the gain deferral method, in order for the gain 
deferral method to be applied to tiered partnerships. See Sec.  
1.721(c)-3T(b)(5) (the last requirement to apply the gain deferral 
method).

b. Additional Requirements for Applying the Gain Deferral Method

1. In General
    For purposes of applying the gain deferral method, the temporary 
regulations address the conditions required to be satisfied by upper-
tier partnerships and lower-tier partnerships involved in tiered-
partnership transactions to ensure that the gain

[[Page 7594]]

deferral method is applied at all levels in the ownership chain and the 
allocation of partnership items up the chain correctly traces the 
built-in gain to the U.S. transferor. See Sec.  1.721(c)-3T(d). In the 
base case in which a U.S. transferor directly contributes section 
721(c) property to a section 721(c) partnership, the U.S. transferor 
will recognize gain under the general rule in these temporary 
regulations unless the gain deferral method is applied to the 
contribution. The same principle applies when section 721(c) property 
is indirectly (through an upper-tier partnership) contributed by a U.S. 
transferor to a section 721(c) partnership and the partnership look-
through rule in Sec.  1.721(c)-2T(d)(1) applies, in which case, the 
tiered-partnership rules in Sec.  1.721(c)-3T(d)(2) apply to the 
transferor upper-tier partnership and all controlled partnerships above 
it in the ownership chain. In addition, when the section 721(c) 
property is an interest in a partnership, the tiered-partnership rules 
in Sec.  1.721(c)-3T(d)(1) apply to the partnership whose interest is 
transferred and all controlled partnerships below it in the ownership 
chain. Therefore, when a partnership interest described in the 
preceding sentence is indirectly contributed by a U.S. transferor and 
the partnership look-through rule applies, the rules of both Sec.  
1.721(c)-3T(d)(1) and (2) apply.
2. Indirect Contribution of Section 721(c) Property
    Section 1.721(c)-3T(d)(2) provides the additional requirements for 
applying the gain deferral method if the section 721(c) property is 
indirectly contributed by a U.S. transferor to a section 721(c) 
partnership and the partnership look-through rule applies. In 
particular, this rule applies if an upper-tier partnership in which a 
U.S. transferor is a direct or indirect partner contributes section 
721(c) property to a lower-tier section 721(c) partnership. The upper-
tier partnership need not be a section 721(c) partnership for the 
partnership look-through rule to apply, but, in order for the upper-
tier partnership to avoid immediate gain recognition under the general 
gain recognition rule, the lower-tier section 721(c) partnership must 
apply the gain deferral method to the contributed property. This 
application of the gain deferral method has several additional 
requirements. First, the lower-tier section 721(c) partnership must 
treat the upper-tier partnership (which is not necessarily a section 
721(c) partnership) as the U.S. transferor solely for purposes of 
applying the consistent allocation method. Second, the upper-tier 
partnership, if it is a controlled partnership, must apply the gain 
deferral method to its interest in the lower-tier section 721(c) 
partnership. If the upper-tier partnership is not a section 721(c) 
partnership, it is deemed to be so, and the interest in the lower-tier 
section 721(c) partnership is deemed to be section 721(c) property. See 
Sec.  1.721(c)-1T(b)(14)(ii) and (b)(15)(ii).
    For the upper-tier partnership to apply the gain deferral method to 
the interest in the lower-tier partnership, Sec.  1.704-3T(a)(13)(ii) 
provides that the upper-tier partnership must treat its distributive 
share of lower-tier partnership items of gain, loss, and amortization, 
depreciation, or other cost recovery deductions with respect to a 
lower-tier partnership's section 721(c) property as though they were 
items of gain, loss, and amortization, depreciation, or other cost 
recovery with respect to the upper-tier partnership's interest in the 
lower-tier partnership. Section 1.704-3T(a)(13)(ii) is intended to 
reach the same result as if an aggregate approach governed the 
application of Sec.  1.704-3(a)(9) in the context of the gain deferral 
method. Section 1.704-3(a)(9) provides that if a partnership 
contributes section 704(c) property to a lower-tier partnership, or if 
a partner that receives a partnership interest in exchange for 
contributed property subsequently contributes the partnership interest 
to an upper-tier partnership, the upper-tier partnership must allocate 
its distributive share of lower-tier partnership items with respect to 
that section 704(c) property in a manner that takes into account the 
contributing partner's remaining built-in gain or loss. The Treasury 
Department and the IRS considered comments about aggregate treatment 
that were received on Notice 2009-70, 2009-34 I.R.B. 255, in developing 
the rule in Sec.  1.704-3T(a)(13)(ii). This rule applies only to a 
tiered-partnership structure that has at least one section 721(c) 
partnership and to which the gain deferral method is applied. The 
Treasury Department and the IRS intend no inference regarding the 
application of Sec.  1.704-3(a)(9) to partnerships not applying the 
gain deferral method.
    If the U.S. transferor is an indirect partner in the upper-tier 
partnership through one or more partnerships, these requirements must 
be satisfied by each controlled partnership in the chain of ownership 
between the upper-tier partnership and the U.S. transferor.
3. Contribution of an Interest in a Partnership
    Section 1.721(c)-3T(d)(1) provides the additional requirements for 
applying the gain deferral method if the section 721(c) property that 
is contributed to a section 721(c) partnership is an interest in a 
lower-tier partnership. The lower-tier partnership need not be a 
section 721(c) partnership. First, the lower-tier partnership, if it is 
a controlled partnership with respect to a U.S. transferor, must 
revalue all of its property under Sec.  1.704-1T(b)(2)(iv)(f)(6) if the 
revaluation would result in a new positive reverse section 704(c) layer 
in at least one property that is not excluded property (revaluation 
requirement). If the lower-tier partnership is not a section 721(c) 
partnership, it will be deemed to be so upon the revaluation. See Sec.  
1.721(c)-1T(b)(14)(ii).
    The revaluation requirement ensures, to the greatest extent 
possible, that all appreciation in the underlying property of a lower-
tier partnership that is reflected in the book value of the partnership 
interest in the lower-tier partnership is subject to the temporary 
regulations to the same extent that appreciation would be subject to 
the temporary regulations if the property of the lower-tier partnership 
(rather than the interest in the lower-tier partnership) were 
contributed.
    Second, the lower-tier partnership must apply the gain deferral 
method with respect to each property (other than excluded property) for 
which there is a new positive reverse section 704(c) layer as a result 
of the revaluation. A property with a new positive reverse section 
704(c) layer is deemed to be section 721(c) property, and the remaining 
built-in gain includes the new positive reverse section 704(c) layer. 
See Sec.  1.721(c)-1T(b)(15)(ii) and (b)(13)(ii), respectively. 
Although Sec.  1.721(c)-3T(b)(1)(i)(A) requires the application of the 
remedial allocation method to the remaining built-in gain, a lower-tier 
partnership may apply the gain deferral method by adopting the remedial 
allocation method only for the positive reverse section 704(c) layer if 
the partnership has previously adopted a section 704(c) method other 
than the remedial method for the property. Accordingly, the lower-tier 
partnership may continue to apply a different, historical section 
704(c) method to forward section 704(c) layers or to pre-existing 
reverse section 704(c) layers, as applicable, and still satisfy the 
requirements of the gain deferral method. For further discussion of the 
revaluation requirement and the definition of a controlled partnership, 
see Paragraph c of this Part IX.
    Third, the lower-tier partnership must treat a partner that is a 
partnership in which the U.S. transferor is a direct or

[[Page 7595]]

indirect partner as the U.S. transferor solely for purposes of applying 
the consistent allocation requirement. As a result, the lower-tier 
partnership must allocate its book items to the deemed U.S. transferor 
under the consistent allocation method. Regardless of the number of 
tiers of partnerships in the chain, the tiered-partnership rules are 
intended to cause the U.S. transferor that contributed (directly or 
indirectly) the lower-tier partnership interest to the section 721(c) 
partnership to be the person to recognize gain upon an acceleration 
event.
    If the lower-tier partnership owns (directly or indirectly through 
one or more partnerships) one or more partnerships that are controlled 
partnerships with respect to the U.S. transferor, these three 
requirements must be satisfied by each controlled partnership.

c. Revaluation Requirement

    In recognition of the possibility that a U.S. transferor may not be 
able to cause a lower-tier partnership to revalue its property when a 
partnership interest is contributed to an upper-tier partnership, the 
revaluation requirement is limited to those lower-tier partnerships 
that are controlled partnerships with respect to the U.S. transferor. 
Control is a facts-and-circumstances test, except that the U.S. 
transferor and related persons will be deemed to control a partnership 
in which those persons, in the aggregate, own (directly or indirectly 
through one or more partnerships) more than 50 percent of the interests 
in partnership capital or profits. See Sec.  1.721(c)-1T(b)(4).
    The definition of built-in gain in the notice excluded revaluation 
gain because a reverse section 704(c) layer with respect to property 
does not arise on the contribution of that property. However, a 
partnership that does not create and apply the remedial method to a 
positive reverse section 704(c) layer created on the contribution of a 
lower-tier partnership interest to an upper-tier partnership may shift 
the tax consequences of a portion of the built-in gain to a partner 
that is a related foreign person. The Treasury Department and the IRS 
believe that the description of the tiered-partnership rules contained 
in the notice notified taxpayers of an intention to promulgate a rule 
with the result reached by the temporary regulations.
    The revaluation requirement described in the gain deferral method 
requires an expansion of permissible events for partnership 
revaluations under section 704(b). Accordingly, Sec.  1.704-
1T(b)(2)(iv)(f)(6) allows a partnership to revalue its property if the 
revaluation is a condition for applying the gain deferral method. When 
multiple partnerships revalue their property, the revaluations occur in 
order from the lowest-tier partnership to the highest-tier partnership.
    If a partnership revalues its property, Sec.  1.704-3T(a)(13)(i) 
provides that the principles of Sec.  1.704-3(a)(9) shall apply to any 
reverse section 704(c) allocations made as a result of the revaluation.
    In developing the revaluation requirement and Sec.  1.704-
3T(a)(13)(i), the Treasury Department and the IRS considered comments 
received on revaluation rules in proposed regulations under section 
751(b) that are contained in a notice of proposed rulemaking (REG-
151416-06) published on November 3, 2014, in the Federal Register (79 
FR 65151). See proposed Sec. Sec.  1.704-1(b)(2)(iv)(f) and 1.704-
3(a)(9).

X. Procedural and Reporting Requirements

    To comply with the gain deferral method, the notice 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. The notice 
requested comments on whether the regulations should provide rules 
similar to those in the regulations under sections 367(a) and 6038B 
regarding failures to file gain recognition agreements or to satisfy 
other reporting obligations, including the standards for relief 
therein. See T.D. 9704 (79 FR 68763) (the 2014 GRA regulations). 
Comments were received expressing support for this approach.

a. Reporting and Procedural Requirements for the Year of the Gain 
Deferral Contribution

    The temporary regulations implement the rules described in the 
notice in a manner consistent with the approach in the 2014 GRA 
regulations. For a U.S. transferor, the reporting requirements include, 
among other information, the information required to be filed under 
section 6038B. The temporary regulations also adopt procedural 
requirements in order to seek relief for a failure to meet the 
reporting requirements of the gain deferral method, which mirror the 
approach in the 2014 GRA regulations, including procedures relating to 
the manner by which a transferor can establish the lack of willfulness 
and that a failure was due to reasonable cause. See Sec. Sec.  
1.721(c)-6T(f) and 1.6038B-2T(h). The temporary regulations adopt these 
procedural requirements for all U.S. persons that have a reporting 
obligation under section 6038B with respect to a transfer of property 
to a foreign partnership and that are seeking relief under the 
reasonable cause exception, not only for U.S. transferors described in 
the section 721(c) regulations. The reasonable cause procedure in the 
temporary regulations applies to all requests for reasonable cause 
relief (regardless of the date on which the contribution or the failure 
to file occurred) filed on or after January 18, 2017.
    In addition to adopting the current requirements of Sec.  1.6038B-
2(c), the temporary regulations require reporting necessary to 
demonstrate compliance with the gain deferral method. In general, the 
temporary regulations require a U.S. transferor to report information 
on a statement included on (or attached to) the Form 8865, Schedule O, 
Transfer of Property to a Foreign Partnership. The Treasury Department 
and the IRS intend that the Schedule O will be revised to include the 
information required by the temporary regulations.
    For purposes of the U.S. transferor's reporting requirements under 
Sec.  1.721(c)-6T with respect to a gain deferral contribution to a 
domestic section 721(c) partnership, a domestic section 721(c) 
partnership will generally be treated as foreign under section 
7701(a)(4) for reporting purposes. See Sec. Sec.  1.721(c)-6T(b)(4) and 
1.6038B-2T(a)(1)(iii). As a result, a U.S. transferor that contributes 
section 721(c) property to a domestic section 721(c) partnership in a 
gain deferral contribution must file a Form 8865, Return of U.S. 
Persons With Respect to Certain Foreign Partnerships (including Form 
8865, Schedule O, Transfer of Property to a Foreign Partnership), with 
its return for the taxable year that includes the date of the gain 
deferral contribution.
    Also as a requirement of the gain deferral method, the temporary 
regulations require that the U.S. transferor agree to extend the period 
of limitations on the assessment of tax for eight full taxable years 
with respect to the gain realized but not recognized on a gain deferral 
contribution, and for six full taxable years with respect to the U.S. 
transferor's distributive share of all items with respect to the 
section 721(c) property for the year of contribution and two subsequent 
years. See Sec.  1.721(c)-6T(b)(5)(i) and (ii). The U.S. transferor 
also must agree to extend the period of limitations on the assessment 
of tax for five full taxable years with respect to the gain recognized 
on the contribution of section 721(c) property for which the gain 
deferral method is not applied if

[[Page 7596]]

the contribution is made within five partnership taxable years 
following a gain deferral contribution. See Sec.  1.721(c)-
6T(b)(5)(iii). All agreements to extend the period of limitations on 
assessment of tax are deemed consented to and signed by the Secretary 
for purposes of section 6501(c)(4). The Treasury Department and the IRS 
intend to issue a designated form for use in extending the period of 
limitations by consent, as described above. Until the time such form is 
issued, the required consent must be submitted as a statement attached 
to the U.S. Transferor's Form 8865, Schedule O. Once such form is 
issued, the U.S. transferor must use the designated form to submit the 
required consent. These agreements must be filed only in connection 
with contributions occurring on or after January 18, 2017.
    If section 721(c) property that is subject to the gain deferral 
method is ECI property, the temporary regulations require the U.S. 
transferor to obtain from the section 721(c) partnership and each 
related foreign person that is a direct or indirect partner in the 
section 721(c) partnership a statement pursuant to which the partner 
and the partnership waive any claim under any income tax convention 
(whether or not currently in force at the time of the contribution) to 
an exemption from U.S. income tax or a reduced rate of U.S. income 
taxation on income derived from the use of the ECI property for the 
period in which there is remaining built-in gain. See Sec.  1.721(c)-
6T(c)(1).
    The temporary regulations require the U.S. transferor also to 
provide information with respect to related foreign partners and 
certain section 721(c) partnerships under section 6038B and the gain 
deferral method. This requirement also applies in the case of a 
partnership in a tiered-partnership structure that applies the gain 
deferral method under Sec.  1.721(c)-3T(d). See Sec.  1.721(c)-
6T(b)(2). The U.S. transferor must attach this information to its 
return.
    If the section 721(c) partnership has a reporting obligation under 
section 6031, it also will be required to report certain information 
under the temporary regulations. See Sec.  1.721(c)-6T(d). Although the 
temporary regulations require the partnership to submit certain 
information to the IRS and comply with other requirements relating to 
the application of the gain deferral method, a failure to do so will 
not constitute an acceleration event to the U.S. transferor. The 
Treasury Department and the IRS intend that the Form 1065, Schedule K-
1, or their accompanying instructions will be revised to describe this 
required information. Failure to include this information may result in 
imposition of a penalty. See sections 6721 and 6722.

b. Annual Reporting Requirements

    The temporary regulations require the U.S. transferor to provide 
certain information on an annual basis with respect to section 721(c) 
property subject to the gain deferral method. See Sec. Sec.  1.721(c)-
6T(b)(3) and 1.6038B-2T(c)(9). This includes information about income 
from the section 721(c) property (book and remedial income) allocated 
to the U.S. transferor in the partnership taxable year that ends with, 
or within, the U.S. transferor's taxable year, a calculation of 
remaining built-in gain, and information about acceleration, 
termination, successor, and partial acceleration events. The U.S. 
transferor must also attach a Schedule K-1 (Form 8865), Partner's Share 
of Income, Deductions, Credits, etc., for all related foreign persons 
that are direct or indirect partners in the section 721(c) partnership 
(if the partnership does not have a filing obligation under section 
6031) for the partnership taxable year that ends with, or within, the 
U.S. transferor's taxable year.
    In the case of ECI property subject to the gain deferral method, 
the U.S. transferor must annually declare that, after exercising 
reasonable diligence, to the best of the U.S. transferor's knowledge 
and belief all the income from the property was income effectively 
connected with the conduct of a trade or business within the United 
States, and no benefits with respect to the ECI property were claimed 
under any income tax convention by related foreign persons that are 
direct or indirect partners in the section 721(c) partnership or by the 
section 721(c) partnership. This requirement eliminates the potential 
need for related foreign persons that are direct or indirect partners 
in the section 721(c) partnership and the partnership to submit to the 
U.S. transferor an annual waiver of treaty benefits.
    The U.S. transferor must describe all acceleration, termination, 
successor, and partial acceleration events that occur with respect to 
the section 721(c) property during the partnership taxable year that 
ends with, or within, the U.S. transferor's taxable year. When there is 
a successor event, the U.S. transferor must identify the new 
partnership, lower-tier partnership, upper-tier partnership, or U.S. 
corporation (as applicable). If the section 721(c) partnership is a 
foreign partnership, the U.S. transferor must include the information 
described in Sec.  1.6038-3(g) (contents of information returns 
required of certain United States persons with respect to controlled 
foreign partnerships), if not already reported elsewhere, without 
regard to whether the section 721(c) partnership is a controlled 
foreign partnership or whether the U.S. transferor controlled the 
section 721(c) partnership. If the U.S. transferor is not a controlling 
fifty-percent partner (as defined in Sec.  1.6038-3(a)), the U.S. 
transferor may comply with this requirement by providing only the 
information described in Sec.  1.6038-3(g)(1). These requirements also 
apply to a U.S. transferor that is a successor, as described in 
Paragraph c.2 of Part VIII of the Explanation of Provisions section of 
this preamble.
    If the section 721(c) partnership has a filing obligation under 
section 6031, the partnership must include the information required 
under Sec.  1.721(c)-6T(b)(2) and (3) on the Schedule K-1 (Form 1065), 
Partner's Share of Income, Deductions, Credits, etc., of the U.S. 
transferor and all related foreign persons that are direct or indirect 
partners in the section 721(c) partnership. See Sec.  1.721(c)-
6T(d)(2).

XI. Effective/Applicability Dates

    The applicability dates of the temporary regulations generally 
relate back to the issuance of the notice. Accordingly, in general, the 
temporary regulations apply to contributions occurring on or after 
August 6, 2015, and to contributions occurring before August 6, 2015, 
resulting from an entity classification election made under Sec.  
301.7701-3 that is filed on or after August 6, 2015 (referred to in 
this preamble as the ``general applicability date''). However, new 
rules, including any substantive changes to the rules described in the 
notice, apply to contributions occurring on or after January 18, 2017, 
or to contributions occurring before January 18, 2017, resulting from 
an entity classification election made under Sec.  301.7701-3 that is 
filed on or after January 18, 2017. Taxpayers may, however, elect to 
apply those new rules and substantive changes to the rules described in 
the notice to a contribution occurring on or after the general 
applicability date. The election is made by reflecting the application 
of the relevant rule on a timely filed or amended return.

Special Analyses

    Certain IRS regulations, including these, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It is hereby certified that the

[[Page 7597]]

collection of information contained in this regulation will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a regulatory flexibility analysis is not required. This 
certification is based on the fact that the temporary regulations 
include a $1,000,000 de minimis exception for certain transfers, and 
tangible property with built-in gain that does not exceed $20,000 is 
excluded from the regulations. In addition, the regulations only apply 
when a U.S. transferor contributes property to a partnership with a 
partner that is a related foreign person, and persons related to the 
U.S. transferor own more than 80 percent of the interests in the 
partnership. Accordingly, the Treasury Department and the IRS expect 
that these regulations primarily will affect large domestic 
corporations. Pursuant to section 7805(f) of the Code, these 
regulations have been submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on their impact on small 
business.

Drafting Information

    The principal author of these regulations is Ryan A. Bowen of the 
Office of the Associate Chief Counsel (International). However, other 
personnel from the Treasury Department and the IRS participated in the 
development of the regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *.
    Section 1.197-2T also issued under 26 U.S.C. 197(g).
* * * * *
    Section 1.721(c)-1T also issued under 26 U.S.C. 721(c).
    Section 1.721(c)-2T also issued under 26 U.S.C. 721(c).
    Section 1.721(c)-3T also issued under 26 U.S.C. 721(c).
    Section 1.721(c)-4T also issued under 26 U.S.C. 721(c).
    Section 1.721(c)-5T also issued under 26 U.S.C. 721(c).
    Section 1.721(c)-6T also issued under 26 U.S.C. 721(c).
    Section 1.721(c)-7T also issued under 26 U.S.C. 721(c).
* * * * *
    Section 1.6038B-2T also issued under 26 U.S.C. 6038B.
* * * * *

0
Par. 2. Section 1.197-2 is amended by adding paragraphs (h)(12)(vii)(C) 
and (l)(5) to read as follows:


Sec.  1.197-2  Amortization of goodwill and certain other intangibles.

* * * * *
    (h) * * *
    (12) * * *
    (vii) * * *
    (C) [Reserved]. For further guidance, see Sec.  1.197-
2T(h)(12)(vii)(C).
* * * * *
    (l) * * *
    (5) [Reserved]. For further guidance, see Sec.  1.197-2T(l)(5).

0
Par 3. Section 1.197-2T is added to read as follows:


Sec.  1.197-2T   Amortization of goodwill and certain other 
intangibles.

    (a) through (h)(12)(vii)(B) [Reserved]. For further guidance, see 
Sec.  1.197-2(a) through (h)(12)(vii)(B).
    (C) Rules for section 721(c) partnerships. See Sec.  1.704-
3T(d)(5)(iii) if there is a contribution of a section 197(f)(9) 
intangible to a section 721(c) partnership (as defined in Sec.  
1.721(c)-1T(b)(14)).
    (viii) through (l)(4)(iii) [Reserved]. For further guidance, see 
Sec.  1.197-2(h)(12)(viii) through (l)(4)(iii).
    (5) Rules for section 721(c) partnerships--(i) Applicability 
dates--(A) In general. Except as provided in paragraph (l)(5)(i)(B) of 
this section, paragraph (h)(12)(vii)(C) of this section applies with 
respect to contributions occurring on or after January 18, 2017, and 
with respect to contributions occurring before January 18, 2017, 
resulting from an entity classification election made under Sec.  
301.7701-3 of this chapter that is filed on or after January 18, 2017.
    (B) Election to apply the provisions described in paragraph 
(l)(5)(i)(A) of this section retroactively. Paragraph (h)(12)(vii)(C) 
of this section may, by election, be applied with respect to a 
contribution occurring on or after August 6, 2015, and to a 
contribution occurring before August 6, 2015, resulting from an entity 
classification election made under Sec.  301.7701-3 of this chapter 
that is filed on or after August 6, 2015. The election is made by 
applying paragraph (h)(12)(vii)(C) of this section on a timely filed 
original return (including extensions) or an amended return filed no 
later than six months after January 18, 2017.
    (ii) Expiration date. Paragraph (h)(12)(vii)(C) of this section 
expires on January 17, 2020.

0
Par. 4. Section 1.704-1 is amended by adding paragraph (b)(2)(iv)(f)(6) 
following the undesignated paragraph at the end of paragraph 
(b)(2)(iv)(f)(5) and adding paragraph (f) to read as follows:


Sec.  1.704-1   Partner's distributive share.

* * * * *
    (b) * * *
    (2) * * *
    (iv) * * *
    (f) * * *
    (6) [Reserved]. For further guidance, see Sec.  1.704-
1T(b)(2)(iv)(f)(6).
* * * * *
    (f) [Reserved]. For further guidance, see Sec.  1.704-1T(f).

0
Par. 5. Section 1.704-1T is amended by:
0
1. Revising paragraphs (b)(1)(iii) through (b)(2)(iv)(f)(5).
0
2. Adding paragraph (b)(2)(iv)(f)(6).
0
3. Revising paragraphs (b)(2)(iv)(g) through (b)(4)(viii)(a) 
introductory text.
0
4. Redesignating paragraph (f) as paragraph (g).
0
5. Adding a new paragraph (f).
0
6. Revising newly redesignated paragraph (g).
    The additions and revisions read as follows:


Sec.  1.704-1T   Partner's distributive share (temporary).

* * * * *
    (b)(1)(iii) through (b)(2)(iv)(f)(5) [Reserved]. For further 
guidance, see Sec.  1.704-1(b)(1)(iii) through (b)(2)(iv)(f)(5).
    (6) Notwithstanding paragraph (b)(2)(iv)(f)(5) of this section, the 
revaluation is required under Sec.  1.721(c)-3T(d)(1) as a condition of 
the application of the gain deferral method (as described in Sec.  
1.721(c)-3T(b)) and is pursuant to an event described in this paragraph 
(b)(2)(iv)(f)(6). If an interest in a partnership is contributed to a 
section 721(c) partnership (as defined in Sec.  1.721(c)-1T(b)(14)), 
the partnership whose interest is contributed may revalue its property 
in accordance with this section. In this case, the revaluation by the 
partnership whose interest was contributed must occur immediately 
before the contribution. If a partnership that revalues its property 
pursuant to this paragraph owns an interest in another partnership, the 
partnership in which it owns an interest may also revalue its property 
in accordance with this section. When multiple partnerships revalue 
under this paragraph (b)(2)(iv)(f)(6), the revaluations occur in order 
from the lowest-tier partnership to the highest-tier partnership.

[[Page 7598]]

    (b)(2)(iv)(g) through (b)(4)(viii)(a) introductory text [Reserved]. 
For further guidance, see Sec.  1.704-1(b)(2)(iv)(g) through 
(b)(4)(viii)(a) introductory text.
* * * * *
    (f) Dates--(1) Applicability dates--(i) In general. Except as 
provided in paragraph (f)(1)(ii) of this section, paragraph 
(b)(2)(iv)(f)(6) of this section applies with respect to contributions 
occurring on or after January 18, 2017, and with respect to 
contributions occurring before January 18, 2017, resulting from an 
entity classification election made under Sec.  301.7701-3 of this 
chapter that is filed on or after January 18, 2017.
    (ii) Election to apply the provisions described in paragraph 
(f)(1)(i) of this section retroactively. Paragraph (b)(2)(iv)(f)(6) of 
this section may, by election, be applied with respect to a 
contribution occurring on or after August 6, 2015, but before January 
18, 2017, and with respect to a contribution occurring before August 6, 
2015, resulting from an entity classification election made under Sec.  
301.7701-3 of this chapter that is filed on or after August 6, 2015. 
The election is made by applying paragraph (b)(2)(iv)(f)(6) of this 
section on a timely filed original return (including extensions) or an 
amended return filed no later than six months after January 18, 2017.
    (2) Expiration date. Paragraph (b)(2)(iv)(f)(6) of this section 
expires on January 17, 2020.
    (g) Expiration date. The applicability of this section (other than 
paragraphs (b)(2)(iv)(f)(6) and (f) of this section) expires on 
February 4, 2019.

0
Par. 6. Section 1.704-3 is amended by adding paragraphs (a)(13), 
(d)(5)(iii), and (g) to read as follows:


Sec.  1.704-3   Contributed property.

    (a) * * *
    (13) [Reserved]. For further guidance, see Sec.  1.704-3T(a)(13).
* * * * *
    (d) * * *
    (5) * * *
    (iii) [Reserved]. For further guidance, see Sec.  1.704-
3T(d)(5)(iii).
* * * * *
    (g) [Reserved]. For further guidance, see Sec.  1.704-3T(g).

0
Par. 7. Section 1.704-3T is added to read as follows:


Sec.  1.704-3T   Contributed property (temporary).

    (a)(1) through (12) [Reserved]. For further guidance, see Sec.  
1.704-3(a)(1) through (12).
    (13) Rules for tiered section 721(c) partnerships--(i) 
Revaluations. If a partnership revalues its property pursuant to Sec.  
1.704-1T(b)(2)(iv)(f)(6) immediately before an interest in the 
partnership is contributed to another partnership, or if an upper-tier 
partnership owns an interest in a lower-tier partnership, and both the 
upper-tier partnership and the lower-tier partnership revalue 
partnership property pursuant to Sec.  1.704-1T(b)(2)(iv)(f)(6), the 
principles of Sec.  1.704-3(a)(9) will apply to any reverse section 
704(c) allocations made as a result of the revaluation.
    (ii) Basis-derivative items. If a lower-tier partnership that is a 
section 721(c) partnership applies the gain deferral method, then, for 
purposes of applying this section, the upper-tier partnership must 
treat its distributive share of lower-tier partnership items of gain, 
loss, amortization, depreciation, or other cost recovery with respect 
to the lower-tier partnership's section 721(c) property as though they 
were items of gain, loss, amortization, depreciation, or other cost 
recovery with respect to the upper-tier partnership's interest in the 
lower-tier partnership. For purposes of this paragraph (a)(13)(ii), 
gain deferral method is defined in Sec.  1.721(c)-1T(b)(8), section 
721(c) partnership is defined in Sec.  1.721(c)-1T(b)(14), and section 
721(c) property is defined in Sec.  1.721(c)-1T(b)(15).
    (b) through (d)(5)(ii) [Reserved]. For further guidance, see Sec.  
1.704-3(b) through (d)(5)(ii).
    (iii) Special rules for a section 721(c) partnership and anti-
churning property--(A) In general. Solely in the case of a gain 
deferral contribution of section 721(c) property that is a section 
197(f)(9) intangible that was not an amortizable section 197 intangible 
in the hands of the contributor, the remedial allocation method is 
modified with respect to allocations to a related person to the U.S. 
transferor pursuant to paragraphs (d)(5)(iii)(B) through (F) of this 
section. For purposes of this paragraph (d)(5)(iii), gain deferral 
contribution is defined in Sec.  1.721(c)-1T(b)(7), related person is 
defined in Sec.  1.721(c)-1T(b)(12), section 721(c) partnership is 
defined in Sec.  1.721(c)-1T(b)(14), section 721(c) property is defined 
in Sec.  1.721(c)-1T(b)(15), and U.S. transferor is defined in Sec.  
1.721(c)-1T(b)(18). For an example applying the rules of this paragraph 
(d)(5)(iii), see Sec.  1.721(c)-7T, Example 6.
    (B) Book basis recovery. The section 721(c) partnership must 
amortize the portion of the partnership's book value in the section 
197(f)(9) intangible that exceeds the adjusted basis in the property 
upon contribution using any recovery period and amortization method 
available to the partnership as if the property had been newly 
purchased by the partnership from an unrelated party.
    (C) Effect of ceiling rule limitations. If the ceiling rule causes 
the book allocation of the item of amortization of a section 197(f)(9) 
intangible under paragraph (d)(5)(iii)(B) of this section by a section 
721(c) partnership to a related person with respect to the U.S. 
transferor to differ from the tax allocation of the same item to the 
related person (a ceiling rule limited related person), the partnership 
must not create a remedial item of deduction to allocate to the related 
person but instead must increase the adjusted basis of the section 
197(f)(9) intangible by an amount equal to the difference solely with 
respect to that related person. The partnership simultaneously must 
create an offsetting remedial item in an amount identical to the 
increase in adjusted tax basis of the section 197(f)(9) intangible and 
allocate it to the contributing partner.
    (D) Effect of basis adjustment--(1) In general. The basis 
adjustment described in paragraph (d)(5)(iii)(C) of this section 
constitutes an adjustment to the adjusted basis of a section 197(f)(9) 
intangible with respect to the ceiling rule limited related person 
only. No adjustment is made to the common basis of partnership 
property. Thus, for purposes of calculating gain and loss, the ceiling 
rule limited related person will have a special basis for that section 
197(f)(9) intangible. The adjustment to the basis of partnership 
property under this section has no effect on the partnership's 
computation of any item under section 703.
    (2) Computation of a partner's distributive share of partnership 
items. The partnership first computes its items of gain or loss at the 
partnership level under section 703. The partnership then allocates the 
partnership items among the partners, including the ceiling rule 
limited related person, in accordance with section 704, and adjusts the 
partners' capital accounts accordingly. The partnership then adjusts 
the ceiling rule limited related person's distributive share of the 
items of partnership gain or loss, in accordance with paragraph 
(d)(5)(iii)(D)(3) of this section, to reflect the effects of that 
person's basis adjustment under this section. These adjustments to that 
person's distributive shares must be reflected on Schedules K and K-1 
of the partnership's return (Form 1065) (when otherwise required to be 
completed) and do not affect that person's capital account.
    (3) Effect of basis adjustment in determining items of income, 
gain, or

[[Page 7599]]

loss. The amount of a ceiling rule limited related person's gain or 
loss from the sale or exchange of a section 197(f)(9) intangible in 
which that person has a tax basis adjustment is equal to that person's 
share of the partnership's gain or loss from the sale of the asset 
(including any remedial allocations under this paragraph (d) and Sec.  
1.704-3(d)), minus the amount of that person's tax basis adjustment for 
the section 197(f)(9) intangible.
    (E) Subsequent transfers--(1) In general. Except as provided in 
paragraph (d)(5)(iii)(E)(2) of this section, if a ceiling rule limited 
related person transfers all or part of its partnership interest, the 
portion of the basis adjustment for a section 197(f)(9) intangible 
attributable to the interest transferred is eliminated. The transferor 
of the partnership interest remains the ceiling rule limited related 
person with respect to any remaining basis adjustment for the section 
197(f)(9) intangible.
    (2) Special rules for substituted basis transactions. Paragraph 
(d)(5)(iii)(E)(1) of this section does not apply to the extent a 
ceiling rule limited related person transfers its partnership interest 
in a transaction in which the transferee's basis in the partnership 
interest is determined in whole or in part by reference to the ceiling 
rule limited related person's basis in that interest. Instead, in such 
a case, the transferee succeeds to that portion of the transferor's 
basis adjustment for a section 197(f)(9) intangible attributable to the 
interest transferred. In such a case, the basis adjustment in a section 
197(f)(9) intangible to which the transferee succeeds is taken into 
account for purposes of determining the transferee's share of the 
adjusted basis to the partnership of the partnership's property for 
purposes of Sec. Sec.  1.743-1(b) and 1.755-1(b)(5). To the extent a 
transferee would be required to decrease the adjusted basis of a 
section 197(f)(9) intangible pursuant to Sec. Sec.  1.743-1(b)(2) and 
1.755-1(b)(5), the decrease first reduces the special basis adjustment 
described in paragraph (d)(5)(iii)(C) of this section, if any, to which 
the transferee succeeds.
    (F) Non-amortization of basis adjustment. Neither the increase to 
the adjusted basis of a section 197(f)(9) intangible with respect to a 
ceiling rule limited related person nor the portion of the basis of any 
property that was determined by reference to such increase is subject 
to amortization, depreciation, or other cost recovery.
    (d)(6) through (f) [Reserved]. For further guidance, see Sec.  
1.704-3(d)(6) through (f).
    (g) Certain rules for section 721(c) partnerships--(1) 
Applicability dates--(i) In general. Notwithstanding Sec.  1.704-3(f), 
except as provided in paragraph (g)(1)(ii) of this section, paragraphs 
(a)(13) and (d)(5)(iii) of this section apply with respect to 
contributions occurring on or after January 18, 2017, and with respect 
to contributions occurring before January 18, 2017, resulting from an 
entity classification election made under Sec.  301.7701-3 of this 
chapter that is filed on or after January 18, 2017.
    (ii) Election to apply the provisions described in paragraph 
(g)(1)(i) of this section retroactively. Paragraphs (a)(13) and 
(d)(5)(iii) of this section may, by election, be applied with respect 
to a contribution occurring on or after August 6, 2015, but before 
January 18, 2017, and with respect to a contribution occurring before 
August 6, 2015, resulting from an entity classification election made 
under Sec.  301.7701-3 of this chapter that is filed on or after August 
6, 2015. The election is made by applying paragraph (a)(13) or 
paragraph (d)(5)(iii) of this section, as applicable, on a timely filed 
original return (including extensions) or an amended return filed no 
later than six months after January 18, 2017.
    (2) Expiration date. The applicability of paragraphs (a)(13) and 
(d)(5)(iii) of this section expires on January 17, 2020.

0
Par. 8. Section 1.721(c)-1T is added to read as follows:


Sec.  1.721(c)-1T   Overview, definitions, and rules of general 
application (temporary).

    (a) Overview--(1) In general. This section and Sec. Sec.  1.721(c)-
2T through 1.721(c)-7T (collectively, the section 721(c) regulations) 
provide rules under section 721(c). This section provides definitions 
and rules of general application for purposes of the section 721(c) 
regulations. Section 1.721(c)-2T provides the general operative rules 
that override section 721(a) nonrecognition of gain upon a contribution 
of section 721(c) property to a section 721(c) partnership. Section 
1.721(c)-3T describes the gain deferral method, which may be applied in 
order to avoid the immediate recognition of gain upon a contribution of 
section 721(c) property to a section 721(c) partnership. Section 
1.721(c)-4T provides rules regarding acceleration events for purposes 
of applying the gain deferral method. Section 1.721(c)-5T identifies 
exceptions to the rules regarding acceleration events provided in Sec.  
1.721(c)-4T(b). Section 1.721(c)-6T provides procedural and reporting 
requirements. Section 1.721(c)-7T provides examples illustrating the 
application of the section 721(c) regulations.
    (2) Scope. Paragraph (b) of this section provides definitions. 
Paragraph (c) of this section describes the treatment of a change in 
form of a partnership. Paragraph (d) of this section provides an anti-
abuse rule. Paragraph (e) of this section provides the dates of 
applicability, and paragraph (f) of this section provides the date of 
expiration.
    (b) Definitions. The following definitions apply for purposes of 
the section 721(c) regulations. Unless otherwise indicated, the 
definitions apply on a property-by-property basis, as applicable.
    (1) Acceleration event. An acceleration event has the meaning 
provided in Sec.  1.721(c)-4T(b).
    (2) Built-in gain. Built-in gain is, with respect to property 
contributed to a partnership, the excess of the book value of the 
property over the partnership's adjusted tax basis in the property upon 
the contribution, determined without regard to the application of Sec.  
1.721(c)-2T(b).
    (3) Consistent allocation method. The consistent allocation method 
is the method described in Sec.  1.721(c)-3T(c).
    (4) Controlled partnership. A partnership is a controlled 
partnership with respect to a U.S. transferor if the U.S. transferor 
and related persons control the partnership. For this purpose, control 
is determined based on all the facts and circumstances, except that a 
partnership will be deemed to be controlled by a U.S. transferor and 
related persons if those persons, in the aggregate, own (directly or 
indirectly through one or more partnerships) more than 50 percent of 
the interests in the partnership capital or profits.
    (5) Direct or indirect partner. A direct or indirect partner is a 
person (other than a partnership) that owns an interest in a 
partnership directly or indirectly through one or more partnerships.
    (6) Excluded property. Excluded property is--
    (i) A cash equivalent;
    (ii) A security within the meaning of section 475(c)(2), without 
regard to section 475(c)(4);
    (iii) Tangible property with a book value exceeding adjusted tax 
basis by no more than $20,000 or with an adjusted tax basis in excess 
of book value; and
    (iv) An interest in a partnership in which 90 percent or more of 
the property (as measured by value) held by the partnership (directly 
or indirectly through interests in one or more partnerships that are 
not excluded property) consists of property described in paragraphs 
(b)(6)(i) through (iii) of this section.

[[Page 7600]]

    (7) Gain deferral contribution. A gain deferral contribution is a 
contribution of section 721(c) property to a section 721(c) partnership 
with respect to which the recognition of gain is deferred under the 
gain deferral method.
    (8) Gain deferral method. The gain deferral method is the method 
described in Sec.  1.721(c)-3T(b).
    (9) Partial acceleration event. A partial acceleration event is an 
event described in Sec.  1.721(c)-5T(d)(2) or (3).
    (10) Regulatory allocation. A regulatory allocation is--
    (i) An allocation pursuant to a minimum gain chargeback, as defined 
in Sec.  1.704-2(b)(2);
    (ii) A partner nonrecourse deduction, as determined in Sec.  1.704-
2(i)(2);
    (iii) An allocation pursuant to a partner minimum gain chargeback, 
as described in Sec.  1.704-2(i)(4);
    (iv) An allocation pursuant to a qualified income offset, as 
defined in Sec.  1.704-1(b)(2)(ii)(d);
    (v) An allocation with respect to the exercise of a noncompensatory 
option described in Sec.  1.704-1(b)(2)(iv)(s); and
    (vi) An allocation of partnership level ordinary income or loss 
described in Sec.  1.751-1(a)(3).
    (11) Related foreign person. A related foreign person is, with 
respect to a U.S. transferor, a related person (other than a 
partnership) that is not a U.S. person.
    (12) Related person. A related person is, with respect to a U.S. 
transferor, a person that is related (within the meaning of section 
267(b) or 707(b)(1)) to the U.S. transferor.
    (13) Remaining built-in gain--(i) In general. Remaining built-in 
gain is, with respect to section 721(c) property subject to the gain 
deferral method, the built-in gain reduced by decreases in the 
difference between the property's book value and adjusted tax basis, 
but, for this purpose, without taking into account increases or 
decreases to the property's book value pursuant to Sec.  1.704-
1(b)(2)(iv)(f) or (s).
    (ii) Special rule for tiered partnerships. If section 721(c) 
property is described in Sec.  1.721(c)-3T(d)(1)(ii), the remaining 
built-in gain includes the new positive reverse section 704(c) layer 
described in Sec.  1.721(c)-3T(d)(1)(ii), reduced by decreases in the 
difference between the property's book value and adjusted tax basis, 
but, for this purpose, without taking into account increases or 
decreases to the property's book value pursuant to Sec.  1.704-
1(b)(2)(iv)(f) or (s) that are unrelated to the revaluation described 
in Sec.  1.721(c)-3T(d)(1)(i).
    (14) Section 721(c) partnership--(i) In general. A partnership 
(domestic or foreign) 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--
    (A) A related foreign person with respect to the U.S. transferor is 
a direct or indirect partner in the partnership; and
    (B) The U.S. transferor and related persons own 80 percent or more 
of the interests in partnership capital, profits, deductions, or 
losses.
    (ii) Special rule for tiered partnerships. A partnership described 
in Sec.  1.721(c)-3T(d)(1) or (2) is deemed to be a section 721(c) 
partnership for purposes of the gain deferral method.
    (15) Section 721(c) property--(i) In general. Section 721(c) 
property is property, other than excluded property, with built-in gain 
that is contributed to a partnership by a U.S. transferor, including 
pursuant to a contribution described in Sec.  1.721(c)-2T(d) 
(partnership look-through rule). If the U.S. transferor is treated as 
contributing its share of property to a partnership pursuant to Sec.  
1.721(c)-2T(d), the entire property will be section 721(c) property.
    (ii) Special rule for tiered partnerships. Property described in 
Sec.  1.721(c)-3T(d)(1)(ii) and an interest in a partnership described 
in Sec.  1.721(c)-3T(d)(2)(ii) is deemed to be section 721(c) property.
    (16) Successor event. A successor event is an event described in 
Sec.  1.721(c)-5T(c)(2), (3), (4), or (5).
    (17) Termination event. A termination event is an event described 
in Sec.  1.721(c)-5T(b)(2), (3), (4), (5), (6), or (7).
    (18) U.S. transferor--(i) In general. A U.S. transferor is a United 
States person within the meaning of section 7701(a)(30) (a U.S. 
person), other than a domestic partnership.
    (ii) Special rule for tiered partnerships. Solely for purposes of 
applying the consistent allocation method, a U.S. transferor includes a 
partnership that is treated as a U.S. transferor under Sec.  1.721(c)-
3T(d)(1)(iii) or (d)(2)(i).
    (c) Change in form of a partnership. A mere change in identity, 
form, or place of organization of a partnership or a recapitalization 
of a partnership will not cause the partnership to become a section 
721(c) partnership.
    (d) Anti-abuse rule. If a U.S. transferor engages in a transaction 
(or series of transactions) or an arrangement with a principal purpose 
of avoiding the application of the section 721(c) regulations, the 
transaction (or series of transactions) or the arrangement may be 
recharacterized (including by aggregating or disregarding steps or 
disregarding an intermediate entity) in accordance with its substance.
    (e) Applicability dates--(1) In general. Except as provided in 
paragraphs (e)(2) and (3) of this section, this section applies to 
contributions occurring on or after August 6, 2015, and to 
contributions occurring before August 6, 2015, resulting from an entity 
classification election made under Sec.  301.7701-3 of this chapter 
that is filed on or after August 6, 2015.
    (2) Certain provisions. Except as provided in paragraph (e)(3) of 
this section, paragraphs (b)(6)(iv) and (c) of this section apply to 
contributions occurring on or after January 18, 2017, and to 
contributions occurring before January 18, 2017, resulting from an 
entity classification election made under Sec.  301.7701-3 of this 
chapter that is filed on or after January 18, 2017. Except as provided 
in paragraph (e)(3) of this section, paragraph (b)(14)(i)(B) of this 
section applies by replacing ``80 percent or more'' with ``greater than 
50 percent'' with respect to contributions occurring on or after August 
6, 2015, but before January 18, 2017, and with respect to contributions 
occurring before August 6, 2015, resulting from an entity 
classification election made under Sec.  301.7701-3 of this chapter 
that is filed on or after August 6, 2015, but before January 18, 2017.
    (3) Election to apply the provisions described in paragraph (e)(2) 
of this section retroactively. Paragraphs (b)(6)(iv), (b)(14)(i)(B), 
and (c) of this section, without the modification described in 
paragraph (e)(2) of this section, may, by election, be applied to a 
contribution occurring on or after August 6, 2015, but before January 
18, 2017, and to a contribution occurring before August 6, 2015, 
resulting from an entity classification election made under Sec.  
301.7701-3 of this chapter that is filed on or after August 6, 2015. 
The election is made by applying paragraph (b)(6)(iv) or (c) as 
described in paragraph (b)(14)(i)(B) or (e)(2) of this section, without 
the modification described in paragraph (e)(2) of this section, as 
applicable, to the contribution on a timely filed original return 
(including extensions) or an amended return filed no later than six 
months after January 18, 2017.
    (f) Expiration date. The applicability of this section expires on 
January 17, 2020.

0
Par. 9. Section 1.721(c)-2T is added to read as follows:

[[Page 7601]]

Sec.  1.721(c)-2T  Recognition of gain on certain contributions of 
property to partnerships with related foreign partners (temporary).

    (a) Scope. This section provides the general operative rules that 
override section 721(a) nonrecognition of gain upon a contribution of 
section 721(c) property to a section 721(c) partnership. Paragraph (b) 
of this section provides the general rule that nonrecognition of gain 
under section 721(a) does not apply to a contribution of section 721(c) 
property to a section 721(c) partnership. Paragraph (c) of this section 
provides a de minimis exception to the application of the general rule 
in paragraph (b) of this section. Paragraph (d) of this section 
provides rules for identifying a section 721(c) partnership when a 
partnership in which a U.S. transferor is a direct or indirect partner 
contributes property to another partnership. Paragraph (e) of this 
section provides the dates of applicability, and paragraph (f) of this 
section provides the date of expiration. For definitions that apply for 
purposes of this section, see Sec.  1.721(c)-1T(b).
    (b) General rule for contributions of section 721(c) property. 
Except as provided in this paragraph (b), paragraph (c) of this 
section, and Sec.  1.721(c)-3T (describing the gain deferral method), 
nonrecognition under section 721(a) will not apply to gain realized by 
the contributing partner upon a contribution of section 721(c) property 
to a section 721(c) partnership. This paragraph (b) does not apply to a 
direct contribution by a U.S. transferor if the U.S. transferor and 
related persons with respect to the U.S. transferor do not own 80 
percent or more of the interests in partnership capital, profits, 
deductions, or losses.
    (c) De minimis exception. Paragraph (b) of this section will not 
apply with respect to contributions to a section 721(c) partnership 
during a taxable year of the section 721(c) partnership for which the 
sum of the built-in gain with respect to all section 721(c) property 
contributed in that taxable year does not exceed $1 million. If, 
pursuant to the last sentence of paragraph (b) of this section, a 
direct contribution of property to the section 721(c) partnership by a 
U.S. transferor is not subject to paragraph (b) of this section, then 
such contribution is not taken into account for purposes of this 
paragraph (c).
    (d) Rules for identifying a section 721(c) partnership when a 
partnership contributes property to another partnership--(1) 
Partnership look-through rule. If a U.S. transferor is a direct or 
indirect partner in a partnership (upper-tier partnership) and the 
upper-tier partnership contributes all or a portion of its property to 
another partnership (lower-tier partnership), then, for purposes of 
determining if the lower-tier partnership is a section 721(c) 
partnership, the U.S. transferor is 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.
    (2) Exception for a technical termination of a partnership. 
Paragraph (d)(1) of this section will not apply to a deemed 
contribution that occurs as a result of a termination of a partnership 
described in section 708(b)(1)(B) (technical termination). If a 
partnership is a section 721(c) partnership immediately before a 
technical termination, see Sec.  1.721(c)-5T(c)(4) (which treats 
technical terminations as successor events in certain circumstances).
    (e) Applicability dates--(1) In general. Except as provided in 
paragraphs (e)(2) and (3) of this section, this section applies to 
contributions occurring on or after August 6, 2015, and to 
contributions occurring before August 6, 2015, resulting from an entity 
classification election made under Sec.  301.7701-3 of this chapter 
that is filed on or after August 6, 2015.
    (2) Certain provisions. Except as provided in paragraph (e)(3) of 
this section, the final sentence of paragraph (b) of this section, the 
final sentence of paragraph (c) of this section, and paragraph (d)(2) 
of this section apply to contributions occurring on or after January 
18, 2017, and to contributions occurring before January 18, 2017, 
resulting from an entity classification election made under Sec.  
301.7701-3 of this chapter that is filed on or after January 18, 2017.
    (3) Election to apply the provisions described in paragraph (e)(2) 
of this section retroactively. The final sentence of paragraph (b) of 
this section, the final sentence of paragraph (c) of this section, and 
paragraph (d)(2) of this section may, by election, be applied to a 
contribution occurring on or after August 6, 2015, but before January 
18, 2017, and to a contribution occurring before August 6, 2015, 
resulting from an entity classification election made under Sec.  
301.7701-3 of this chapter that is filed on or after August 6, 2015. 
The election is made by applying the final sentence of paragraph (b) of 
this section, the final sentence of paragraph (c) of this section, or 
paragraph (d)(2) of this section, as applicable, to the contribution on 
a timely filed original return (including extensions) or an amended 
return filed no later than six months after January 18, 2017.
    (f) Expiration date. The applicability of this section expires on 
January 17, 2020.

0
Par. 10. Section 1.721(c)-3T is added to read as follows:


Sec.  1.721(c)-3T   Gain deferral method (temporary).

    (a) Scope. This section describes the gain deferral method to avoid 
the immediate recognition of gain upon a contribution of section 721(c) 
property to a section 721(c) partnership. Paragraph (b) of this section 
provides the requirements of the gain deferral method, including the 
requirement to apply the consistent allocation method. Paragraph (c) of 
this section describes the consistent allocation method. Paragraph (d) 
of this section provides rules for tiered partnerships. Paragraph (e) 
of this section provides the dates of applicability, and paragraph (f) 
of this section provides the date of expiration. For definitions that 
apply for purposes of this section, see Sec.  1.721(c)-1T(b).
    (b) Requirements of the gain deferral method. A contribution of 
section 721(c) property to a section 721(c) partnership that would be 
subject to Sec.  1.721(c)-2T(b) will not be subject to Sec.  1.721(c)-
2T(b) if the conditions in paragraphs (b)(1) through (5) of this 
section are satisfied with respect to that property.
    (1) Either--
    (i) Both--
    (A) The section 721(c) partnership adopts the remedial allocation 
method described in Sec.  1.704-3(d) with respect to the section 721(c) 
property; and
    (B) The section 721(c) partnership applies the consistent 
allocation method provided in paragraph (c) of this section; or
    (ii) For the period beginning on the date of the contribution of 
the section 721(c) property and ending on the date on which there is no 
remaining built-in gain with respect to that property, all distributive 
shares of income and gain with respect to the section 721(c) property 
for all direct and indirect partners that are related foreign persons 
with respect to the U.S. transferor will be subject to taxation as 
income effectively connected with a trade or business within the United 
States (under either section 871 or 882), and neither the section 
721(c) partnership nor a related foreign person that is a direct or 
indirect partner in the section 721(c) partnership claims benefits 
under an income tax convention that would exempt the income or gain 
from tax or reduce the rate of taxation to which the income or gain is 
subject.

[[Page 7602]]

    (2) Upon an acceleration event, the U.S. transferor recognizes an 
amount of gain equal to the remaining built-in gain with respect to the 
section 721(c) property or an amount of gain required to be recognized 
under Sec.  1.721(c)-5T(d) or (e), as applicable.
    (3) The procedural and reporting requirements provided in Sec.  
1.721(c)-6T(b) are satisfied.
    (4) The U.S. transferor consents to extend the period of 
limitations on assessment of tax as required by Sec.  1.721(c)-
6T(b)(5).
    (5) If the section 721(c) property is a partnership interest or 
property described in the partnership look-through rule provided in 
Sec.  1.721(c)-2T(d), the applicable tiered-partnership rules provided 
in paragraph (d) of this section are applied.
    (c) Consistent allocation method--(1) In general. For each taxable 
year of a section 721(c) partnership in which there is remaining built-
in gain in the section 721(c) property, the section 721(c) partnership 
must allocate each book item of income, gain, deduction, and loss with 
respect to the section 721(c) property to the U.S. transferor in the 
same percentage. For exceptions to this general rule, see paragraph 
(c)(4) of this section.
    (2) Determining income or gain with respect to section 721(c) 
property. For purposes of applying paragraph (c)(1) of this section, a 
section 721(c) partnership must attribute book income and gain to each 
item of section 721(c) property in a consistent manner using any 
reasonable method taking into account all the facts and circumstances. 
All items of book income and gain attributable to an item of section 
721(c) property will comprise a single class of gross income for 
purposes of applying paragraph (c)(3) of this section.
    (3) Determining deduction or loss with respect to section 721(c) 
property. For purposes of applying paragraph (c)(1) of this section, a 
section 721(c) partnership must use the principles of Sec. Sec.  1.861-
8 and 1.861-8T to allocate and apportion its items of deduction, except 
for interest expense and research and experimental expenditures, and 
loss to the class of gross income with respect to each item of section 
721(c) property as determined in paragraph (c)(2) of this section. 
Accordingly, a deduction or loss will be considered to be definitely 
related and therefore allocable to a class of gross income with respect 
to particular section 721(c) property whether or not there is any item 
of gross income in that class that is received or accrued during the 
taxable year and whether or not the amount of deduction or loss exceeds 
the amount of gross income in that class during the taxable year. If a 
deduction or loss is definitely related and therefore allocable to 
gross income attributable to more than one class of gross income of the 
section 721(c) partnership or if a deduction or loss is not definitely 
related to any class of gross income of the section 721(c) partnership, 
the section 721(c) partnership must apportion that deduction or loss 
among its classes of gross income using a reasonable method that 
reflects to a reasonably close extent the factual relationship between 
the deduction or loss and the classes of gross income. The section 
721(c) partnership may allocate and apportion its interest expense and 
research and experimental expenditures under any reasonable method, 
including, but not limited to, the methods prescribed in Sec. Sec.  
1.861-9 and 1.861-9T (interest expense) and Sec.  1.861-17 (research 
and experimental expenditures). For this purpose, the section 721(c) 
partnership must allocate and apportion its deductions and losses 
without regard to the partners' percentage interests in the 
partnership.
    (4) Exceptions to the consistent allocation method--(i) Regulatory 
allocations. A regulatory allocation (as defined in Sec.  1.721(c)-
1T(b)(10)) of book income, gain, deduction, or loss with respect to 
section 721(c) property that otherwise would fail to satisfy paragraph 
(c)(1) of this section is nevertheless deemed to satisfy that paragraph 
if the allocation is--
    (A) An allocation of income or gain to the U.S. transferor (or a 
member of its consolidated group as defined in Sec.  1.1502-1(h));
    (B) An allocation of deduction or loss to a partner other than the 
U.S. transferor (or a member of its consolidated group); or
    (C) Treated as a partial acceleration event pursuant to Sec.  
1.721(c)-5T(d)(2).
    (ii) Allocation of creditable foreign tax expenditures. An 
allocation of a creditable foreign tax expenditure (as defined in Sec.  
1.704-1(b)(4)(viii)(b)) is not subject to the consistent allocation 
method.
    (d) Tiered partnership rules. This paragraph (d) provides the 
tiered partnership rules referred to in paragraph (b)(5) of this 
section.
    (1) Section 721(c) property is a partnership interest. If the 
section 721(c) property that is contributed to a section 721(c) 
partnership is an interest in a partnership (lower-tier partnership), 
then the lower-tier partnership, if it is a controlled partnership with 
respect to the U.S. transferor, and each partnership in which an 
interest is owned (directly or indirectly through one or more 
partnerships) by the lower-tier partnership and that is a controlled 
partnership with respect to the U.S. transferor, must satisfy the 
requirements of paragraphs (d)(1)(i), (ii), and (iii) of this section.
    (i) The partnership must revalue all its property under Sec.  
1.704-1(b)(2)(iv)(f)(6) if the revaluation would result in a separate 
positive difference between book value and adjusted tax basis in at 
least one property that is not excluded property.
    (ii) The partnership must apply the gain deferral method for each 
property (other than excluded property) for which there is a separate 
positive difference between book value and adjusted tax basis resulting 
from the revaluation described in paragraph (d)(1) of this section (new 
positive reverse section 704(c) layer). If the partnership has 
previously adopted a section 704(c) method other than the remedial 
allocation method for the property, the partnership satisfies the 
requirement of paragraph (b)(1)(i)(A) of this section by adopting the 
remedial allocation method for the new positive reverse section 704(c) 
layer.
    (iii) The partnership must treat a partner that is a partnership in 
which the U.S. transferor is a direct or indirect partner as if it were 
the U.S. transferor with respect to the section 721(c) property solely 
for purposes of applying the consistent allocation method.
    (2) Section 721(c) property is indirectly contributed by a U.S. 
transferor under the partnership look-through rule. If the U.S. 
transferor is a direct or indirect partner in the upper-tier 
partnership described in Sec.  1.721(c)-2T(d)(1), and under Sec.  
1.721(c)-2T(d)(1), the U.S. transferor is treated as contributing the 
section 721(c) property (including an interest in a partnership 
described in paragraph (d)(1) of this section) to a section 721(c) 
partnership, then the requirements of paragraphs (d)(2)(i), (ii), and 
(iii) of this section must be satisfied.
    (i) The section 721(c) partnership must treat the upper-tier 
partnership as the U.S. transferor of the section 721(c) property 
solely for purposes of applying the consistent allocation method;
    (ii) The upper-tier partnership, if it is a controlled partnership 
with respect to the U.S. transferor, must apply the gain deferral 
method to its interest in the section 721(c) partnership; and
    (iii) If the U.S. transferor is an indirect partner in the upper-
tier partnership through one or more partnerships, the principles of 
paragraphs (d)(2)(i) and (ii) of this section must be applied with 
respect to those partnerships that are

[[Page 7603]]

controlled partnerships with respect to the U.S. transferor.
    (e) Applicability dates--(1) In general. Except as provided in 
paragraphs (e)(2) and (3) of this section, this section applies to 
contributions occurring on or after August 6, 2015, and to 
contributions occurring before August 6, 2015, resulting from an entity 
classification election made under Sec.  301.7701-3 of this chapter 
that is filed on or after August 6, 2015.
    (2) Certain provisions. Except as provided in paragraph (e)(3) of 
this section, paragraphs (b)(1)(ii), (c)(2) and (3), (c)(4)(i) and 
(ii), and (d)(1) and (2) of this section apply to contributions 
occurring on or after January 18, 2017, and to contributions occurring 
before January 18, 2017, resulting from an entity classification 
election made under Sec.  301.7701-3 of this chapter that is filed on 
or after January 18, 2017.
    (3) Election to apply the provisions described in paragraph (e)(2) 
of this section retroactively. Paragraphs (b)(1)(ii), (c)(2) and (3), 
(c)(4)(i) and (ii), and (d)(1) and (2) of this section may, by 
election, be applied to a contribution occurring on or after August 6, 
2015, but before January 18, 2017, and to a contribution occurring 
before August 6, 2015, resulting from an entity classification election 
made under Sec.  301.7701-3 of this chapter that is filed on or after 
August 6, 2015. The election is made by applying paragraph (b)(1)(ii), 
(c)(2) and (3), (c)(4)(i) and (ii), and (d)(1) or (2) of this section, 
as applicable, to the contribution on a timely filed original return 
(including extensions) or an amended return filed no later than six 
months after January 18, 2017. In order to elect to apply paragraph 
(c)(2) or (3) of this section to a contribution described in this 
paragraph (e)(3), an election must also be made to apply paragraph 
(c)(3) or (2) of this section, respectively, to the contribution.
    (4) Transitional rules. If a contribution is described in paragraph 
(e)(2) of this section and no election described in paragraph (e)(3) of 
this section is made to apply one or more of paragraphs (c)(2) and (3) 
and (c)(4)(i) and (ii) of this section, as applicable, to the 
contribution, then, for purposes of paragraph (c)(1) of this section, 
the section 721(c) partnership must attribute book income, gain, loss, 
and deduction to the section 721(c) property in a consistent manner 
under any reasonable method taking into account all the facts and 
circumstances. If a contribution is described in paragraph (e)(2) of 
this section and no election described in paragraph (e)(3) of this 
section is made to apply paragraph (d)(1) or (2) of this section, as 
applicable, to the contribution, then, this section must be applied in 
a manner consistent with the purpose of the section 721(c) regulations. 
Thus, for example, if a U.S. transferor is a direct or indirect partner 
in a partnership and that partnership contributes section 721(c) 
property to a lower-tier partnership, or, if a U.S. transferor 
contributes an interest in a partnership that owns section 721(c) 
property to a lower-tier partnership, then paragraph (b) of this 
section applies as though the U.S. transferor contributed its share of 
the section 721(c) property directly.
    (f) Expiration date. The applicability of this section expires on 
January 17, 2020.

0
Par. 11. Section 1.721(c)-4T is added to read as follows:


Sec.  1.721(c)-4T  Acceleration events (temporary).

    (a) Scope. This section provides rules regarding acceleration 
events for purposes of applying the gain deferral method. Paragraph (b) 
of this section defines an acceleration event. Paragraph (c) of this 
section provides the consequences of an acceleration event. Paragraph 
(d) of this section provides the dates of applicability, and paragraph 
(e) of this section provides the date of expiration. For definitions 
that apply for purposes of this section, see Sec.  1.721(c)-1T(b).
    (b) Definition of an acceleration event--(1) General rules. Except 
as provided in this paragraph (b) and Sec.  1.721(c)-5T (acceleration 
event exceptions), an acceleration event with respect to section 721(c) 
property is any event that either would reduce the amount of remaining 
built-in gain that a U.S. transferor would recognize under the gain 
deferral method if the event had not occurred or could defer the 
recognition of the remaining built-in gain. An acceleration event 
includes a contribution of section 721(c) property to another 
partnership by a section 721(c) partnership and a contribution of an 
interest in a section 721(c) partnership to another partnership. This 
paragraph (b) applies on a property-by-property basis.
    (2) Failure to comply with a requirement of the gain deferral 
method--(i) General rule. An acceleration event with respect to section 
721(c) property occurs when any party fails to comply with a condition 
of the gain deferral method with respect to the section 721(c) 
property.
    (ii) Certain failures to comply with procedural and reporting 
requirements. Notwithstanding paragraph (b)(2)(i) of this section, an 
acceleration event will not occur solely as a result of a failure to 
comply with a requirement of Sec.  1.721(c)-3T(b)(3) that is not 
willful. See Sec. Sec.  1.721(c)-6T(f) and 1.6038B-2T(h)(3).
    (3) Lower-tier partnership allocations. Notwithstanding paragraph 
(b)(1) of this section, an acceleration event will not occur because of 
a reduction in remaining built-in gain in an interest in a partnership 
that is section 721(c) property that occurs as a result of allocations 
of book items of deduction and loss, or tax items of income and gain.
    (4) Deemed acceleration event. A U.S. transferor may treat an 
acceleration event as having occurred with respect to section 721(c) 
property by both recognizing gain in an amount equal to the remaining 
built-in gain that would have been allocated to the U.S. transferor if 
the section 721(c) partnership had sold the section 721(c) property 
immediately before the deemed acceleration event for fair market value 
and satisfying the reporting required by Sec.  1.721(c)-6T(b)(3)(iv). 
In this case, see paragraph (c) of this section regarding basis 
adjustments.
    (c) Consequences of an acceleration event. Paragraphs (c)(1) and 
(2) of this section provide the consequences of an acceleration event 
with respect to section 721(c) property, a partial acceleration event 
with respect to section 721(c) property to the extent provided in Sec.  
1.721(c)-5T(d)(1), and a transfer described in section 367 of section 
721(c) property to the extent provided in Sec.  1.721(c)-5T(e).
    (1) U.S. transferor. The U.S. transferor must recognize gain in an 
amount equal to the remaining built-in gain that would have been 
allocated to the U.S. transferor if the section 721(c) partnership had 
sold the section 721(c) property immediately before the acceleration 
event for fair market value. The U.S. transferor will increase its 
basis in its partnership interest by the amount of gain recognized. If 
the U.S. transferor is an indirect partner in the section 721(c) 
partnership through one or more tiered partnerships, appropriate basis 
adjustments will be made to the interests in the tiered partnerships.
    (2) Section 721(c) partnership. The section 721(c) partnership will 
increase its basis in the section 721(c) property by the amount of 
built-in gain recognized by the U.S. transferor under paragraph (c)(1) 
of this section. Any tax consequences of the acceleration event will be 
determined taking into account the increase in the partnership's 
adjusted tax basis in the section 721(c) property. If the section 
721(c) property remains in the partnership after the

[[Page 7604]]

acceleration event, the increase in basis of the section 721(c) 
property may be recovered using any applicable recovery period and 
depreciation (or other cost recovery) method (including first-year 
conventions) available to the partnership for newly purchased property 
of the same type placed in service on the date of the acceleration 
event. The section 721(c) property will no longer be subject to the 
gain deferral method.
    (d) Applicability dates. This section applies to contributions 
occurring on or after August 6, 2015, and to contributions occurring 
before August 6, 2015, resulting from an entity classification election 
made under Sec.  301.7701-3 of this chapter that is filed on or after 
August 6, 2015.
    (e) Expiration date. The applicability of this section expires on 
January 17, 2020.

0
Par. 12. Section 1.721(c)-5T is added to read as follows:


Sec.  1.721(c)-5T  Acceleration event exceptions (temporary).

    (a) Scope. This section identifies exceptions to the acceleration 
events, which, like the rules regarding acceleration events provided in 
Sec.  1.721(c)-4T(b), apply on a property-by-property basis. Paragraph 
(b) of this section identifies the events that terminate the 
requirement to apply the gain deferral method. Paragraph (c) of this 
section identifies the successor events that allow for the continued 
application of the gain deferral method. Paragraph (d) of this section 
identifies the partial acceleration events. Paragraph (e) of this 
section provides special rules for transfers of section 721(c) property 
to a foreign corporation described in section 367. Paragraph (f) of 
this section allows for the continued application of the gain deferral 
method if there is a fully taxable disposition of a portion of an 
interest in a partnership. Paragraph (g) of this section provides the 
dates of applicability, and paragraph (h) of this section provides the 
date of expiration. For definitions that apply for purposes of this 
section, see Sec.  1.721(c)-1T(b).
    (b) Termination events--(1) In general. Notwithstanding Sec.  
1.721(c)-4T(b)(1), a termination event with respect to section 721(c) 
property will not constitute an acceleration event. In these cases, the 
section 721(c) property will no longer be subject to the gain deferral 
method.
    (2) Transfers of section 721(c) property (other than a partnership 
interest) to a domestic corporation described in section 351. A 
termination event occurs if a section 721(c) partnership transfers 
section 721(c) property (other than an interest in a partnership) to a 
domestic corporation in a transaction to which section 351 applies.
    (3) Certain incorporations of a section 721(c) partnership. A 
termination event occurs upon an incorporation of a section 721(c) 
partnership into a domestic corporation by any method of incorporation 
(other than a method involving an actual distribution of partnership 
property to the partners, followed by a contribution of that property 
to a corporation), provided that the section 721(c) partnership is 
liquidated as part of the incorporation transaction.
    (4) Certain distributions of section 721(c) property. A termination 
event occurs if a section 721(c) partnership distributes section 721(c) 
property either to the U.S. transferor or, if the U.S. transferor is a 
member of a consolidated group (as defined in Sec.  1.1502-1(h)) at the 
time of the distribution and the distribution occurs outside the seven-
year period described in section 704(c)(1)(B), to a member of the 
consolidated group.
    (5) Partnership ceases to have a partner that is a related foreign 
person. A termination event occurs when a section 721(c) partnership 
ceases to have any direct or indirect partners that are related foreign 
persons with respect to the U.S. transferor, provided there is no plan 
for a related foreign person to subsequently become a direct or 
indirect partner in the partnership (or a successor). This paragraph 
(b)(5) does not apply to a distribution of section 721(c) property in 
redemption of a related foreign person's interest in a section 721(c) 
partnership.
    (6) Fully taxable dispositions of section 721(c) property. A 
termination event occurs if a section 721(c) partnership disposes of 
section 721(c) property in a transaction in which all gain or loss, if 
any, is recognized.
    (7) Fully taxable dispositions of an entire interest in a section 
721(c) partnership. A termination event occurs if a U.S. transferor or 
a partnership in which a U.S. transferor is a direct or indirect 
partner disposes of its entire interest in a section 721(c) partnership 
that owns the section 721(c) property in a transaction in which all 
gain or loss, if any, is recognized. This paragraph (b)(7) does not 
apply if a U.S. transferor is a member of a consolidated group (as 
defined in Sec.  1.1502-1(h)) and the interest in the section 721(c) 
partnership is transferred in an intercompany transaction (as defined 
in Sec.  1.1502-13(b)(1)).
    (c) Successor events--(1) In general. Notwithstanding Sec.  
1.721(c)-4T(b)(1), a successor event with respect to section 721(c) 
property will not constitute an acceleration event. If only a portion 
of an interest in a partnership is transferred in a successor event 
described in this paragraph (c), the principles of Sec.  1.704-3(a)(7) 
apply to determine the remaining built-in gain in section 721(c) 
property that is attributable to the portion of the interest that is 
transferred and the portion of the interest that is retained.
    (2) Transfers of an interest in a section 721(c) partnership by a 
U.S. transferor or upper-tier partnership to a domestic corporation in 
certain nonrecognition transactions. A successor event occurs if a U.S. 
transferor or a partnership in which a U.S. transferor is a direct or 
indirect partner transfers (directly or indirectly through one or more 
partnerships) an interest in a section 721(c) partnership to a domestic 
corporation in a transaction to which section 351 or 381 applies, and 
the gain deferral method is continued by treating the transferee 
domestic corporation as the U.S. transferor for purposes of the section 
721(c) regulations. If the transfer described in this paragraph (c)(2) 
also results in a termination under section 708(b)(1)(B) of the section 
721(c) partnership, see paragraph (c)(4) of this section.
    (3) Transfers of an interest in a section 721(c) partnership in an 
intercompany transaction. A successor event occurs if a U.S. transferor 
that is a member of a consolidated group (as defined in Sec.  1.1502-
1(h)) transfers (directly or indirectly through one or more 
partnerships) an interest in a section 721(c) partnership in an 
intercompany transaction (as defined in Sec.  1.1502-13(b)(1)), and the 
gain deferral method is continued by treating the transferee member as 
the U.S. transferor for purposes of the section 721(c) regulations. If 
the transfer described in this paragraph (c)(3) also results in a 
termination under section 708(b)(1)(B) of the section 721(c) 
partnership, see paragraph (c)(4) of this section.
    (4) Termination under section 708(b)(1)(B) of a section 721(c) 
partnership. A successor event occurs if there is a termination under 
section 708(b)(1)(B) of a section 721(c) partnership, and the gain 
deferral method is continued by treating the new partnership as the 
section 721(c) partnership for purposes of the section 721(c) 
regulations.
    (5) Transactions involving tiered partnerships--(i) Contributions 
of section 721(c) property to a lower-tier

[[Page 7605]]

partnership. A successor event occurs if a section 721(c) partnership 
contributes the section 721(c) property to a partnership that is a 
controlled partnership with respect to the U.S. transferor (lower-tier 
section 721(c) partnership) and the requirements of paragraphs 
(c)(5)(i)(A), (B), and (C) of this section are satisfied.
    (A) The lower-tier section 721(c) partnership is a section 721(c) 
partnership or is treated as a section 721(c) partnership.
    (B) The gain deferral method is applied with respect to the section 
721(c) property in the hands of the lower-tier section 721(c) 
partnership.
    (C) The gain deferral method is applied with respect to the section 
721(c) partnership's interest in the lower-tier section 721(c) 
partnership. See Sec. Sec.  1.721(c)-3T(b)(5) and (d)(2).
    (ii) Contributions of an interest in a section 721(c) partnership 
to an upper-tier partnership. A successor event occurs if a U.S. 
transferor or a partnership in which a U.S. transferor is a direct or 
indirect partner contributes (directly or indirectly through one or 
more partnerships) an interest in a section 721(c) partnership to a 
partnership that is a controlled partnership with respect to the U.S. 
transferor (upper-tier section 721(c) partnership) and the requirements 
of paragraphs (c)(5)(ii)(A), (B), (C), and (D) of this section are 
satisfied.
    (A) The gain deferral method is continued with respect to the 
section 721(c) property in the hands of the section 721(c) partnership.
    (B) The upper-tier section 721(c) partnership is, or is treated as, 
a section 721(c) partnership.
    (C) If the upper-tier section 721(c) partnership directly owns its 
interest in the section 721(c) partnership, the gain deferral method is 
applied with respect to the upper-tier section 721(c) partnership's 
interest in the section 721(c) partnership. See Sec.  1.721(c)-3T(b)(5) 
and (d)(1).
    (D) If the upper-tier section 721(c) partnership indirectly owns 
its interest in the section 721(c) partnership through one or more 
partnerships, the principles of paragraphs (c)(5)(ii)(B) and (C) of 
this section are applied with respect to each partnership through which 
the upper-tier section 721(c) partnership indirectly owns an interest 
in the section 721(c) partnership.
    (d) Partial acceleration events--(1) In general. Notwithstanding 
Sec.  1.721(c)-4T, a partial acceleration event with respect to section 
721(c) property does not constitute an acceleration event. In these 
cases, except as provided in paragraph (d)(3) of this section, the 
rules in Sec.  1.721(c)-4T(c) (concerning the consequences of an 
acceleration event) for making basis adjustments apply to the extent 
that the U.S. transferor is required to recognize gain under paragraph 
(d)(2) or (3) of this section. Furthermore, if there is remaining 
built-in gain with respect to the section 721(c) property after the 
application of this paragraph (d), the application of the gain deferral 
method with respect to the section 721(c) property must be continued in 
the same manner.
    (2) Regulatory allocations. If a regulatory allocation is described 
in Sec.  1.721(c)-3T(c)(4)(i) but not in Sec.  1.721(c)-3T(c)(4)(i)(A) 
or (B), a partial acceleration event occurs with respect to section 
721(c) property if the U.S. transferor recognizes an amount of gain 
(but not in excess of remaining built-in gain) equal to the amount of 
the allocation that, under the consistent allocation method, had the 
regulatory allocation not occurred, would have been allocated to the 
U.S. transferor in the case of income or gain, or would not have been 
allocated to the U.S. transferor in the case of deduction or loss.
    (3) Certain distributions of other partnership property to a 
partner that result in an adjustment under section 734. A partial 
acceleration event occurs with respect to section 721(c) property if 
there is a distribution of other property by the section 721(c) 
partnership that results in a positive basis adjustment to the section 
721(c) property under section 734. In these cases, the U.S. transferor 
must recognize an amount of gain (but not in excess of the remaining 
built-in gain) equal to the positive basis adjustment to the section 
721(c) property under section 734, reduced (but not below zero) by the 
amount of gain recognized by the U.S. transferor (or a member of its 
consolidated group (as defined in Sec.  1.1502-1(h))) under section 
731(a). In these cases, the partnership will not increase its basis 
under Sec.  1.721(c)-4T(c)(2) by the amount of gain recognized by the 
U.S. transferor.
    (e) Transfers described in section 367 of section 721(c) property 
to a foreign corporation. If a section 721(c) partnership transfers 
section 721(c) property, or a U.S. transferor or a partnership in which 
a U.S. transferor is a direct or indirect partner transfers (directly 
or indirectly through one or more partnerships) all or a portion of an 
interest in a section 721(c) partnership that owns section 721(c) 
property, to a foreign corporation in a transaction described in 
section 367, then, the property will no longer be subject to the gain 
deferral method. To the extent any U.S. transferor is treated as 
transferring the section 721(c) property to the foreign corporation for 
purposes of section 367, the tax consequences will be determined under 
section 367. In this regard, see Sec. Sec.  1.367(a)-1T(c)(3)(i) and 
(ii), 1.367(d)-1T(d)(1), and 1.367(e)-2(b)(1)(iii) (providing for the 
aggregate treatment of partnerships). However, for the remaining 
portion of the property (if any), the U.S. transferor must recognize an 
amount of gain equal to the remaining built-in gain that would have 
been allocated to the U.S. transferor if the section 721(c) partnership 
had sold that portion of the section 721(c) property immediately before 
the transfer for fair market value. The stock in the transferee foreign 
corporation received will not be subject to the gain deferral method. 
The rules in Sec.  1.721(c)-4T(c) (concerning the consequences of an 
acceleration event) for making basis adjustments will apply to the 
extent that the U.S. transferor recognizes gain under this paragraph 
(e).
    (f) Fully taxable dispositions of a portion of an interest in a 
partnership. If a U.S. transferor or a partnership in which a U.S. 
transferor is a direct or indirect partner disposes of (directly or 
indirectly through one or more partnerships) a portion of an interest 
in a section 721(c) partnership in a transaction in which all gain or 
loss, if any, is recognized, an acceleration event will not occur with 
respect to the portion of the interest transferred. The gain deferral 
method will continue to apply with respect to the section 721(c) 
property of the section 721(c) partnership. The principles of Sec.  
1.704-3(a)(7) will apply to determine the remaining built-in gain in 
section 721(c) property that is attributable to the portion of the 
interest in a section 721(c) partnership that is retained. This 
paragraph (f) will not apply to an intercompany transaction (as defined 
in Sec.  1.1502-13(b)(1)).
    (g) Applicability dates--(1) In general. Except as provided in 
paragraph (g)(2) of this section, this section applies to contributions 
occurring on or after January 18, 2017, and to contributions occurring 
before January 18, 2017, resulting from an entity classification 
election made under Sec.  301.7701-3 of this chapter that is filed on 
or after January 18, 2017.
    (2) Election to apply this section retroactively. This section may, 
by election, be applied to a contribution occurring on or after August 
6, 2015, but before January 18, 2017, and to a contribution occurring 
before August 6, 2015, resulting from an entity classification election 
made under Sec.  301.7701-3 of this chapter that is filed

[[Page 7606]]

on or after August 6, 2015. The election is made by applying this 
section to the contribution on a timely filed original return 
(including extensions) or an amended return filed no later than six 
months after January 18, 2017.
    (h) Expiration date. The applicability of this section expires on 
January 17, 2020.

0
Par. 13. Section 1.721(c)-6T is added to read as follows:


Sec.  1.721(c)-6T   Procedural and reporting requirements (temporary).

    (a) Scope. This section provides procedural and reporting 
requirements that must be satisfied under Sec.  1.721(c)-3T(b)(3) of 
the gain deferral method. Paragraph (b) of this section describes the 
procedural and reporting requirements of a U.S. transferor. Paragraph 
(c) of this section describes information required to be reported with 
respect to related foreign persons and partnerships. Paragraph (d) of 
this section describes the procedural and reporting requirements of a 
section 721(c) partnership with a section 6031 filing obligation. 
Paragraph (e) of this section provides the proper signatory for the 
information provided under this section. Paragraph (f) of this section 
provides relief for certain failures to comply that are not willful. 
Paragraph (g) of this section provides the dates of applicability, and 
paragraph (h) of this section provides the date of expiration. For 
definitions that apply for purposes of this section, see Sec.  
1.721(c)-1T(b).
    (b) Procedural and reporting requirements of a U.S. transferor--(1) 
In general. This paragraph (b) describes the procedural and reporting 
requirements that a U.S. transferor (as defined Sec.  1.721(c)-
1T(b)(18)(i)) must satisfy in applying the gain deferral method. The 
information required under this paragraph (b) must be included with the 
U.S. transferor's timely filed return on (or attached to) the 
appropriate forms (including Form 8865, Schedule O, Transfer of 
Property to a Foreign Partnership), and must be submitted in the form 
and manner and to the extent prescribed by the form (and its 
accompanying instructions).
    (2) Reporting of a gain deferral contribution. A U.S. transferor 
must report the following information with respect to a gain deferral 
contribution:
    (i) A statement, titled ``Statement of Application of the Gain 
Deferral Method under Section 721(c),'' that contains the following 
information with respect to the section 721(c) property--
    (A) A description of the property and recovery period (or periods) 
for the property;
    (B) Whether the property is an intangible described in section 
197(f)(9);
    (C) A calculation of the built-in gain, the basis, and fair market 
value on the date of the contribution, including the amount of gain 
recognized by the U.S. transferor, if any, on the gain deferral 
contribution;
    (D) The name, U.S. taxpayer identification number (if any), 
address, and country of organization (if any) of each direct or 
indirect partner in the section 721(c) partnership that is a related 
person with respect to the U.S. transferor, and a description of each 
partner's interest in capital and profits immediately after the gain 
deferral contribution; and
    (E) When the section 721(c) property is a partnership interest, the 
information described in paragraphs (b)(2)(i)(A) through (D) of this 
section with respect to each property of a lower-tier partnership to 
which the gain deferral method is applied under Sec.  1.721(c)-
3T(d)(1);
    (ii) A statement, titled ``Consent to Extend the Time to Assess Tax 
Pursuant to the Gain Deferral Method under Section 721(c),'' completed 
and executed in the manner prescribed in forms and instructions, 
extending the period of limitations on the assessment of tax as 
described in paragraph (b)(5) of this section;
    (iii) A copy of the waiver of treaty benefits described in 
paragraphs (c)(1) of this section (if any);
    (iv) Information relating to the section 721(c) partnership 
described in paragraph (c)(2) of this section (if any);
    (v) With respect to any foreign partnership (or partnership treated 
as foreign under paragraph (b)(4) of this section) the information 
required under Sec.  1.6038B-2(c)(1) through (7); and
    (vi) The information required under paragraph (b)(3) of this 
section.
    (3) Annual reporting relating to gain deferral method. A U.S. 
transferor must file an annual statement, titled ``Annual Statement of 
Application of the Gain Deferral Method under Section 721(c),'' for 
each gain deferral contribution. The information in the statement must 
be with respect to the partnership taxable year that ends with, or 
within, the taxable year of the U.S. transferor, beginning with the 
partnership's taxable year that includes the date of the gain deferral 
contribution and ending with the last taxable year in which the gain 
deferral method is applied to the section 721(c) property. The 
statement must contain the following information:
    (i) The amount of book income, gain, deduction, and loss and tax 
items allocated to the U.S. transferor with respect to the section 
721(c) property, including a description of any regulatory allocations;
    (ii) The proportion (expressed as a percentage) in which the book 
income, gain, deduction, and loss with respect to the section 721(c) 
property was allocated among the U.S. transferor and related persons 
that are partners in the section 721(c) partnership under the 
consistent allocation method;
    (iii) The amount of remaining built-in gain at the beginning of the 
taxable year, the remedial income allocated to the U.S. transferor 
under the remedial allocation method, the amount of built-in gain taken 
into account by reason of an acceleration event or partial acceleration 
event (if any), the partnership's adjustment to its tax basis in the 
section 721(c) property, and the remaining built-in gain at the end of 
the taxable year;
    (iv) A declaration stating whether an acceleration event or partial 
acceleration event occurred during the taxable year, the date of the 
event, and a description of the event (including a citation to the 
relevant paragraph of Sec.  1.721(c)-5T(d) in the case of a partial 
acceleration event, and whether the acceleration event is described in 
Sec.  1.721(c)-4T(b)(4));
    (v) A description of a termination event or any successor event 
that occurred during the taxable year with a citation to the relevant 
paragraph of Sec.  1.721(c)-5T(b) or (c), the date of the event, and, 
in the case of a successor event, the name, address, and U.S. taxpayer 
identification number (if any) of any successor partnership, lower-tier 
partnership, upper-tier partnership, or U.S. corporation (as 
applicable);
    (vi) A description of all transfers of 721(c) property to a foreign 
corporation described in Sec.  1.721-5T(e) that occurred during the 
taxable year, and for each transfer, the date of the transfer, the 
section 721(c) property transferred, and the name, address, and U.S. 
taxpayer identification number (if any) of the foreign transferee 
corporation;
    (vii) With respect to section 721(c) property for which a waiver of 
treaty benefits was filed under paragraph (b)(2)(iii) of this section, 
a declaration that, after exercising reasonable diligence, to the best 
of the U.S. transferor's knowledge and belief, all income from the 
section 721(c) property allocated to the partners during the taxable 
year remained subject to taxation as income effectively connected with 
the conduct of a trade or business within the United States (under 
either section 871 or 882) for all direct or indirect partners that are 
related foreign persons with respect to the U.S. transferor (regardless 
of whether any

[[Page 7607]]

such partner was a partner at the time of the gain deferral 
contribution), and, that neither the partnership nor any such partner 
has made any claim under any income tax convention to an exemption from 
U.S. income tax or a reduced rate of U.S. income taxation on income 
derived from the use of the section 721(c) property;
    (viii) A statement, titled ``Consent to Extend the Time To Assess 
Tax Pursuant to the Gain Deferral Method under Section 721(c),'' 
completed and executed as prescribed in forms and instructions, 
extending the period of limitations on the assessment of tax, in the 
case of a gain deferral contribution, as described in paragraph 
(b)(5)(ii) of this section, and, in the case of certain contributions 
on which gain is recognized, as described in paragraph (b)(5)(iii) of 
this section;
    (ix) If the section 721(c) partnership is a partnership that does 
not have a filing obligation under section 6031, the information 
described in Sec.  1.6038-3(g) (contents of information returns 
required of certain United States persons with respect to controlled 
foreign partnerships), if not already reported elsewhere, without 
regard to whether the section 721(c) partnership is a controlled 
foreign partnership within the meaning of section 6038. If the U.S. 
transferor is not a controlling fifty-percent partner (as defined in 
Sec.  1.6038-3(a)), the U.S. transferor complies with the requirement 
of this paragraph (b)(3)(ix) by providing only the information 
described in Sec.  1.6038-3(g)(1);
    (x) A description of all section 721(c) property contributed by the 
U.S. transferor to the section 721(c) partnership (including pursuant 
to a contribution described in Sec.  1.721(c)-2T(d)(1)) during the 
taxable year to which the gain deferral method is not applied; and
    (xi) The information required in paragraphs (c)(2) and (3) of this 
section for related foreign persons that are direct or indirect 
partners in the section 721(c) partnership and the section 721(c) 
partnership itself (if any).
    (4) Domestic partnerships treated as foreign. Solely for purposes 
of this section, a U.S. transferor must treat a domestic section 721(c) 
partnership as a foreign partnership if the partnership was formed on 
or after January 18, 2017. If the section 721(c) partnership has an 
information return filing obligation under section 6031, that 
requirement is not affected by the requirement of this paragraph (b)(4) 
that the U.S. transferor treat the partnership as a foreign 
partnership.
    (5) Extension of period of limitations on assessment of tax. In 
order to comply with the gain deferral method, a U.S. transferor must 
extend the period of limitations on the assessment of tax:
    (i) With respect to the gain realized but not recognized on a gain 
deferral contribution, through the close of the eighth full taxable 
year following the U.S. transferor's taxable year that includes the 
date of the gain deferral contribution;
    (ii) With respect to all book and tax items with respect to the 
section 721(c) property allocated to the U.S. transferor in the 
partnership's taxable year that includes the date of the gain deferral 
contribution and the subsequent two years, through the close of the 
sixth full taxable year following such taxable year with which, or 
within which, the partnership's taxable year ends; and
    (iii) With respect to the gain recognized on a contribution of 
section 721(c) property to a section 721(c) partnership for which the 
gain deferral method is not applied, if the contribution occurs within 
five partnership taxable years following a partnership taxable year 
that includes the date of a gain deferral contribution, through the 
close of the fifth full taxable year following the U.S. transferor's 
taxable year that includes the date of the contribution on which gain 
is recognized.
    (c) Information with respect to section 721(c) partnerships and 
related foreign persons--(1) Effectively connected income. If the gain 
deferral method is applied with respect to a contribution of section 
721(c) property that satisfies the condition in Sec.  1.721(c)-
3T(b)(1)(ii), the U.S. transferor must obtain a statement from the 
section 721(c) partnership and from each related foreign person that is 
a direct or indirect partner in the section 721(c) partnership, titled 
``Statement of Waiver of Treaty Benefits under Sec.  1.721(c)-6T,'' 
pursuant to which the partner and the partnership waive any claim under 
any income tax convention (whether or not currently in force at the 
time of the contribution) to an exemption from U.S. income tax or a 
reduced rate of U.S. income taxation on income derived from the use of 
the section 721(c) property for the period during which the section 
721(c) property is subject to the gain deferral method.
    (2) Partnerships in tiered-partnership structures applying the gain 
deferral method. If the gain deferral method is applied as a result of 
a transaction described in Sec.  1.721(c)-3T(d), the U.S. transferor 
must supply all information that a section 721(c) partnership would be 
required to report under paragraph (b) of this section if the section 
721(c) partnership were a U.S. transferor.
    (3) Schedules K-1 for related foreign partners. If a section 721(c) 
partnership does not have a filing obligation under section 6031, the 
U.S. transferor must obtain a Schedule K-1 (Form 8865), Partner's Share 
of Income, Deduction, Credits, etc., for all related foreign persons 
that are direct or indirect partners in the section 721(c) partnership.
    (d) Reporting and procedural requirements of a section 721(c) 
partnership with a section 6031 filing obligation--(1) Waiver of treaty 
benefits. A section 721(c) partnership with a return filing obligation 
under section 6031 must include its waiver of treaty benefits described 
in paragraph (c)(1) of this section with its tax return for the taxable 
year that includes the date of the gain deferral contribution.
    (2) Information on Schedule K-1. A section 721(c) partnership with 
a return filing obligation under section 6031 must provide the relevant 
information necessary for the U.S. transferor to comply with the 
requirements in paragraphs (b)(2) and (3) of this section with the U.S. 
transferor's Schedule K-1 (Form 1065), Partner's Share of Income, 
Deductions, Credits, etc. The partnership must also attach to its Form 
1065 a Schedule K-1 (Form 1065) for each partner that is a related 
foreign person with respect to the U.S. transferor.
    (e) Signatory. The statements required in this section must be 
signed under penalties of perjury by an agent of the U.S. transferor, 
the related foreign person that is a direct or indirect partner in the 
section 721(c) partnership, or the section 721(c) partnership, as 
applicable, that is authorized to sign under a general or specific 
power of attorney, or by an appropriate party. For the U.S. transferor, 
an appropriate party is a person described in Sec.  1.367(a)-8(e)(1). 
For a partnership with a section 6031 filing obligation, an appropriate 
party is any party authorized to sign Form 1065.
    (f) Relief for certain failures to file or failures to comply that 
are not willful--(1) In general. This paragraph (f)(1) provides relief 
from the failure to comply with the procedural and reporting 
requirements of the gain deferral method prescribed by Sec.  1.721(c)-
3T(b)(3) and provided in paragraph (b) of this section if there is a 
failure to file or to include information required by this section 
(failure to comply). A failure to comply will be deemed not to have 
occurred for purposes of Sec.  1.721(c)-3T(b)(3) if the U.S. transferor 
demonstrates that the

[[Page 7608]]

failure was not willful using the procedure provided in this paragraph 
(f). For this purpose, willful is to be interpreted consistent with the 
meaning of that term in the context of other civil penalties, which 
would include a failure due to gross negligence, reckless disregard, or 
willful neglect. Whether a failure to comply was willful will be 
determined by the Director of Field Operations, Cross Border Activities 
Practice Area of Large Business & International (or any successor to 
the roles and responsibilities of such position, as appropriate) 
(Director) based on all the facts and circumstances. The U.S. 
transferor must submit a request for relief and an explanation as 
provided in paragraph (f)(2) of this section. A U.S. transferor whose 
failure to comply is determined not to be willful under this paragraph 
will be subject to a penalty under section 6038B if it fails to satisfy 
the applicable reporting requirements under that section and does not 
demonstrate that the failure was due to reasonable cause and not 
willful neglect. See Sec.  1.6038B-2(h). The determination of whether 
the failure to comply was willful under this section has no effect on 
any request for relief made under Sec.  1.6038B-2(h).
    (2) Procedures for establishing that a failure to comply was not 
willful--(i) Time and manner of submission. A U.S. transferor's 
statement that a failure to comply was not willful will be considered 
only if, promptly after the U.S. transferor becomes aware of the 
failure, an amended return is filed for the taxable year to which the 
failure relates that includes the information that should have been 
included with the original return for such taxable year or that 
otherwise complies with the rules of this section as well as a written 
statement explaining the reasons for the failure to comply. The U.S. 
transferor also must file, with the amended return, a Form 8865, 
Schedule O, and a statement (as described in paragraph (b)(5) of this 
section), completed and executed as prescribed in forms and 
instructions, consenting to extend the period of limitations on 
assessment of tax with respect to the gain realized but not recognized 
on the gain deferral contribution to the later of the close of the 
eighth full taxable year following the taxable year during which the 
contribution occurred (date one), or the close of the third full 
taxable year ending after the date on which the required information is 
provided to the Director (date two). However, the U.S. transferor is 
not required to file a Form 8865, Schedule O, with the amended return 
if both date one is later than date two and a consent to extend the 
period of limitations on assessment of tax with respect to the gain 
realized but not recognized on the gain deferral contribution for the 
U.S. transferor's taxable year that includes the date of the 
contribution was previously submitted with a Form 8865, Schedule O. The 
amended return and either a Form 8865, Schedule O, or a copy of the 
previously filed Form 8865, Schedule O, as the case may be, must be 
filed with the Internal Revenue Service at the location where the U.S. 
transferor filed its original return. The U.S. transferor may submit a 
request for relief from the penalty under section 6038B as part of the 
same submission. See Sec.  1.6038B-2T(h)(3).
    (ii) Notice requirement. In addition to the requirements of 
paragraph (f)(2)(i) of this section, the U.S. transferor must comply 
with the notice requirements of this paragraph (f)(2)(ii). If any 
taxable year of the U.S. transferor is under examination when the 
amended return is filed, a copy of the amended return must be delivered 
to the Internal Revenue Service personnel conducting the examination. 
If no taxable year of the U.S. transferor is under examination when the 
amended return is filed, a copy of the amended return must be delivered 
to the Director.
    (g) Applicability dates--(1) In general. Except as provided in 
paragraphs (g)(2) and (3) of this section, this section applies with 
respect to contributions occurring on or after January 18, 2017, and 
with respect to contributions occurring before January 18, 2017, 
resulting from an entity classification election made under Sec.  
301.7701-3 of this chapter that is filed on or after January 18, 2017.
    (2) Reporting relating to effectively connected income. Paragraphs 
(b)(2)(iii), (b)(3)(vii), and (d)(1) of this section apply to a 
contribution occurring on or after August 6, 2015, and to a 
contribution occurring before August 6, 2015, resulting from an entity 
classification election made under Sec.  301.7701-3 of this chapter 
that is filed on or after August 6, 2015, and, in either case, provided 
Sec.  1.721(c)-3T(b)(1)(ii) applies to the contribution. To the extent 
that a previously filed return did not comply with paragraph 
(b)(2)(iii), (b)(3)(vii), or (d)(1) of this section, an amended return 
complying with such paragraphs must be filed no later than six months 
after January 18, 2017.
    (3) Transition rules. For transfers occurring on or after August 6, 
2015, and for transfers occurring before August 6, 2015, resulting from 
an entity classification election made under Sec.  301.7701-3 of this 
chapter that is filed on or after August 6, 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 regulations thereunder with respect to 
the contribution of the section 721(c) property to the section 721(c) 
partnership.
    (h) Expiration date. The applicability of this section expires on 
January 17, 2020.

0
Par. 14. Section 1.721(c)-7T is added to read as follows:


Sec.  1.721(c)-7T  Examples (temporary).

    (a) Presumed facts. For purposes of the examples in paragraph (b) 
of this section, assume that there are no other transactions that are 
related to the transactions described in the examples and that all 
partnership allocations have substantial economic effect under section 
704(b). For definitions that apply for purposes of this section, see 
Sec.  1.721(c)-1T(b). Except where otherwise indicated, the following 
facts are presumed--
    (1) USP and USX are domestic corporations that each use a calendar 
taxable year. USX is not a related person with respect to USP.
    (2) CFC1, CFC2, FX, and FY are foreign corporations.
    (3) USP wholly owns CFC1 and CFC2. Neither FX nor FY is a related 
person with respect to USP or with respect to each other.
    (4) PRS1, PRS2, and PRS3 are foreign entities classified as 
partnerships for U.S. tax purposes. A partnership interest in PRS1, 
PRS2, and PRS3 is not described in section 475(c)(2).
    (5) A taxable year is referred to, for example, as year 1.
    (6) A partner in a partnership has the same percentage interest in 
income, gain, loss, deduction, and capital of the partnership.
    (7) No property is described in section 197(f)(9) in the hands of a 
contributing partner.
    (8) No partnership is a controlled partnership solely under the 
facts and circumstances test in Sec.  1.721(c)-1T(b)(4).
    (b) Examples. The application of the rules stated in Sec. Sec.  
1.721(c)-1T through 1.721(c)-6T may be illustrated by the following 
examples:

    Example 1.  Determining if a partnership is a section 721(c) 
partnership. (i) Facts. In year 1, USP and CFC1 form PRS1 as equal 
partners. CFC1 contributes cash of $1.5 million to PRS1, and USP 
contributes three properties to PRS1: A patent with a book value of 
$1.2 million and an adjusted tax basis of zero, a security (within 
the meaning

[[Page 7609]]

of section 475(c)(2)) with a book value of $100,000 and an adjusted 
tax basis of $20,000, and a machine with a book value of $200,000 
and an adjusted tax basis of $600,000.
    (ii) Results. (A) Under Sec.  1.721(c)-1T(b)(18)(i), USP is a 
U.S. transferor because USP is a U.S. person and not a domestic 
partnership. Under Sec.  1.721(c)-1T(b)(2), the patent has built-in 
gain of $1.2 million. The patent is not excluded property under 
Sec.  1.721(c)-1T(b)(6). Therefore, under Sec.  1.721(c)-
1T(b)(15)(i), the patent is section 721(c) property because it is 
property, other than excluded property, with built-in gain that is 
contributed by a U.S. transferor, USP.
    (B) Under Sec.  1.721(c)-1T(b)(2), the security has built-in 
gain of $80,000. Under Sec.  1.721(c)-1T(b)(6)(ii), the security is 
excluded property because it is described in section 475(c)(2). 
Therefore, the security is not section 721(c) property.
    (C) The tax basis of the machine exceeds its book value. Under 
Sec.  1.721(c)-1T(b)(6)(iii), the machine is excluded property and 
therefore is not section 721(c) property.
    (D) Under Sec.  1.721(c)-1T(b)(12), CFC1 is a related person 
with respect to USP, and under Sec.  1.721(c)-1T(b)(11), CFC1 is a 
related foreign person. Because USP and CFC1 collectively own at 
least 80 percent of the interests in the capital, profits, 
deductions, or losses of PRS1, under Sec.  1.721(c)-1T(b)(14)(i), 
PRS1 is a section 721(c) partnership upon the contribution by USP of 
the patent.
    (E) The de minimis exception described in Sec.  1.721(c)-2T(c) 
does not apply to the contribution because during PRS1's year 1 the 
sum of the built-in gain with respect to all section 721(c) property 
contributed in year 1 to PRS1 is $1.2 million, which exceeds the de 
minimis threshold of $1 million. As a result, under Sec.  1.721(c)-
2T(b), section 721(a) does not apply to USP's contribution of the 
patent to PRS1, unless the requirements of the gain deferral method 
are satisfied.
    Example 2.  Determining if partnership interest is section 
721(c) property. (i) Facts. In year 1, USP and FX form PRS2. USP 
contributes a security (within the meaning of section 475(c)(2)) 
with a book value of $100,000 and an adjusted tax basis of $20,000 
and a building located in country X with a book value of $30,000 and 
an adjusted tax basis of $8,000 in exchange for a 40-percent 
interest. FX contributes a machine with a book value of $195,000 and 
an adjusted tax basis of $250,000 in exchange for a 60-percent 
interest.
    (ii) Results. PRS2 is not a section 721(c) partnership because 
FX is not a related person with respect to USP, USP's contributions 
to PRS2 are not subject to Sec.  1.721(c)-2T(b).
    (iii) Alternative facts and results. (A) Assume the same facts 
as in paragraph (i) of this Example 2. In addition, USP and CFC1 
form PRS1 as equal partners. CFC1 contributes cash of $130,000 to 
PRS1, and USP contributes its 40-percent interest in PRS2.
    (B) PRS2's property consists of a security and a machine that 
are excluded property, and a building with built-in gain in excess 
of $20,000. Under Sec.  1.721(c)-1T(b)(6)(iv), because more than 90 
percent of the value of the property of PRS2 consists of excluded 
property described in Sec.  1.721(c)-1T(b)(6)(i) through (iii) (the 
security and the machine), any interest in PRS2 is excluded 
property. Therefore, the 40-percent interest in PRS2 contributed by 
USP to PRS1 is not section 721(c) property. Accordingly, USP's 
contribution of its interest in PRS2 to PRS1 is not subject to Sec.  
1.721(c)-2T(b).
    Example 3.  Assets-over tiered partnerships. (i) Facts. In year 
1, USP and CFC1 form PRS1 as equal partners. USP contributes a 
patent with a book value of $300 million and an adjusted tax basis 
of $30 million (USP contribution). CFC1 contributes cash of $300 
million. Immediately thereafter, PRS1 contributes the patent to PRS2 
in exchange for a two-thirds interest (PRS1 contribution), and CFC2 
contributes cash of $150 million in exchange for a one-third 
interest. The patent has a remaining recovery period of 5 years out 
of a total of 15 years. With respect to all contributions described 
in Sec.  1.721(c)-2T(b), the de minimis exception does not apply, 
and the gain deferral method is applied. Thus, the partnership 
agreements of PRS1 and PRS2 provide that the partnership will make 
allocations under section 704(c) using the remedial allocation 
method under Sec.  1.704-3(d).
    (ii) Results: USP contribution. PRS1 is a section 721(c) 
partnership as a result of the USP contribution.
    (iii) Results: PRS1 contribution. (A) For purposes of 
determining whether PRS2 is a section 721(c) partnership as a result 
of the PRS1 contribution, under Sec.  1.721(c)-2T(d)(1), USP is 
treated as contributing to PRS2 its share of the patent that PRS1 
actually contributes to PRS2. USP and CFC1 are each one-third 
indirect partners in PRS2. Taking into account the one-third 
interest in PRS2 directly owned by CFC2, USP, CFC1, and CFC2 
collectively own at least 80 percent of the interests in PRS2. Thus, 
PRS2 is a section 721(c) partnership as a result of the PRS1 
contribution.
    (B) Under Sec.  1.721(c)-2T(b), section 721(a) does not apply to 
PRS1's contribution of the patent to PRS2, unless the requirements 
of the gain deferral method are satisfied. Under Sec.  1.721(c)-
3T(b), the gain deferral method must be applied with respect to the 
patent. In addition, under Sec.  1.721(c)-3T(d)(2), because PRS1 is 
a controlled partnership with respect to USP, the gain deferral 
method must be applied with respect to PRS1's interest in PRS2, and, 
solely for purposes of applying the consistent allocation method, 
PRS2 must treat PRS1 as the U.S. transferor. As stated in paragraph 
(i) of this Example 3, the gain deferral method is applied. PRS2 is 
a controlled partnership with respect to USP. Under Sec.  1.721(c)-
5T(c)(5)(i), the PRS1 contribution is a successor event with respect 
to the USP contribution.
    (iv) Results: Application of remedial allocation method. (A) 
Under Sec.  1.704-3(d)(2), in year 1, PRS2 has $24 million of book 
amortization with respect to the patent ($6 million ($30 million of 
book value equal to adjusted tax basis divided by the 5-year 
remaining recovery period) plus $18 million ($270 million excess of 
book value over tax basis divided by the new 15-year recovery 
period)). PRS2 has $6 million of tax amortization. Under the PRS2 
partnership agreement, PRS2 allocates $8 million of book 
amortization to CFC2 and $16 million of book amortization to PRS1. 
Because of the application of the ceiling rule, PRS2 allocates $6 
million of tax amortization to CFC2 and $0 of tax amortization to 
PRS1. Because the ceiling rule would cause a disparity of $2 million 
between CFC2's book and tax amortization, PRS2 must make a remedial 
allocation of $2 million of tax amortization to CFC2 and an 
offsetting remedial allocation of $2 million of taxable income to 
PRS1.
    (B) PRS1's distributive share of each of PRS2's items with 
respect to the patent is $16 million of book amortization, $0 of tax 
amortization, and $2 million of taxable income from the remedial 
allocation from PRS1. Under Sec.  1.704-3(a)(9), PRS1 must allocate 
its distributive share of each of PRS2's items with respect to the 
patent in a manner that takes into account USP's remaining built-in 
gain in the patent. Therefore, PRS1 allocates $2 million of taxable 
income to USP. Under Sec.  1.704-3T(a)(13)(ii), PRS1 treats its 
distributive share of each of PRS2's items of amortization with 
respect to PRS2's patent as items of amortization with respect to 
PRS1's interest in PRS2. Under the PRS1 partnership agreement, PRS1 
allocates $8 million of book amortization and $0 of tax amortization 
to CFC1, and $8 million of book amortization and $0 of tax 
amortization to USP. Because the ceiling rule would cause a 
disparity of $8 million between CFC1's book and tax amortization, 
PRS1 must make a remedial allocation of $8 million of tax 
amortization to CFC1. PRS1 must also make an offsetting remedial 
allocation of $8 million of taxable income to USP. USP reports $10 
million of taxable income ($2 million of remedial income from PRS2 
and $8 million of remedial income from PRS1).
    Example 4.  Section 721(c) partnership ceases to have a related 
foreign person as a partner. (i) Facts. In year 1, USP and CFC1 form 
PRS1. USP contributes a trademark with a built-in gain of $5 million 
in exchange for a 60-percent interest, and CFC1 contributes other 
property in exchange for the remaining 40-percent interest. With 
respect to all contributions described in Sec.  1.721(c)-2T(b), the 
de minimis exception does not apply, and the gain deferral method is 
applied. On day 1 of year 4, CFC1 sells its entire interest in PRS1 
to FX. There is no plan for a related foreign person with respect to 
USP to subsequently become a partner in PRS1 (or a successor).
    (ii) Results. (A) PRS1 is a section 721(c) partnership.
    (B) With respect to year 4, under Sec.  1.721(c)-5T(b)(5), the 
sale is a termination event because, as a result of CFC1's sale of 
its interest, PRS1 will no longer have a partner that is a related 
foreign person, and there is no plan for a related foreign person to 
subsequently become a partner in PRS1 (or a successor). Thus, under 
Sec.  1.721(c)-5T(b)(1), the trademark is no longer subject to the 
gain deferral method.
    Example 5.  Transfer described in section 367 of section 721(c) 
property to a foreign corporation. (i) Facts. In year 1, USP, CFC1,

[[Page 7610]]

and USX form PRS1. USP contributes a patent with a built-in gain of 
$5 million in exchange for a 60-percent interest, CFC1 contributes 
other property in exchange for a 30-percent interest, and USX 
contributes cash in exchange for a 10-percent interest. With respect 
to all contributions described in Sec.  1.721(c)-2T(b), the de 
minimis exception does not apply, and the gain deferral method is 
applied. In year 3, when the patent has remaining built-in gain, 
PRS1 transfers the patent to FX in a transaction described in 
section 351.
    (ii) Results. (A) PRS1 is a section 721(c) partnership.
    (B) With respect to year 3, the transfer of the patent to FX is 
a transaction described in section 367(d). Therefore, under Sec.  
1.721(c)-5T(e), the patent is no longer subject to the gain deferral 
method. Under Sec. Sec.  1.367(d)-1T(d)(1) and 1.367(a)-1T(c)(3)(i), 
for purposes of section 367(d), USP and USX are treated as 
transferring their proportionate share of the patent actually 
transferred by PRS1 to FX. Under Sec.  1.721(c)-5T(e), to the extent 
USP and USX are treated as transferring the patent to FX, the tax 
consequences are determined under section 367(d) and the regulations 
thereunder. With respect to the remaining portion of the patent, 
which is attributable to CFC1, USP must recognize an amount of gain 
equal to the remaining built-in gain that would have been allocated 
to USP if PRS1 had sold that portion of the patent immediately 
before the transfer for fair market value. Under Sec.  1.721(c)-
4T(c)(1), USP must increase the basis in its partnership interest in 
PRS1 by the amount of gain recognized by USP and under Sec.  
1.721(c)-4T(c)(2), immediately before the transfer, PRS1 must 
increase its basis in the patent by the same amount. The stock in FX 
received by PRS1 is not subject to the gain deferral method.
    Example 6.  Limited remedial allocation method for anti-churning 
property with respect to related partners. (i) Facts. USP, CFC1, and 
FX form PRS1. On January 1 of year 1, USP contributes intellectual 
property (IP) with a book value of $600 million and an adjusted tax 
basis of $0 in exchange for a 60-percent interest. The IP is a 
section 197(f)(9) intangible (within the meaning of Sec.  1.197-
2(h)(1)(i)) that was not an amortizable section 197 intangible in 
USP's hands. CFC1 contributes cash of $300 million in exchange for a 
30-percent interest, and FX contributes cash of $100 million in 
exchange for a 10-percent interest. The IP is section 721(c) 
property, and PRS1 is a section 721(c) partnership. The gain 
deferral method is applied. The partnership agreement provides that 
PRS1 will make allocations under section 704(c) with respect to the 
IP using the remedial allocation method under Sec.  1.704-
3T(d)(5)(iii). All of PRS1's allocations with respect to the IP 
satisfy the requirements of the gain deferral method. On January 1 
of year 16, PRS1 sells the IP for cash of $900 million to a person 
that is not a related person. During years 1 through 16, PRS1 earns 
no income other than gain from the sale of the IP in year 16, has no 
expenses or deductions other than from amortization of the IP, and 
makes no distributions.
    (ii) Results: Year 1. Under Sec.  1.704-3T(d)(5)(iii)(B), PRS1 
must recover the excess of the book value of the IP over its 
adjusted tax basis at the time of the contribution ($600 million) 
using any recovery period and amortization method that would have 
been available to PRS1 if the property had been newly purchased 
property from an unrelated party. Thus, under section 197(a), PRS1 
must amortize $600 million of the IP's book value ratably over 15 
years for book purposes, and PRS1 will have $40 million of book 
amortization per year without any tax amortization. Under the 
partnership agreement, in year 1, PRS1 allocates book amortization 
of $24 million to USP, $12 million to CFC1, and $4 million to FX. 
Because in year 1 the ceiling rule would cause a disparity between 
FX's allocations of book and tax amortization, PRS1 makes a remedial 
allocation of tax amortization of $4 million to FX and an offsetting 
remedial allocation of $4 million of taxable income to USP. In year 
1, the ceiling rule would also cause a disparity between CFC1's 
allocations of book and tax amortization. However, Sec.  1.197-
2(h)(12)(vii)(B) precludes PRS1 from making a remedial allocation of 
tax amortization to CFC1. Instead, pursuant to Sec.  1.704-
3T(d)(5)(iii)(C), PRS1 increases the adjusted tax basis in the IP by 
$12 million, and pursuant to Sec.  1.704-3T(d)(5)(iii)(D), that 
basis adjustment is solely with respect to CFC1. Pursuant to Sec.  
1.704-3T(d)(5)(iii)(C), PRS1 also makes an offsetting remedial 
allocation of $12 million of taxable income to USP.
    (iii) Results: Years 2-15. At the end of year 15, PRS1 has book 
basis and adjusted tax basis of $0 in the IP. PRS1 has amortized 
$600 million for book purposes by allocating total book amortization 
deductions of $360 million to USP, $180 million to CFC1, and $60 
million to FX. For U.S. tax purposes, by the end of year 15, PRS1 
has made remedial allocations of $60 million of tax amortization to 
FX and increased the adjusted tax basis in the IP by $180 million 
solely with respect to CFC1. PRS1 has also made total remedial 
allocations of $240 million of taxable income to USP (attributable 
to $60 million of remedial tax amortization to FX and $180 million 
of tax basis adjustments with respect to CFC1). With respect to 
their partnership interests in PRS1, USP has a capital account and 
an adjusted tax basis of $240 million, CFC1 has a capital account of 
$120 million and an adjusted tax basis of $300 million, and FX has a 
capital account and an adjusted tax basis of $40 million.
    (iv) Results: Sale of property in year 16. PRS1's sale of the IP 
for cash of $900 million on January 1 of year 16 results in $900 
million of book and tax gain ($900 million-$0). PRS1 allocates the 
book and tax gain 60 percent to USP ($540 million), 10 percent to FX 
($90 million), and 30 percent to CFC1 ($270 million). However, under 
Sec.  1.704-3T(d)(5)(iii)(D)(3), CFC1's tax gain is $90 million, 
equal to its share of PRS1's gain ($270 million), minus the amount 
of the tax basis adjustment ($180 million). After the sale, PRS1's 
only property is cash of $1.3 billion. With respect to their 
partnership interests in PRS1, USP has a capital account and an 
adjusted tax basis of $780 million, CFC1 has a capital account and 
an adjusted tax basis of $390 million, and FX has a capital account 
and an adjusted tax basis of $130 million.


0
Par. 15. Section 1.6038B-2 is amended by:
0
1. Revising paragraphs (a)(1)(i) and (ii), (a)(3), (c)(6) and 
(c)(7)(v).
0
2. Adding paragraphs (a)(1)(iii) and (c)(8) and (9).
0
3. Revising paragraphs (h)(1) introductory text and (h)(3).
0
4. Adding paragraphs (j)(4) and (5).
    The revisions and additions read as follows.


Sec.  1.6038B-2  Reporting of certain transfers to foreign 
partnerships.

    (a) * * *
    (1) * * *
    (i) Immediately after the transfer, the United States person owns, 
directly, indirectly, or by attribution, at least a 10-percent interest 
in the partnership, as defined in section 6038(e)(3)(C) and the 
regulations thereunder;
    (ii) The value of the property transferred, when added to the value 
of any other property transferred in a section 721 contribution by such 
person (or any related person) to the partnership during the 12-month 
period ending on the date of the transfer, exceeds $100,000; or
    (iii) [Reserved]. For further guidance, see Sec.  1.6038B-
2T(a)(1)(iii).
* * * * *
    (3) [Reserved]. For further guidance see Sec.  1.6038B-2T(a)(3).
* * * * *
    (c) * * *
    (6) A separate description of each item of contributed property 
that is appreciated property subject to the allocation rules of section 
704(c) (except to the extent that the property is permitted to be 
aggregated in making allocations under section 704(c)), or is 
intangible property, including its estimated fair market value and 
adjusted basis;
    (7) * * *
    (v) Other property;
    (8) [Reserved]. For further guidance, see Sec.  1.6038B-2T(c)(8); 
and
    (9) [Reserved]. For further guidance, see Sec.  1.6038B-2T(c)(9).
* * * * *
    (h) * * *
    (1) Consequences of a failure. If a United States person is 
required to file a return under paragraph (a) of this section and fails 
to comply with the reporting requirements of section 6038B and this 
section, or Sec.  1.721(c)-6T, then that person is subject to the 
following penalties:
* * * * *
    (3) [Reserved]. For further guidance see Sec.  1.6038B-2T(h)(3).
* * * * *

[[Page 7611]]

    (j) * * *
    (4) through (5) [Reserved]. For further guidance, see Sec.  
1.6038B-2T(j)(4) through (5).

0
Par. 16. Section 1.6038B-2T is added to read as follows:


Sec.  1.6038B-2T   Reporting of certain transfers to foreign 
partnerships (temporary).

    (a) introductory text through (a)(1)(ii) [Reserved]. For further 
guidance, see Sec.  1.6038B-2(a) introductory text through (a)(1)(ii).
    (iii) The United States person is a U.S. transferor (as defined in 
Sec.  1.721(c)-1T(b)(18)) that makes a gain deferral contribution and 
is required to report under Sec.  1.721(c)-6T(b)(2). The reporting 
required under this paragraph (a) includes the annual reporting 
required by Sec.  1.721(c)-6T(b)(3). For purposes of applying this 
paragraph (a)(1)(iii) to partnerships formed on or after January 18, 
2017, a domestic partnership is treated as a foreign partnership 
pursuant to section 7701(a)(4).
    (a)(2) [Reserved]. For further guidance, see Sec.  1.6038B-2(a)(2).
    (3) Indirect transfer through a foreign partnership. Solely for 
purposes of this section, if a foreign partnership transfers section 
721(c) property (as defined in Sec.  1.721(c)-1T(b)(15)) to another 
foreign partnership in a transfer described in Sec.  1.721(c)-3T(d) 
(tiered-partnership rules), then the transferor foreign partnership's 
partners will be considered to have transferred a proportionate share 
of the property to the foreign partnership.
    (a)(4) through (c)(7) [Reserved]. For further guidance, see Sec.  
1.6038B-2(a)(4) through (c)(7).
    (8) With respect to reporting required under Sec.  1.721(c)-
6T(b)(2) and paragraph (a)(1)(iii) of this section with regard to a 
gain deferral contribution, the information required by Sec.  1.721(c)-
6T(b)(2); and
    (9) With respect to section 721(c) property for which a statement 
is required to be filed under Sec.  1.721(c)-6T(b)(3) and paragraph 
(a)(1)(iii) of this section, the information required by Sec.  
1.721(c)-6T(b)(3).
    (d) through (h)(2) [Reserved]. For further guidance, see Sec.  
1.6038B-2(d) through (h)(2).
    (3) Reasonable cause exception. Under section 6038B(c)(2) and this 
section, the provisions of paragraph (h)(1) of this section will not 
apply if the United States person shows, in a timely manner, that a 
failure to comply was due to reasonable cause and not willful neglect. 
A United States person's statement that the failure to comply was due 
to reasonable cause and not willful neglect will be considered timely 
only if, promptly after the United States person becomes aware of the 
failure, an amended return is filed for the taxable year to which the 
failure relates that includes the information that should have been 
included with the original return for such taxable year or that 
otherwise complies with the rules of this section, and that includes a 
written statement explaining the reasons for the failure to comply. If 
any taxable year of the United States person is under examination when 
the amended return is filed, a copy of the amended return must be 
delivered to the Internal Revenue Service personnel conducting the 
examination when the amended return is filed. If no taxable year of the 
United States person is under examination when the amended return is 
filed, a copy of the amended return must be delivered to the Director 
of Field Operations, Cross Border Activities Practice Area of Large 
Business & International (or any successor to the roles and 
responsibilities of such position, as appropriate) (Director). Whether 
a failure to comply was due to reasonable cause and not willful neglect 
will be determined by the Director under all the facts and 
circumstances.
    (i) through (j)(3) [Reserved]. For further guidance, see Sec.  
1.6038B-2(i) through (j)(3).
    (4) Transfers of section 721(c) property--(i) Applicability dates. 
Paragraph (c)(8) of this section applies to transfers occurring on or 
after August 6, 2015, and to transfers occurring before August 6, 2015, 
resulting from an entity classification election made under Sec.  
301.7701-3 of this chapter that is filed on or after August 6, 2015. 
Paragraphs (a)(1)(iii), (a)(3), and (c)(9) of this section apply to 
transfers occurring on or after January 18, 2017, and to transfers 
occurring before January 18, 2017, resulting from entity classification 
elections made under Sec.  301.7701-3 of this chapter that are filed on 
or after January 18, 2017.
    (ii) Expiration date. The applicability of paragraphs (a)(1)(iii), 
(a)(3), and (c)(8) and (9) of this section expires on January 17, 2020.
    (5) Reasonable cause exception--(i) Applicability date. Paragraph 
(h)(3) of this section applies to all requests for relief for transfers 
of property to partnerships filed on or after February 21, 2017.
    (ii) Expiration date. The applicability of paragraph (h)(3) of this 
section expires on January 17, 2020.

 John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: January 10, 2017.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2017-01049 Filed 1-18-17; 8:45 am]
 BILLING CODE 4830-01-P