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Update on International Tax Developments


Partnership Contributions Involving Appreciated Property
On August 6, 2015, the IRS released Notice 2015-54, 2015-34 IRB, to address U.S. persons’ transfers of property to foreign partners.  The Notice gives an overview of regulations that will be proposed in this area and other relevant issues.  The Notice also indicates that additional regulations under both sections 482 and 6662 will be issued to address valuation of these transactions.

Contributions to a partnership in exchange for an interest in the partnership are generally tax-free to both partners and the partnership under section 721(a). Unlike in the corporate context, where U.S. tax may apply to contributions of appreciated property by a U.S. person to a foreign corporation under section 367, a contribution of appreciated property by a U.S. person to a foreign partnership is not subject to the section 367 tax. As a result, taxpayers can potentially shift a gain on assets contributed to a foreign partnership via special allocations and transfer pricing.  Sections 721(c) and 367(d)(3), however, provide that the IRS can issue regulations to override the non-recognition rule of section 721(a). This appears to be what the IRS will do in the coming months. 

New Section 721(c) Regulations
Unless a new “Gain Deferral Method” applies to the property, the regulations to be issued under section 721(c) will disallow non-recognition treatment when a U.S. person contributes property with built-in gain to certain partnerships.  The Gain Deferral Method will be based on the remedial allocation method described in the section 704 regulations.  Partnerships affected by these rules are those that have a foreign person as a partner and where more than 50% of the partnership is owned by the partnership U.S. person transferring property to the partnership and related persons.  Importantly, a U.S. transferor of property subject to the regulations must extend the statute of limitations to eight years following the transfer of property if the Gain Deferral Method is to be used.  In addition, changes to Form 8865 will require supplemental information on Schedule O in an effort to improve reporting on partnerships affected by the new regulations. 

Additional regulations will be issued under section 482 that will provide methods to apply to controlled transactions involving affected partnerships.  Possible changes to section 6662 would require additional documentations for these controlled transactions.

Please note that the new regulations are effective as of August 6, 2015.

The IRS is justified in its concern over abuse of the partnership and transfer pricing rules.  However, the additional reporting on Form 8865 and the potential for extension of the statute of limitations will be burdensome for taxpayers.  It will also require practitioners to take a closer look at partnership contributions where a foreign partner is involved.

Abusive Offshore Tax Avoidance Schemes
In late August, the IRS posted a Q&A toolkit for practitioners on its website, link here. The toolkit is intended to help practitioners combat abusive tax avoidance schemes outside the U.S. 

The IRS states that foreign trusts are of particular concern in addressing tax abusive schemes because they “lend themselves to being the type of entity through which income and assets are more easily hidden and disguised.”  Accordingly, the FAQs focus on expatriation of income and assets to tax haven jurisdictions that provide banking secrecy laws.  The IRS offers a list of entities that may be subject to tax evasion:

  • Foreign trusts
  • Foreign corporations
  • Foreign partnerships, limited liability companies, and limited liability partnerships
  • International Business Companies
  • Offshore private annuities
  • Offshore private banks
  • Personal investment companies
  • Captive insurance companies,
  • Offshore bank accounts and credit cards
  • Related party loans

Taxpayers should note that the IRS may scrutinize structures or transactions involving foreign trusts or one or more of the elements listed above.  It is troubling to see so many common entities, such as foreign partnerships, foreign corporations, offshore bank accounts, and related party loans listed as indicia of tax abuse. 

Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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