The IRS has issued final regulations (TD 9833) under Sections 337(d) and 732(f), which generally adopt with minor clarifications temporary regulations issued in 2015, that prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner. The IRS noted, however, that it is considering proposing substantive amendments to the final regulations under Section 337(d), and described a number of the changes that it might make. (Section reference are to the Internal Revenue Code of 1986, as amended.)
The regulations prevent corporations from avoiding gain recognition using partnership interests. The guidance was issued, in part, as a reaction to the May Department Stores Co. transaction in which the company attempted to avoid gain on the disguised sale of some of its appreciated real estate through the use of a partnership to avoid the repeal of the General Utilities doctrine.
The preamble to the final regulations states that the IRS and Treasury received only one comment letter regarding the proposed and temporary regulations. That letter was submitted by the New York State Bar Association Tax Section (see our prior coverage here) and led to only a few “minor, nonsubstantive clarifications” of the Section 337(d) rules and no changes to the Section 732(f) rules, according to the preamble.