Final regulations have been issued that provide guidance on the 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 provision unless the partnership adopts the remedial allocation method and other requirements are satisfied. The regulations affect U.S. partners in domestic or foreign partnerships.
Related person definition and consistent allocation method. The final regulations: (1) modify the definition of related person to provide relief when certain foreign individual partners of a partnership would be treated as a related person with respect to a domestic corporation pursuant to Code Sec. 267(c); and (2) provide that upon a variation of a U.S. transferor’s interest in a Code Sec. 721(c) partnership, book items regarding property that are allocated under the interim closing method will be treated as allocated in the same percentage for purposes of applying the consistent allocation method in a single tax year unless the variation results from a transaction undertaken with a principal purpose of avoiding the tax consequences of the gain deferral method.
Reporting requirements. In addition, the regulations include the reporting requirements for both gain deferral contributions and the annual reporting requirements with respect to Code Sec. 721(c) property to which the gain deferral method applies. Since most reporting is on statements attached to returns, 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)).
Technical terminations. Code Sec. 708(b) generally provides that a partnership will terminate if the partnership ceases to do business. Code Sec. 708(b)(1)(B) states another way for a partnership to terminate which is 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 is commonly referred to as a “technical termination.” The Tax Cuts and Jobs Act (TCJA) (P.L. 115-97) repealed Code Sec. 708(b)(1)(B) for all partnership tax years beginning after December 31, 2017. Therefore, technical terminations no longer apply after that date.
For more information on the rules regarding the transfer of property to a foreign partnership, see the “Foreign Partnerships” topic under the Federal Topics – International Taxation – Foreign Corporations and Other Foreign Entities of “Tax Essentials” on the Tax-Federal dashboard on Cheetah, brought to you by Wolters Kluwer.
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