The U.S. Treasury Department and the IRS today released for publication in the Federal Register temporary regulations (T.D. 9814) (the “Temporary Regulations”) and, by cross-reference, proposed regulations (REG-127203-15), concerning transfers of appreciated property by U.S. persons to partnerships with foreign partners related to the transferor.
As explained by today’s release, the Temporary Regulations reflect rules previously described in Notice 2015-54 and 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) pursuant to section 721(c) unless the partnership adopts the remedial allocation method under section 704(c) and certain other requirements are satisfied.
The Temporary Regulations also include rules under sections 197, 704, and 6038B that apply to certain transfers described in section 721.
As described in Notice 2015-54, the IRS and Treasury Department were aware that certain taxpayers purported 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. Notice 2015-54 explains that some taxpayers selected a section 704(c) method other than the remedial allocation method or used valuation techniques that were inconsistent with an arm’s-length standard, or both. The IRS and Treasury determined that regulations were needed 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. The IRS notice states that these regulations generally will apply to transfers occurring on or after August 6, 2015, and to transfers occurring before August 6, 2015, resulting from entity classification elections made on or after August 6, 2015. Read an initial description of Notice 2015-54 in TaxNewsFlash-United States
The “Temporary Regulations” generally incorporate the rules outlined in Notice 2015-54, which override section 721(a) and require immediate gain recognition when a U.S. transferor contributes certain appreciated property (“Section 721(c) Property”) to a domestic or foreign partnership that is owned by the U.S. transferor and certain related foreign persons (a “Section 721(c) Partnership”) unless the Section 721(c) Partnership adopts the “Gain Deferral Method.” The Temporary Regulations make some significant changes, additions, and clarifications to the rules in the notice, however, including those summarized below.
 KPMG observation: The Temporary Regulations cite Reg. section 1.751-1(a)(3); however, the cite appears to be referring to Reg. section 1.751-1(b)(3).
The Temporary Regulations generally apply to contributions occurring on or after August 6, 2015, and to contributions occurring before August 6, 2015, resulting from an entity classification election filed on or after August 6, 2015. New rules and substantive changes to rules outlined in Notice 2015-54 (as specified in the Temporary Regulations) generally apply to contributions occurring on or after January 18, 2017, or to contributions occurring before January 18, 2017, resulting from an entity classification election that is filed on after that date.
For more information, contact a tax professional with KPMG’s Washington National Tax:
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