IRS regulations limit deferral of gain on contributions to partnerships with related foreign partners

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February 2017


The IRS issued on January 18, 2017, final, temporary (T.D. 9814), and proposed regulations (REG-127203-15) under Sections 721, 704, 197, and 6038B pursuant to the regulatory authority provided by Section 721(c) (the Section 721(c) regulations). The intent to issue these regulations previously was announced by the IRS in Notice 2015-54 (the Notice).


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The new regulations override the general nonrecognition rule for contributions of property to a partnership under Section 721(a) if a US person contributes property to a partnership that is controlled by the US transferor and a related foreign partner, unless the partnership adopts the remedial method for making allocations under Section 704(c) and certain other requirements are met (the Gain Deferral Method). The preamble to the regulations states that the regulations are intended to address the IRS’s concern that taxpayers are using partnerships to shift income or gain from US persons to related foreign partners that are not subject to US tax.

The Section 721(c) regulations generally apply to contributions occurring on or after August 6, 2015 (the date of the Notice), and to contributions occurring before August 6, 2015, that result from an entity classification election filed on or after that date. New rules not described in the Notice, including any substantive changes to the rules as described in the Notice, generally are effective by substituting January 18, 2017, for the August 6, 2015, date. The regulations provide that taxpayers may elect to apply the rules of the Section 721(c) regulations to transactions prior to January 18, 2017 that otherwise are covered by the Notice.

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Julie Allen

National Tax Services Market Leader and Mergers and Acquisitions Tax Leader, PwC US

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