IRS clarifies “stock of corporate partner” in partnership temporary regulations

IRS clarifies “stock of corporate partner”

The IRS has issued a statement concerning the scope of regulations known by tax professionals as the “May Company regulations.”

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In June 2015, temporary regulations (T.D. 9722) were published in the Federal Register providing rules to prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner.

According to a recent IRS statement (quoted in full below), the definition of “stock of the corporate partner” in the temporary regulations did not “match the intended definition” as discussed in the preamble. Rather, the regulations are being clarified so that the term “stock of the corporate partner” includes the stock or other equity interests of a corporation that controls the corporate partner within the meaning of section 304(c), except that section 318(a)(1) and (3) do not apply

 

On June 12, 2015, the Internal Revenue Service and Treasury issued final and temporary regulations (T.D. 9722) that prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner. The regulations were published in the Federal Register dated June 12, 2015 (80 FR 33402). Soon after issuance, practitioners noted that the stated definition in the regulations of “Stock of the Corporate Partner” did not match the intended definition as discussed in the preamble. In order to correct the stated definition, the IRS will publish a correction in the Federal Register to amend the relevant text of both the preamble and the regulation to clarify that the term “Stock of the Corporate Partner” includes the stock or other equity interests of a corporation that controls the Corporate Partner within the meaning of section 304(c), except that section 318(a)(1) and (3) shall not apply. The regulations, as published in the Internal Revenue Bulletin on June 29, 2015 (I.R.B. 2015-26 at 1094 et seq.), reflect these intended changes.

 

As noted in the IRS statement, when the temporary regulations were published in this week’s edition of the Internal Revenue Bulletin  2015-26 [PDF 12 MB], the definition of “stock of the corporate partner” was revised to reflect this change and to limit the application of the regulations to situations involving “hook stock,” as described in the preamble.
According to an informal communication with the IRS author of the regulations, this correction will be released for publication in the Federal Register in the “next couple of days.” The  correction [PDF 213 KB] was then released for publication in the Federal Register on the afternoon of July 2, 2015.

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