The US IRS in Notice 2015-54 released August 6 announced that the government will issue regulations overriding section 721(c) nonrecognition treatment in cases where property is transferred by a US person to a partnership that has foreign partners related to the transferor.
Under the regs, gain will either be taken into account immediately or the taxpayer may elect the “gain deferral method” to periodically report gain and income. The gain deferral method requires use of the remedial allocation method described in §1.704-3(d) for the contributed property to prevent the shifting of tax consequences among partners of precontribution gain or loss. All items of section 704(b) income, gain, loss, and deduction with respect to that section 721(c) property must be allocated in the same proportion. Reporting requirements must also be satisfied.
A deminius rule will apply when built-in-gain on property contributed during the year does not exceed $1 million.
The government also said in the notice that it will issue regulations under sections 482 and 6662 applicable to controlled transactions involving partnerships to ensure the appropriate valuation of such transactions.
Specified valuation methods and periodic adjustment rules for controlled transactions involving partnerships would be based on §1.482-7(g) and (i)(6) rules applicable to cost sharing arrangements, with adjustments to reflect the differences between partnerships and cost sharing arrangements.
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