[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]
[[Page 7581]]
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