On August 6, 2015, the IRS issued Notice 2015-54 (the "Notice"), which states that the IRS and Treasury Department intend to issue regulations under section 721(c) of the Internal Revenue Code of 1986 (the "Code") to ensure that, when a U.S. person transfers certain property to a partnership that has a foreign partner related to the transferor, income or gain attributable to the property will be taken into account by the transferor either immediately or periodically. The rules will apply whether the partnership is U.S. or foreign.
The Notice is significant because many transactions are currently structured to use a partnership rather than a corporation to avoid application of Code section 367, which generally turns off the corporate nonrecognition provisions for transfers to foreign corporations. These rules are grounded in the belief by Treasury and the IRS that U.S. taxpayers have been using partnership structures that adopt Code section 704(c) methods, special allocations under Code section 704(b), and inappropriate valuation techniques with a view towards shifting income to their foreign affiliates. However, the regulations envisioned in the Notice will only apply when property is transferred and the amount of built-in gain for the tax year is greater than $1 million, thereby limiting its scope, although built-in losses do not reduce built-in gains.
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