Transfers of Certain Property by U.S. Persons to Partnerships With Related Foreign Partners
| Published date | 23 January 2020 |
| Citation | 85 FR 3833 |
| Record Number | 2020-00383 |
| Section | Rules and Regulations |
| Court | Internal Revenue Service |
Federal Register, Volume 85 Issue 15 (Thursday, January 23, 2020)
[Federal Register Volume 85, Number 15 (Thursday, January 23, 2020)]
[Rules and Regulations]
[Pages 3833-3852]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-00383]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9891]
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 regulations and removal of temporary regulations.
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SUMMARY: This document contains final regulations that provide guidance
applicable to transfers of appreciated property by U.S. persons to
partnerships with foreign partners related to the transferor.
Specifically, when a U.S. person transfers appreciated property to a
partnership with a foreign partner related to the transferor, the
regulations override the general nonrecognition rule unless the
partnership adopts the remedial allocation method and certain other
requirements are satisfied. The
[[Page 3834]]
regulations affect U.S. partners in domestic or foreign partnerships.
DATES:
Effective Date: These regulations are effective on January 17,
2020.
Applicability Dates: For dates of applicability, see Sec. Sec.
1.197-2(l)(5)(i), 1.704-1(f), 1.704-3(g)(1), 1.721(c)-1(e), 1.721(c)-
2(e), 1.721(c)-3(e), 1.721(c)-4(d), 1.721(c)-5(g), 1.721(c)-6(g), and
1.6038B-2(j)(4).
FOR FURTHER INFORMATION CONTACT: Chadwick Rowland, (202) 317-6937 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 721(c) was added to the Internal Revenue Code (the
``Code'') by the Taxpayer Relief Act of 1997, Public Law 105-34 (111
Stat. 788). In section 721(c), Congress granted the Secretary
regulatory authority 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.
On August 6, 2015, the Department of the Treasury (the ``Treasury
Department'') and the IRS issued Notice 2015-54, 2015-34 I.R.B. 210,
which announces an intent to issue regulations under section 721(c).
On January 19, 2017, the Treasury Department and the IRS published
temporary and final regulations (T.D. 9814) under sections 721(c), 197,
704, and 6038B in the Federal Register (82 FR 7582) (the ``temporary
regulations''). A notice of proposed rulemaking (REG-127203-15) cross-
referencing the temporary regulations was published in the same issue
of the Federal Register (82 FR 6368 (the ``proposed regulations'' and
together with the temporary regulations the ``2017 regulations'').
No public hearing on the 2017 regulations was requested or held;
however, the Treasury Department and the IRS received one written
comment with respect to the 2017 regulations. The Comment Summary and
Explanation of Revisions section summarizes the comment and discusses
relevant provisions of the 2017 regulations.
Comment Summary and Explanation of Revisions
I. Overview
The Treasury Department and the IRS received one comment regarding
the 2017 regulations. After full consideration of the comment, this
Treasury Decision adopts the rules contained in the proposed
regulations with certain modifications. This Comment Summary and
Explanation of Provisions section summarizes the comment received,
explains the Treasury Department and the IRS's response to that
comment, and discusses the modifications to the proposed regulations
adopted in this Treasury Decision.
II. Comment
The comment expressed concern that an intercompany transaction
between a U.S. person and a foreign person may result in a deemed or
``accidental partnership,'' despite no intention by the partners to
create one and no realization one was created. As a consequence, the
requirements under the regulations would not be met to avoid gain
recognition under section 721(c). The comment recommended an additional
exception to gain recognition under section 721(c) in these
circumstances if the taxpayer has reasonably determined that the
property in question was not contributed to a partnership, the taxpayer
is not amortizing or depreciating the property for section 704(b)
purposes with respect to the arrangement for which the property owner
has entered into a transaction with a related party, and all parties
involved consistently treat the arrangement, with respect to the
subject property, as one to which subchapter K of the Code does not
apply.
The final regulations do not adopt this recommendation. The issue
of what constitutes deemed or accidental partnerships and any relief
that should be provided for them is not unique to the application of
these regulations and, thus, goes beyond the scope of this Treasury
Decision. Nevertheless, when an accidental partnership exists as the
comment describes, the filing obligations under Sec. 1.6038B-
2(a)(1)(iii) (which cross references the reporting requirements under
Sec. 1.721(c)-6(b)) will have not been fulfilled and, therefore, the
limitations period on assessment under section 6501(c)(8) will remain
open until three years after the IRS is provided the information
required to be reported under section 6038B. Accordingly, a taxpayer
that makes a contribution to an accidental partnership could file
amended returns applying the gain deferral method, including fulfilling
its reporting requirements (see Sec. 1.721(c)-6(f)).
III. Modifications and Clarifications
A. Related Party Definition
Section 1.721(c)-1T(b) provides definitions that apply for purposes
of the 2017 regulations. Section 1.721(c)-1T(b)(12) provides that 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. 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. See Sec. 1.721(c)-1T(b)(11).
The Treasury Department and the IRS have determined that a
modification to the definition of related person is appropriate to
limit the application of these rules in certain situations.
Specifically, a new paragraph is added in Sec. 1.721(c)-1(b)(12) that
provides that for purposes of determining if a person is a related
person with respect to a U.S. transferor, section 267(b) is applied
without regard to section 267(c)(3). This modification to the
definition of related person provides relief when certain foreign
individual partners of a partnership would be treated as a related
person with respect to a domestic corporation by reason of section
267(c)(3). This change is consistent with section 707(b)(3) and is
intended to address the following specific fact pattern, or a variation
thereof:
A partnership (PRS1) has two partners: A foreign individual that
holds 4 percent of the interests in PRS1's capital and profits and a
U.S. individual (unrelated to the foreign individual) that holds 96
percent of the interests in PRS1's capital and profits. PRS1 wholly
owns a domestic corporation (UST). In Year 1, UST forms a new
partnership (PRS2); as part of the formation, UST contributes section
721(c) property (as defined in Sec. 1.721(c)-1(b)(15)) in return for a
90 percent interest in PRS2's capital and profits, and a U.S.
individual (unrelated to UST) contributes cash in return for the
remaining interest in PRS2's capital and profits.
For purposes of determining whether PRS2 is a section 721(c)
partnership (as defined in Sec. 1.721(c)-1(b)(14)), the rules of
section 267(b) must be applied to determine whether the foreign
individual is a related foreign person with respect to UST. Section
267(b)(2) provides that an individual is related to a corporation if
the individual holds, directly or indirectly, more than 50 percent in
value of the corporation's outstanding stock. In applying section
267(b)(2), however, the constructive stock ownership rules of section
267(c) must be taken into account. Section 267(c)(1) provides that
stock owned, directly or indirectly, by a partnership will be treated
as owned proportionally by its partners. Section 267(c)(5)
[[Page 3835]]
provides that stock owned constructively by reason of section 267(c)(1)
will be treated as actually owned for purposes of applying section
267(c)(3). Section 267(c)(3) provides that an individual owning any
stock in a corporation shall be considered as owning the stock owned,
directly or indirectly, by or for his partner. But section 267(c)(3)
will not apply, and will therefore not attribute stock ownership to an
individual partner, if the individual does not actually own, or
constructively own under section 267(c)(1), stock in the corporation
that is owned directly or indirectly by or for another partner of the
partnership. See Sec. 1.267(c)-1(a)(2).
In the facts provided, section 267(c)(1) treats the foreign
individual as constructively owning a proportionate share of the UST
stock that is owned by PRS1; accordingly, the foreign individual is
treated as constructively owning 4 percent of the UST stock. And
because the foreign individual constructively owns stock in UST under
section 267(c)(1), section 267(c)(3) attributes the stock owned by the
U.S individual (the other partner in PRS1) to the foreign individual.
As a result, the foreign individual is treated as owning all of the
value of UST's outstanding stock for purposes of determining
relatedness under section 267(b)(2); therefore, the foreign individual
is a related person with respect to the U.S. transferor under the rule
provided in Sec. 1.721(c)-1T(b)(12) of the 2017 regulations. However,
because the modified definition of related person provided in this
Treasury Decision applies section 267(b) without regard to section
267(c)(3), the foreign individual will not be treated as a related
person under Sec. 1.721(c)-1(b)(12)(ii). As a consequence, PRS2 is not
a section 721(c) partnership.
B. Consistent Allocation Method
Section 1.721(c)-3T(b) of the 2017 regulations provides the
requirements of the gain deferral method. Among the requirements, a
section 721(c) partnership is required to adopt the remedial allocation
method and apply the consistent allocation method with respect to
section 721(c) property. The consistent allocation method, as described
in Sec. 1.721(c)-3T(c)(1), provides that for each taxable year of a
section 721(c) partnership in which there is remaining built-in gain in
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 the taxable year. Although the consistent allocation method
requires each book item of income, gain, deduction, and loss with
respect to section 721(c) property to be allocated to a U.S. transferor
in the same percentage for a single taxable year, the consistent
allocation method does not require the allocations to be in the same
percentage among all taxable years in which the gain deferral method is
applied. The consistent allocation method, therefore, prevents a U.S.
transferor from rendering the remedial allocation method ineffective
by, for example, having the partnership allocate a higher percentage of
book deprecation to the U.S. transferor than the U.S. transferor's
percentage share of income or gain with respect to the section 721(c)
property. See preamble to the temporary regulations (82 FR at 7589).
The consistent allocation method, therefore, ensures that the built-in
gain in section 721(c) property will be subject to U.S. tax.
The Treasury Department and the IRS have determined that a
modification to Sec. 1.721(c)-3T(c)(1) of the 2017 regulations is
appropriate to clarify the application of the consistent allocation
method. Specifically, a new sentence is added in Sec. 1.721(c)-
3(c)(1); the new sentence provides that upon a variation (as described
in Sec. 1.706-4(a)(1)) of a U.S. transferor's interest in a section
721(c) partnership, book items with respect to section 721(c) property
that are allocated under the interim closing method (as described in
Sec. 1.706-4) will be treated as allocated in the same percentage for
purposes of applying the consistent allocation method in a single
taxable year unless the variation results from a transaction undertaken
with a principal purpose of avoiding the tax consequences of the gain
deferral method.
If any partner's interest in a partnership changes during a taxable
year of the partnership, section 706(d) grants the Secretary regulatory
authority to prescribe rules for determining each partner's
distributive share of any partnership item for the taxable year that
takes into account the partner's varying interests in the partnership.
The variations described in section 706(d) include, among other things,
a reduction in a partner's interest in a partnership, including a
reduction that occurs due to the entry of a new partner. See Sec.
1.706-4(a). If a partner's interest in a partnership is reduced during
a taxable year, but not completely disposed of, the taxable year of the
partnership will not close as a result of the variation. See section
706(c)(2)(B). Instead, if a variation occurs during the taxable year of
a partnership, Sec. 1.706-4(a)(3) generally allows the partnership to
choose how to determine each partner's share of the partnership items
for the taxable year under either the proration method or the interim
closing method. See Sec. 1.706-4(a)(3)(iii). The interim closing
method divides the taxable year of the partnership into segments based
on the interim closings of the partnership's books; the segments are
then used to apportion the partnership items for the year among its
segments, and to determine, taking into account the partners' interests
during each segment, the partners' distributive shares of the
partnership items. See generally Sec. 1.706-4(a)(3).
The modification to the consistent allocation method when the
interim closing method is applied is intended to clarify that a U.S.
transferor continues to comply with the consistent allocation method
following certain economic events that do not close the taxable year of
the section 721(c) partnership. Given the high thresholds required to
be subject to these rules, the Treasury Department and the IRS have
determined that allowing the partnership to choose the proration method
is not appropriate for the consistent allocation method: A section
721(c) partnership will have the resources and capabilities necessary
to comply with the more precise interim closing method without imposing
an undue burden on the partnership.
C. Reporting
The final regulations include the reporting requirements provided
in the 2017 regulations regarding both gain deferral contributions and
the annual reporting requirements with respect to section 721(c)
property to which the gain deferral method applies. The 2017
regulations require much of the reporting to be on statements attached
to returns. See Sec. Sec. 1.721(c)-6T and 1.6038B-2T. Since the
issuance of the 2017 regulations, however, the IRS has updated and
added new schedules to Form 8865, Return of U.S. Persons With Respect
to Certain Foreign Partnerships, to facilitate compliance with these
reporting requirements. The IRS has also issued new Form 8838-P,
Consent To Extend the Time To Assess Tax Pursuant to the Gain Deferral
Method (Section 721(c)). The purpose of these changes was to include
the information that previously was reported on the statements. The
final regulations reference and require the use of these forms and
schedules to fulfill the reporting requirements. For tax returns filed
before March 17, 2020, however, Sec. 1.721(c)-6(g)(3)(ii) provides
relief for reporting that met the requirements of
[[Page 3836]]
Sec. 1.721(c)-6T (as in effect before January 1, 2020).
The final regulations also clarify the duration for which the U.S.
transferor must extend the period of limitations on the assessment of
tax under Sec. 1.721(c)-6(b). Section 1.721(c)-6(b)(5) clarifies the
relevant periods to which Form 8838-P applies by measuring each period
by the number of months occurring after the relevant date; accordingly,
the final regulations measure each period by a fixed term that is
determinable on the date of contribution. The final regulations also
provide a similar clarification in Sec. 1.721(c)-6(f)(2).
D. Technical Terminations
Section 708(b) generally provides that a partnership will terminate
if the partnership ceases to do business. Before the enactment of the
Tax Cuts and Jobs Act, Public Law 115-97 (2017) (the ``TCJA''), section
708(b)(1)(B) provided another way for a partnership to terminate: A
partnership terminated if within any 12-month period, 50 percent or
more of the total interest in partnership capital and profits was sold
or exchanged. The termination described in section 708(b)(1)(B) is
commonly referred to as a ``technical termination.'' The regulations in
Sec. 1.708-1(b)(4) provide that a technical termination results in a
deemed contribution of all the terminated partnership's assets and
liabilities to a new partnership in exchange for an interest in the new
partnership, followed by a deemed distribution of interests in the new
partnership to both the purchasing partners and the remaining partners.
The TCJA repealed section 708(b)(1)(B) for all partnership taxable
years beginning after December 31, 2017; therefore, technical
terminations no longer apply. See Conference Report on H.R. 1, Tax Cuts
and Jobs Act, H. Rept. 115-446, at 416.
The 2017 regulations provide rules regarding technical terminations
in two contexts: They provide that a partnership will not be treated as
a section 721(c) partnership (as defined in Sec. 1.721(c)-1T(b)(14))
following a deemed contribution that occurs as a result of a technical
termination, and they treat certain technical terminations as successor
events for purposes of the acceleration event exceptions provided in
Sec. 1.721(c)-5T. See Sec. Sec. 1.721(c)-2T(d)(2) and 1.721(c)-
5T(c)(4).
The rules in the 2017 regulations regarding technical terminations
are retained in this Treasury Decision. Although the TCJA repealed
section 708(b)(1)(B), the applicability date for these final
regulations relates back to the applicability date provided in the 2017
regulations, which is before the effective date provided in the TCJA.
Accordingly, the rules provided in this Treasury Decision regarding
technical terminations will have limited applicability; the rules will
only apply to technical terminations occurring on or after the
applicability date provided in the 2017 regulations but before the
effective date for the repeal of section 708(b)(1)(B) provided in the
TCJA.
E. Request for Comments
Under the final regulations, as well as the 2017 regulations, stock
is excluded from the definition of section 721(c) property and,
therefore, a contribution of stock of a controlled foreign corporation
(within the meaning of section 957) (``CFC'') to a section 721(c)
partnership is not subject to the final regulations. However, the
Treasury Department and the IRS are concerned that taxpayers may avail
themselves of partnerships to shift the tax liability, in whole or in
part, with respect to earnings of a CFC attributable to subpart F
income (within the meaning of section 952) or tested income (within the
meaning of section 951A(c)(2)(A) and Sec. 1.951A-2(b)(1)) to a related
foreign partner that is not owned (within the meaning of section
958(a)) by a United States shareholder (within the meaning of section
951(b)). The Treasury Department and the IRS are studying the use of
partnerships in this context, including under what circumstances it may
be appropriate to apply section 721(c) to a contribution of stock of a
CFC to a partnership. The Treasury Department and the IRS request
comments on this matter.
Special Analyses
I. Regulatory Planning and Review
The Administrator of the Office of Information and Regulatory
Affairs (OIRA), Office of Management and Budget, has determined that
this rule is not a significant regulatory action, as that term is
defined in section 3(f) of Executive Order 12866. Therefore, OIRA has
not reviewed this rule pursuant to section 6(a)(3)(A) of Executive
Order 12866 and the April 11, 2018, Memorandum of Agreement between the
Department of Treasury and the Office of Management and Budget (OMB).
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that the collection of information contained in
this regulation will not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that the regulations include a $1,000,000 de minimis exception
for certain transfers and exclude contributions of tangible property
with built-in gain that does not exceed $20,000. In addition, the
regulations apply only 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.
II. Paperwork Reduction Act
The collection of information imposed by these regulations is
contained in Sec. Sec. 1.721(c)-6 and 1.6038B-2. The collection of
information provided by these regulations has been reviewed and
approved by the Office of Management and Budget under control numbers
1545-1668 and 1545-0123. The information is required to comply with the
gain deferral method, which generally allows a U.S. transferor to avoid
immediate gain recognition upon a contribution of section 721(c)
property to a section 721(c) partnership. The likely respondents are
domestic corporations. Estimates for completing these forms can be
located in the instructions to Forms 8865, 8838-P, and 1065.
Upon a contribution of section 721(c) property to a section 721(c)
partnership, a U.S. transferor must comply with the gain deferral
method described in Sec. 1.721(c)-3 to avoid immediate gain
recognition. To comply with the gain deferral method, Sec. 1.721(c)-
3(b)(3) provides that the procedural and reporting requirements of
Sec. 1.721(c)-6 must be met; additionally, Sec. 1.721(c)-3(b)(4)
provides that a U.S. transferor must consent to an extension of the
period of limitations on assessment of tax as required by Sec.
1.721(c)-6(b)(5).
Section 1.721(c)-6(b) describes the procedural and reporting
requirements of a U.S. transferor. The collection of information
described in Sec. Sec. 1.721(c)-6(b)(2) and (c)(2) and 1.6038B-
2(a)(1)(iii) regarding a gain deferral contribution is provided by the
U.S. transferor to the IRS on any applicable Schedules to Form 8865,
Return of U.S. Persons With Respect to Certain Foreign Partnerships,
and is mandatory; the relevant Schedules include, as
[[Page 3837]]
applicable, Schedule A-1, Certain Foreign Partners; Schedule A-2,
Foreign Partners of Section 721(c) Partnership; Schedule G, Statement
of Application of the Gain Deferral Method Under Section 721(c);
Schedule H, Acceleration Events and Exceptions Reporting Relating to
Gain Deferral Method Under Section 721(c); and Schedule O, Transfer of
Property to a Foreign Partnership. The information will be used by the
U.S. transferor to comply with the gain deferral method.
The collection of information described in Sec. Sec. 1.721(c)-
6(b)(3) and 1.6038B-2(a)(1)(iii) is provided on Schedules G, H, and O
of Form 8865 and is mandatory. The information will be used by the U.S.
transferor to annually report information for each gain deferral
contribution.
The collection of information described in Sec. 1.721(c)-
6(b)(3)(iii), if not already provided elsewhere, is provided on Form
8865, Return of U.S. Persons With Respect to Certain Foreign
Partnerships, and is mandatory. The information will be used by the
U.S. transferor to comply with the gain deferral method.
The collection of information described in Sec. 1.721(c)-6(b)(5)
is provided by the U.S. transferor to the IRS on Form 8838-P, Consent
To Extend the Time To Assess Tax Pursuant to the Gain Deferral Method
(Section 721(c)), and is mandatory. The information will be used by the
U.S. transferor to extend the period of limitations on the assessment
of tax to ensure that the gain deferral method is properly applied.
If a section 721(c) partnership does not have a filing obligation
under section 6031, the collection of information described in Sec.
1.721(c)-6(c)(3) is provided by a section 721(c) partnership to a U.S.
transferor on 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. The
information will be used by the U.S. transferor to annually report
information for each gain deferral contribution.
If a section 721(c) partnership has a filing obligation under
section 6031, the collection of information described in Sec.
1.721(c)-6(d)(2) is provided by the section 721(c) partnership to the
U.S. transferor on Schedule K-1 (Form 1065). The information will be
used by the U.S. transferor to comply with the requirements of the gain
deferral method provided in Sec. 1.721(c)-6(b)(2) and (3).
Revision of Existing Forms
----------------------------------------------------------------------------------------------------------------
Number of additional
New Revision of existing respondents (estimated,
form rounded to nearest 100)
----------------------------------------------------------------------------------------------------------------
Form 8865......................... ........................ Y https://www.irs.gov.
Effect on Other Documents
The following section of the following publication is obsolete as
of January 17, 2020:
Section 4 of Notice 2015-54 (2015-34 I.R.B. 210).
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 removing
the sectional authority citations for Sec. Sec. 1.197-2T, 1.704-3T,
1.721(c)-1T through 1.721(c)-7T, and 1.6038B-2T and adding entries in
numerical order for Sec. Sec. 1.721(c)-1 through 1.721(c)-7 to read in
part as follows:
Authority: 26 U.S.C. 7805, unless otherwise noted.
* * * * *
Section 1.721(c)-1 also issued under 26 U.S.C. 721(c).
[[Page 3838]]
Section 1.721(c)-2 also issued under 26 U.S.C. 721(c).
Section 1.721(c)-3 also issued under 26 U.S.C. 721(c).
Section 1.721(c)-4 also issued under 26 U.S.C. 721(c).
Section 1.721(c)-5 also issued under 26 U.S.C. 721(c).
Section 1.721(c)-6 also issued under 26 U.S.C. 721(c).
Section 1.721(c)-7 also issued under 26 U.S.C. 721(c).
* * * * *
0
Par. 2. Section 1.197-2 is amended by revising 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) Rules for section 721(c) partnerships. See Sec. 1.704-
3(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)-1(b)(14)).
* * * * *
(l) * * *
(5) Applicability dates for section 721(c) partnerships--(i) In
general. Except as provided in paragraph (l)(5)(ii) 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 that occurred before January 18, 2017 resulting from
an entity classification election made under Sec. 301.7701-3 of this
chapter that was effective on or before January 18, 2017 but was filed
on or after January 18, 2017.
(ii) Application of the provisions described in paragraph
(l)(5)(i)(A) of this section retroactively. Paragraph (h)(12)(vii)(C)
of this section may be applied with respect to a contribution occurring
on or after August 6, 2015, and to a contribution that occurred before
August 6, 2015 resulting from an entity classification election made
under Sec. 301.7701-3 of this chapter that was effective on or before
August 6, 2015 but was filed on or after August 6, 2015. A taxpayer
applying paragraph (h)(12)(vii)(C) of this section retroactively must
apply paragraph (h)(12)(vii)(C) of this section on a timely filed
original return (including extensions) or an amended return filed no
later than July 18, 2017.
Sec. 1.197-2T [Removed]
0
Par. 3. Section 1.197-2T is removed.
0
Par. 4. Section 1.704-1 is amended by revising paragraphs
(b)(2)(iv)(f)(6) and (f) to read as follows:
Sec. 1.704-1 Partner's distributive share.
* * * * *
(b) * * *
(2) * * *
(iv) * * *
(f) * * *
(6) Notwithstanding paragraph (b)(2)(iv)(f)(5) of this section, the
revaluation is required under Sec. 1.721(c)-3(d)(1) as a condition of
the application of the gain deferral method (as described in Sec.
1.721(c)-3(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)-1(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.
* * * * *
(f) Applicability dates--(1) In general. Except as provided in
paragraph (f)(2) 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 that occurred
before January 18, 2017 resulting from an entity classification
election made under Sec. 301.7701-3 of this chapter that was effective
on or before January 18, 2017 but was filed on or after January 18,
2017.
(2) Election to apply the provisions described in paragraph (f)(1)
of this section retroactively. Paragraph (b)(2)(iv)(f)(6) of this
section may, by election, be applied with respect to a contribution
that occurred on or after August 6, 2015 but before January 18, 2017,
and with respect to a contribution that occurred before August 6, 2015
resulting from an entity classification election made under Sec.
301.7701-3 of this chapter that was effective on or before August 6,
2015 but was filed on or after August 6, 2015. The election must have
been 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 July 18, 2017.
Sec. 1.704-1T [Amended]
0
Par. 5. Paragraphs (b)(2)(iv)(f)(6) and (f) of Sec. 1.704-1T are
removed.
0
Par. 6. Section 1.704-3 is amended by revising paragraphs (a)(13),
(d)(5)(iii), and (g) to read as follows:
Sec. 1.704-3 Contributed property.
(a) * * *
(13) Rules for tiered section 721(c) partnerships--(i)
Revaluations. If a partnership revalues its property pursuant to Sec.
1.704-1(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. 1.704-1(b)(2)(iv)(f)(6), the
principles of paragraph (a)(9) of this section 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)-1(b)(8), section
721(c) partnership is defined in Sec. 1.721(c)-1(b)(14), and section
721(c) property is defined in Sec. 1.721(c)-1(b)(15).
* * * * *
(d) * * *
(5) * * *
(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)-1(b)(7), related person is
defined in Sec. 1.721(c)-1(b)(12), section 721(c) partnership is
defined in Sec. 1.721(c)-
[[Page 3839]]
1(b)(14), section 721(c) property is defined in Sec. 1.721(c)-
1(b)(15), and U.S. transferor is defined in Sec. 1.721(c)-1(b)(18).
For an example applying the rules of this paragraph (d)(5)(iii), see
Sec. 1.721(c)-7(b)(6) (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 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)), 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.
* * * * *
(g) Applicability dates for rules for section 721(c) partnerships--
(1) In general. Notwithstanding paragraph (f) of this section, except
as provided in paragraph (g)(2) 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 that occurred before January 18, 2017 resulting from an
entity classification election made under Sec. 301.7701-3 of this
chapter that was effective on or before January 18, 2017 but was filed
on or after January 18, 2017.
(2) Election to apply the provisions described in paragraph (g)(1)
of this section retroactively. Paragraphs (a)(13) and (d)(5)(iii) of
this section may, by election, be applied with respect to a
contribution that occurred on or after August 6, 2015 but before
January 18, 2017, and with respect to a contribution that occurred
before August 6, 2015 resulting from an entity classification election
made under Sec. 301.7701-3 of this chapter that was effective on or
before August 6, 2015 but was filed on or after August 6, 2015. The
election must have been made by applying paragraph (a)(13) or
(d)(5)(iii) of this section, as applicable, on a timely filed original
return (including extensions) or an amended return filed no later than
July 18, 2017.
Sec. 1.704-3T [Removed]
0
Par. 7. Section 1.704-3T is removed.
0
Par. 8. Section 1.721(c)-1 is added to read as follows:
Sec. 1.721(c)-1 Overview, definitions, and rules of general
application.
(a) Overview--(1) In general. This section and Sec. Sec. 1.721(c)-
2 through 1.721(c)-7 (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)-2 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)-3
[[Page 3840]]
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)-4
provides rules regarding acceleration events for purposes of applying
the gain deferral method. Section 1.721(c)-5 identifies exceptions to
the rules regarding acceleration events provided in Sec. 1.721(c)-
4(b). Section 1.721(c)-6 provides procedural and reporting
requirements. Section 1.721(c)-7 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.
(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)-4(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)-2(b).
(3) Consistent allocation method. The consistent allocation method
is the method described in Sec. 1.721(c)-3(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 purposes of this
paragraph (b)(4), 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.
(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)-3(b).
(9) Partial acceleration event. A partial acceleration event is an
event described in Sec. 1.721(c)-5(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(b)(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--(i) In general. 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.
(ii) Modification to the application of section 267(b). For
purposes of determining if a person is a related person with respect to
a U.S. transferor, section 267(b) is applied without regard to section
267(c)(3).
(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 purposes of this paragraph (b)(13)(i), 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)-3(d)(1)(ii), the remaining
built-in gain includes the new positive reverse section 704(c) layer
described in Sec. 1.721(c)-3(d)(1)(ii), reduced by decreases in the
difference between the property's book value and adjusted tax basis,
but, for purposes of this paragraph (b)(13)(ii), 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)-3(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)-3(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)-2(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)-2(d), the entire property will be section 721(c) property.
(ii) Special rule for tiered partnerships. Property described in
Sec. 1.721(c)-3(d)(1)(ii) and an interest in a partnership described
in Sec. 1.721(c)-3(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)-5(c)(2), (3), (4), or (5).
(17) Termination event. A termination event is an event described
in Sec. 1.721(c)-5(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.
[[Page 3841]]
(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)-
3(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 that occurred before August 6, 2015 resulting from an
entity classification election made under Sec. 301.7701-3 of this
chapter that was effective on or before August 6, 2015 but was 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 that occurred before January 18, 2017 resulting from an
entity classification election made under Sec. 301.7701-3 of this
chapter that was effective on or before January 18, 2017 but was 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 that occurred on or after August 6, 2015 but
before January 18, 2017, and with respect to contributions that
occurred before August 6, 2015 resulting from an entity classification
election made under Sec. 301.7701-3 of this chapter that was effective
on or before August 6, 2015, but was filed on or after August 6, 2015
but before January 18, 2017. Except as provided in paragraph (e)(3) of
this section, paragraph (b)(12)(ii) of this section applies to
contributions occurring on or after January 17, 2020.
(3) Election to apply the provisions described in paragraph (e)(2)
of this section retroactively. Paragraphs (b)(6)(iv) and (c) of this
section and paragraph (b)(14)(i)(B) of this section, without the
modification described in paragraph (e)(2) of this section, may, by
election, be applied to a contribution that occurred on or after August
6, 2015 but before January 18, 2017, and to a contribution that
occurred before August 6, 2015 resulting from an entity classification
election made under Sec. 301.7701-3 of this chapter that was effective
on or before August 6, 2015 but was filed on or after August 6, 2015.
The election described in the preceding sentence must have been made by
applying paragraph (b)(6)(iv) or (c) as described in paragraph (e)(2)
of this section or paragraph (b)(14)(i)(B) 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 July
18, 2017. Paragraph (b)(12)(ii) of this section, may, by election, be
applied to a contribution that occurred on or after August 6, 2015 but
before January 17, 2020, and to a contribution that occurred before
August 6, 2015 resulting from an entity classification election made
under Sec. 301.7701-3 of this chapter that was effective on or before
August 6, 2015 but was filed on or after August 6, 2015. The election
described in the preceding sentence must be made by applying paragraph
(b)(12)(ii) of this section to the contribution on a timely filed
original return (including extensions) or an amended return filed no
later July 17, 2020.
Sec. 1.721(c)-1T [Removed]
0
Par. 9. Section 1.721(c)-1T is removed.
0
Par. 10. Section 1.721(c)-2 is added to read as follows:
Sec. 1.721(c)-2 Recognition of gain on certain contributions of
property to partnerships with related foreign partners.
(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. For definitions that apply
for purposes of this section, see Sec. 1.721(c)-1(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)-3 (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)-5(c)(4) (which treats
technical terminations as successor events in certain circumstances).
[[Page 3842]]
(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 that occurred before August 6, 2015 resulting from an
entity classification election made under Sec. 301.7701-3 of this
chapter that was effective on or before August 6, 2015 but was 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 that occurred before January 18, 2017
resulting from an entity classification election made under Sec.
301.7701-3 of this chapter that was effective on or before January 18,
2017 but was 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 that occurred on or after August 6, 2015 but before
January 18, 2017, and to a contribution that occurred before August 6,
2015 resulting from an entity classification election made under Sec.
301.7701-3 of this chapter that was effective on or before August 6,
2015 but was filed on or after August 6, 2015. The election must have
been 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 July 18, 2017.
Sec. 1.721(c)-2T [Removed]
0
Par. 11. Section 1.721(c)-2T is removed.
0
Par. 12. Section 1.721(c)-3 is added to read as follows:
Sec. 1.721(c)-3 Gain deferral method.
(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. For definitions
that apply for purposes of this section, see Sec. 1.721(c)-1(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)-2(b) will not be subject to Sec. 1.721(c)-
2(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.
(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)-5(d) or (e), as applicable.
(3) The procedural and reporting requirements provided in Sec.
1.721(c)-6(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)-6(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)-2(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 purposes of this paragraph (c)(1), upon a
variation (as defined in Sec. 1.706-4(a)(1)) of a U.S. transferor's
interest in a section 721(c) partnership, a book item of income, gain,
deduction, and loss with respect to a section 721(c) property is
treated as allocated in the same percentage if the item is allocated
under the interim closing method (as described in Sec. 1.706-4),
unless the variation results from a transaction undertaken with a
principal purpose of avoiding the tax consequences of the gain deferral
method. For exceptions to the first sentence in this paragraph (c)(1),
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
[[Page 3843]]
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 purposes
of this paragraph (c)(3), 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)-
1(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 paragraph
(c)(1) of this section 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)-5(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)-2(d)(1), and under Sec.
1.721(c)-2(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 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 that occurred before August 6, 2015 resulting from an
entity classification election made under Sec. 301.7701-3 of this
chapter that was effective on or before August 6, 2015 but was 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 that
occurred before January 18, 2017 resulting from an entity
classification election made under Sec. 301.7701-3 of this chapter
that was effective on or before January 18, 2017 but was filed on or
after January 18, 2017. Except as provided in paragraph (e)(3) of this
section, the second sentence of paragraph (c)(1) of this section
applies to contributions occurring on or after January 17, 2020.
(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 that occurred on or after August
6, 2015 but before January 18, 2017, and to a contribution that
occurred before August 6, 2015 resulting from an entity classification
election made under Sec. 301.7701-3 of this chapter that was effective
on or before August 6, 2015 but was filed on or after August 6, 2015.
The election described in the preceding sentence must have been made by
applying paragraph (b)(1)(ii), (c)(2) or (3), (c)(4)(i) or (ii), or
(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 July 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 have been made to apply
paragraph (c)(3) or (2) of this section, respectively, to the
contribution. The second sentence of paragraph (c)(1) of this section,
may, by election, be applied to a contribution that occurred on or
after August 6, 2015 but before January 17, 2020, and to a contribution
that occurred before August 6, 2015 resulting from an entity
classification election made under Sec. 301.7701-3 of this chapter
that was effective on or before August 6, 2015 but was filed on or
after August 6, 2015. The election described in the preceding sentence
must be made by applying the second sentence of paragraph (c)(1) of
this section to the contribution on a timely filed original return
(including extensions) or an amended return filed no later than July
17, 2020.
(4) Transitional rules. If a contribution is described in paragraph
(e)(2) of this section and no election
[[Page 3844]]
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.
Sec. 1.721(c)-3T [Removed]
0
Par. 13. Section 1.721(c)-3T is removed.
0
Par. 14. Section 1.721(c)-4 is added to read as follows:
Sec. 1.721(c)-4 Acceleration events.
(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. For
definitions that apply for purposes of this section, see Sec.
1.721(c)-1(b).
(b) Definition of an acceleration event--(1) General rules. Except
as provided in this paragraph (b) and Sec. 1.721(c)-5 (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)-3(b)(3) that is not
willful. See Sec. Sec. 1.721(c)-6(f) and 1.6038B-2(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)-6(b)(3)(i)(D).
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)-5(d)(1), and a transfer described in section 367 of section
721(c) property to the extent provided in Sec. 1.721(c)-5(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 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 that
occurred before August 6, 2015 resulting from an entity classification
election made under Sec. 301.7701-3 of this chapter that was effective
on or before August 6, 2015 but was filed on or after August 6, 2015.
Sec. 1.721(c)-4T [Removed]
0
Par. 15. Section 1.721(c)-4T is removed.
0
Par. 16. Section 1.721(c)-5 is added to read as follows:
Sec. 1.721(c)-5 Acceleration event exceptions.
(a) Scope. This section identifies exceptions to the acceleration
events, which, like the rules regarding acceleration events provided in
Sec. 1.721(c)-4(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. For
[[Page 3845]]
definitions that apply for purposes of this section, see Sec.
1.721(c)-1(b).
(b) Termination events--(1) In general. Notwithstanding Sec.
1.721(c)-4(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)); see paragraph (c)(3) of this section for a
successor event rule applicable to these intercompany transactions.
(c) Successor events--(1) In general. Notwithstanding Sec.
1.721(c)-4(b)(1), a successor event with respect to section 721(c)
property will not constitute an acceleration event. If 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 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) through (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. 1.721(c)-3(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) through (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)-3(b)(5)
and (d)(1).
[[Page 3846]]
(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)-4, 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)-4(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)-3(c)(4)(i) but not in Sec. 1.721(c)-3(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)-4(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)-4(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 that
occurred before January 18, 2017 resulting from an entity
classification election made under Sec. 301.7701-3 of this chapter
that was effective on or before January 18, 2017 but was filed on or
after January 18, 2017.
(2) Election to apply this section retroactively. This section may,
by election, be applied to a contribution that occurred on or after
August 6, 2015 but before January 18, 2017, and to a contribution that
occurred before August 6, 2015 resulting from an entity classification
election made under Sec. 301.7701-3 of this chapter that was effective
on or before August 6, 2015 but was filed on or after August 6, 2015.
The election must have been made by applying this section to the
contribution on a timely filed original return (including extensions)
or an amended return filed no later than July 18, 2017.
Sec. 1.721(c)-5T [Removed]
0
Par. 17. Section 1.721(c)-5T is removed.
0
Par. 18. Section 1.721(c)-6 is added to read as follows:
Sec. 1.721(c)-6 Procedural and reporting requirements.
(a) Scope. This section provides procedural and reporting
requirements that must be satisfied under Sec. 1.721(c)-3(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. For
definitions that apply for purposes of this section, see Sec.
1.721(c)-1(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)-
1(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 or
[[Page 3847]]
schedules (or their successors) and must be submitted in the form and
manner and to the extent prescribed by the forms and schedules (and
their 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) On Schedule A-1, Certain Foreign Partners, Schedule A-2,
Foreign Partners of Section 721(c) Partnership, Schedule G, Statement
of Application of the Gain Deferral Method Under Section 721(c), and
Schedule H, Acceleration Events and Exceptions Reporting Relating to
Gain Deferral Method Under Section 721(c) (for each such Schedule, with
respect to Form 8865, Return of U.S. Persons With Respect to Certain
Foreign Partnerships), as applicable, 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)-3(d)(1);
(ii) On Form 8838-P, Consent To Extend the Time To Assess Tax
Pursuant to the Gain Deferral Method (Section 721(c)), an extension of
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
paragraph (c)(1) of this section (if any);
(iv) On Schedule A-1, Schedule A-2, and Schedule G (for each such
Schedule, with respect to Form 8865), as applicable, information
relating to the section 721(c) partnership described in paragraph
(c)(2) of this section (if any);
(v) On, Schedule O, Transfer of Property to a Foreign Partnership
(Form 8865) 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 annually report information for each gain deferral
contribution. The information reported 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 information reported must include:
(i) For each deferral contribution, the U.S. transferor must report
the following information on Schedule G and Schedule H (for each
Schedule, with respect to Form 8865), as applicable:
(A) 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;
(B) 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;
(C) 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;
(D) 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)-5(d) in the case of a partial
acceleration event, and whether the acceleration event is described in
Sec. 1.721(c)-4(b)(4));
(E) 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)-5(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);
(F) A description of all transfers of section 721(c) property to a
foreign corporation described in Sec. 1.721(c)-5(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; and
(G) 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 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;
(ii) On Form 8838-P, an extension of 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;
(iii) 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)(iii) by providing the information described in
Sec. 1.6038-3(g)(1);
[[Page 3848]]
(iv) On Schedule O (Form 8865), 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)-2(d)(1)) during the taxable year to which the gain deferral
method is not applied; and
(v) 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 using Form
8838-P:
(i) With respect to the gain realized but not recognized on a gain
deferral contribution, through the date that is 96 months after the
close of 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 date that is 72
months after the close of 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
date that is 60 months after the close of 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)-
3(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)-6,''
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)-3(d), the U.S. transferor
must supply all the 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 (using the
Forms and Schedules specified 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 a Schedule K-1 (Form 1065) to its Form 1065 for each direct or
indirect partner that is a related foreign person with respect to the
U.S. transferor.
(e) Signatory. Any 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)-
3(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)-3(b)(3) if the U.S. transferor
demonstrates that the failure was not willful using the procedure
provided in this paragraph (f). For purposes of this paragraph (f),
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 (f) 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.
[[Page 3849]]
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 Schedule O (Form
8865) and Form 8838-P (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 date that is 96
months after the close of the U.S. transferor's taxable year that
includes the date of the gain deferral contribution (date one), or the
date that is 36 months 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 Schedule O (Form 8865), 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 Schedule O (Form 8865).
The amended return and either a Schedule O (Form 8865) or a copy of the
previously filed Schedule O (Form 8865), 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-2(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 that occurred before January 18, 2017
resulting from an entity classification election made under Sec.
301.7701-3 of this chapter that was effective on or before January 18,
2017 but was filed on or after January 18, 2017.
(2) Reporting relating to effectively connected income. Paragraphs
(b)(2)(iii), (b)(3)(i)(G), and (d)(1) of this section apply to a
contribution occurring on or after August 6, 2015, and to a
contribution that occurred before August 6, 2015 resulting from an
entity classification election made under Sec. 301.7701-3 of this
chapter that was effective on or before August 6, 2015 but was filed on
or after August 6, 2015, and, in either case, provided Sec. 1.721(c)-
3(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)(i)(G), or (d)(1) of this section, an amended return complying
with such paragraphs must have been filed no later than July 18, 2017.
(3) Transition rules--(i) Reporting under sections 6038, 6038B, and
6046A. For transfers occurring on or after August 6, 2015, and for
transfers that occurred before August 6, 2015 resulting from an entity
classification election made under Sec. 301.7701-3 of this chapter
that was effective on or before August 6, 2015 but was filed on or
after August 6, 2015, 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 with respect to the contribution of the section 721(c) property
to the section 721(c) partnership.
(ii) Reporting using statements instead of prescribed forms and
schedules. For tax returns filed before March 17, 2020, reporting that
met the requirements of Sec. 1.721(c)-6T (see 26 CFR part 1, revised
as of April 1, 2019) as in effect before January 1, 2020, will be
deemed to satisfy the corresponding requirements of this section.
Sec. 1.721(c)-6T [Removed]
0
Par. 19. Section 1.721(c)-6T is removed.
0
Par. 20. Section 1.721(c)-7 is added to read as follows:
Sec. 1.721(c)-7 Examples.
(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)-1(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)-1(b)(4).
(b) Examples. The application of the rules stated in Sec. Sec.
1.721(c)-1 through 1.721(c)-6 may be illustrated by the following
examples:
(1) 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 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)-1(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)-1(b)(2), the patent has built-in
gain of $1.2 million. The patent is not excluded property under
Sec. 1.721(c)-1(b)(6). Therefore, under Sec. 1.721(c)-1(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)-1(b)(2), the security has built-in gain
of $80,000. Under Sec. 1.721(c)-1(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)-1(b)(6)(iii), the machine is excluded property and
therefore is not section 721(c) property.
(D) Under Sec. 1.721(c)-1(b)(12), CFC1 is a related person with
respect to USP, and
[[Page 3850]]
under Sec. 1.721(c)-1(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)-1(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)-2(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)-
2(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.
(2) 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)-2(b).
(iii) Alternative facts and results. (A) The facts are the same
as in paragraph (b)(2)(i) of this section (the facts in 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)-1(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)-1(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)-2(b).
(3) 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)-2(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)-2(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)-2(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)-
3(b), the gain deferral method must be applied with respect to the
patent. In addition, under Sec. 1.721(c)-3(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 (b)(3)(i)
of this section (the facts in Example 3), the gain deferral method
is applied. PRS2 is a controlled partnership with respect to USP.
Under Sec. 1.721(c)-5(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. 1.704-3(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).
(4) 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)-2(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)-5(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)-5(b)(1), the trademark is no longer subject to the
gain deferral method.
(5) Example 5: Transfer described in section 367 of section
721(c) property to a foreign corporation--(i) Facts. In year 1, USP,
CFC1, 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)-2(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)-5(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)-5(e), to the extent
USP and USX are treated as transferring the patent to FX, the tax
consequences are determined under section
[[Page 3851]]
367(d) and the regulations under section 367(d). With respect to the
remaining portion of the patent, if any, 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)-4(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)-4(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.
(6) 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-
3(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. 1.704-3(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-
3(d)(5)(iii)(C), PRS1 increases the adjusted tax basis in the IP by
$12 million, and pursuant to Sec. 1.704-3(d)(5)(iii)(D), that basis
adjustment is solely with respect to CFC1. Pursuant to Sec. 1.704-
3(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. 1.704-3(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.
Sec. 1.721(c)-7T [Removed]
0
Par. 21. Section 1.721(c)-7T is removed.
0
Par. 22. Section 1.6038B-2 is amended by:
0
1. Revising paragraphs (a)(1)(iii), (a)(3), and (c)(8) and (9).
0
2. In paragraph (h)(1) introductory text, removing ``Sec. 1.721(c)-
6T'' and adding ``Sec. 1.721(c)-6'' in its place.
0
3. Revising paragraphs (h)(3) and (j)(4) and (5).
The revisions read as follows:
Sec. 1.6038B-2 Reporting of certain transfers to foreign
partnerships.
(a) * * *
(1) * * *
(iii) The United States person is a U.S. transferor (as defined in
Sec. 1.721(c)-1(b)(18)) that makes a gain deferral contribution and is
required to report under Sec. 1.721(c)-6(b)(2). The reporting required
under this paragraph (a) includes the annual reporting required by
Sec. 1.721(c)-6(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).
* * * * *
(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)-1(b)(15)) to another
foreign partnership in a transfer described in Sec. 1.721(c)-3(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.
* * * * *
(c) * * *
(8) With respect to reporting required under Sec. 1.721(c)-6(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)-
6(b)(2); and
(9) With respect to section 721(c) property for which reporting is
required under Sec. 1.721(c)-6(b)(3) and paragraph (a)(1)(iii) of this
section, the information required by Sec. 1.721(c)-6(b)(3).
* * * * *
(h) * * *
(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
[[Page 3852]]
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.
* * * * *
(j) * * *
(4) Transfers of section 721(c) property. Paragraph (c)(8) of this
section applies to transfers occurring on or after August 6, 2015, and
to transfers that occurred before August 6, 2015 resulting from an
entity classification election made under Sec. 301.7701-3 of this
chapter that was effective on or before August 6, 2015 but was 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 that occurred before January 18, 2017 resulting from
entity classification elections made under Sec. 301.7701-3 of this
chapter that were effective on or before January 18, 2017 but were
filed on or after January 18, 2017.
(5) Reasonable cause exception. Paragraph (h)(3) of this section
applies to all requests for relief for transfers of property to
partnerships filed on or after January 18, 2017.
Sec. 1.6038-2T [Removed]
0
Par. 23. Section 1.6038B-2T is removed.
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
Approved: December 11, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-00383 Filed 1-17-20; 4:15 pm]
BILLING CODE 4830-01-P
