Presenting a live 90-minute webinar with interactive Q&A New IRS Partnership Transfer Rules for Contributions of Appreciated Property to Partnerships With Foreign Partners Understanding Impact of IRS Notice 2015-54 and Preserving Nonrecognition Treatment TUESDAY, OCTOBER 20, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: L. Andrew Immerman, Partner, Alston & Bird , Atlanta Matthew P . Moseley, Alston & Bird , Washington, D.C. Heather Ripley, Alston & Bird , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800- 926-7926 ext. 10 . NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no longer permitted.
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New IRS Partnership Transfer Rules for Contributions of Appreciated Property to Partnerships With Foreign Partners Understanding Impact of IRS Notice 2015-54 and Preserving Nonrecognition Treatment L. Andrew Immerman Matthew Moseley Heather Ripley October 20, 2015 www.alston.com
Outline Background & pre-Notice rules on transfers to foreign partnerships Notice 2015-54 rules under Code § 721(c) requiring gain recognition How to defer gain recognition under the Notice Notice 2015-54 rules under Code § 482 5
Transfers to Partnerships – General Rule No gain or loss shall be recognized to a partnership or any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership. [IRC § 721(a)] 6
Transfers to Partnerships - Example Partner P contributes Patent (FMV $1 million, zero tax basis) to Partnership. (If P were to sell Patent at FMV, P would receive $1 million.) Partner R contributes cash of $1 million to Partnership. P recognizes no gain at the time of contribution. P has a zero basis in its partnership interest. [IRC § 722] Partnership has a zero basis in Patent. [IRC § 723] Since Patent and the cash are of equal value, P and R agree to 50/50 partnership. P has exchanged Patent for a 50% interest in a partnership that has $1 million cash without recognizing gain – almost as if he sold ½ his interest in Patent to R for $500,000, without recognizing any gain. If Partnership immediately sells Patent, however, the $1 million built-in gain at the time of contribution will be allocated (taxable) entirely to P, the contributor of Patent. Thus, P has merely deferred his tax and not avoided it permanently. 7
Transfers to Partnerships – “Investment Company” Exception Gain (but not loss) recognized on the transfer of property to an “investment company” as defined by reference to the rules for transfers to corporations. [IRC §721(b); IRC § 351(e)(1) and Reg. § 1.351-1(c)] A partnership is an “investment company” if, after the exchange, more than 80% of the value of its assets are held for investment and are: Readily marketable stocks and securities, Interests in real estate investment trusts (REITs), or Interests in “regulated investment companies” (RICs). But no gain on transfer to “investment company” if the transfer does not result in diversification. 8
Transfers to Partnerships – Other Pre-Notice Exceptions Contributions of services in exchange for a partnership interest are taxable. Services are not “property” – only property can be contributed tax free). Partnership’s assumption of liabilities (or receipt of property subject to liabilities) may be taxable. [IRC §§ 721, 731, 752] “Disguised sales” of property to a partnership. [IRC § 707(a)] Incredibly complicated regulations on when a purported contribution is a disguised sale. Actual sales of course taxable. 9
Background & Pre-Notice Rules Until their repeal by the Taxpayer Relief Act of 1997, Code §§ 1491-1494 imposed 35% excise tax on transfers by U.S. person of appreciated property to foreign partnership. The Taxpayer Relief Act of 1997 repealed the excise tax and instead imposed enhanced information reporting requirements with respect to foreign partnerships. [IRC §§ 6038, 6038B and 6046A] 10
Background – Code § 367 Section 367 and its predecessor enacted to prevent US persons from avoiding US tax by using nonrecognition transactions to transfer appreciated property to foreign corporations. [See IRC§ 367(a)] Section 367(d) governs outbound transfers of intangibles to foreign corporations A US person who transfers intangible property to a foreign corporation in a § 351 or 361 exchange is treated as having sold the property for payments contingent on the property’s productivity, use or disposition and receiving amounts that reasonably reflect annual payments that would be received over the property’s useful life or at the time of disposition. Amounts recognized by the US person must be “commensurate with income” attributable to the intangible. 11
Background – § 367 Regulations for Outbound Transfers Involving Partnerships Transfers by partnership with partner who is US person – US partner treated as transferring directly its proportionate share of partnership property to foreign corporation. [Reg. § 1.367(a)- 1T(c)(3)(i)(A) and 1.367(d)-1T(a)] Transfers of partnership interest by US person – US partner treated as transferring directly its proportionate share of partnership property to foreign corporation. [Reg. § 1.367(a)- 1T(c)(3)(ii)(A) and 1.367(d)-1T(a)] 12
Background – Regulatory Authority under TRA of 1997 Code § 367 only applies to transfers to foreign corporations. The 1997 Act granted regulatory authority to the Secretary to override §721(a) nonrecognition under: Code § 721(c) to override general nonrecognition under if built-in gain on contributed property, when recognized, would be includible in the income of a non-US person; and Code § 367(d)(3) to apply the § 367(d) contingent payment sale rules to outbound transfers of intangibles to foreign partnerships. No regulations have ever been issued under these provisions. 13
Background – Partnership Allocations, Generally Partner’s distributive share determined under partnership agreement unless the agreement does not have allocation rules or the allocation provided lacks substantial economic effect. [IRC § 704(a) and (b)] Partnership required to allocate income, gain, loss and deduction with respect to contributed property to take into account the difference between the contributing partner’s tax basis in the property and its FMV at the time of contribution. [IRC § 704(c)(1)(A)] Any reasonable method may be used. [Reg. § 1.704-3(a)(1)] Three generally “reasonable methods”: traditional method, traditional method with curative allocations, and remedial method. [Reg. § 1.704- 3(a)] 14
Background – Partnership Allocations, Anti-Abuse If partnership’s allocation method is unreasonable, Secretary can make adjustments. [Reg. § 1.704-3(a)(10)] Even if an allocation is respected for § 704(b) purposes, there may be reallocation under other provisions, such as Code § 482. [Reg. § 1.704-1(b)(1)(iii)] Rodebaugh v. Comm’r , TC Memo 1974-36, aff’d , 518 F2d 73 (6 th Cir. 1975) (IRS made § 482 allocations different than those provided by the partnership agreement) 15
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