Addressing cost sharing arrangements, controlled transactions with partnerships

Cost sharing arrangements, controlled transactions

The IRS today released an advance version of Notice 2015-54 announces that Treasury and the IRS intend to issue regulations under section 482—specifically the cost sharing rules under Reg. section 1.482-7—applicable to controlled transactions involving partnerships, so that the appropriate valuation of such transactions is appropriately determined.

Related content

Notice 2015-54 [PDF 194 KB] also announces that Treasury and the IRS intend to issue regulations under section 721(c), to provide that when a U.S. person transfers certain property to a partnership that has foreign partners related to the transferor, the income or gain attributable to the property will be taken into account by the transferor either immediately or periodically. Read TaxNewsFlash-United States

Reasons for future regulations

According to today’s notice, the IRS and Treasury 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. The notice further states that many of these taxpayers choose a section 704(c) method other than the remedial method and/or use valuation techniques that are inconsistent with the arm’s length standard.

Notice 2015-54 states that the IRS and Treasury intend to issue regulations regarding the application to controlled transactions involving partnerships of certain rules in Reg. section 1.482-7 that are currently applicable to cost sharing arrangements. Specifically, the future regulations will provide specified methods for such controlled transactions based on the specified methods in Reg. section 1.482-7(g) as appropriately adjusted in light of the differences in the facts and circumstances between the partnerships and cost sharing arrangements.

Also, the to-be-issued regulations will provide periodic adjustment rules that are based on the principles of the cost sharing regulations under Reg. section 1.482-7 for controlled transactions involving partnerships. The regulations will provide that, in the event of a trigger based on a significant divergence of actual returns from projected returns for controlled transactions involving a partnership, the IRS may make periodic adjustments to the results of such transactions, as appropriately adjusted, under a method based on Reg. section 1.482-7(i)(6)(v), as appropriately adjusted, as well as any necessary corresponding adjustments to section 704(b) or section 704(c) allocations.

The notice further states that the IRS and Treasury are considering issuing regulations to require additional documentation for certain controlled transactions involving partnerships. These regulations may require, for example, documentation of projected returns for property contributed to a partnership (as well as attributable to related controlled transactions) and of projected partnership allocations, including projected remedial allocations for a specified number of years.

Implications under current rules

Notice 2015-54 continues by noting that under existing law, section 482 and related penalties apply to controlled transactions involving partnerships.

The notice states that, for example, when U.S. and foreign persons under common control enter into a partnership, the amounts of their contributions to, and distributions from, the partnership are subject to adjustment in order to reflect arm’s length results.

Also subject to adjustment under section 482 are partnership allocations—including allocations under section 704(c)—and the relative magnitudes of the partners’ partnership interests in light of their respective contributions and the related controlled transactions.

Effective dates

Concerning controlled transactions and cost sharing arrangements, Notice 2015-54 provides that the future regulations will apply to transfers and to controlled transactions occurring on or after the date of the publication of the regulations (i.e., not retroactively). However, it is important to note that the IRS notice states that the current section 482 rules apply to partnership contributions and distributions.

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