Transfers of appreciated property to any foreign or domestic entity that qualifies as a partnership for U.S. tax purposes are generally tax free. See IRC § 721(a). However, the Treasury Department and the IRS have broad authority under IRC § 721(c) to override this treatment when the gain from the disposition of such property might potentially be includable in the gross income of a non-U.S. person.
The Treasury Department and IRS have issued Notice 2015-54 (the “Notice”). Pursuant to the Notice, unless the strict requirements for the “Gain Deferral Method” as set forth in the Notice are met, a U.S. transferor must recognize gain on the transfer of appreciated property to certain partnerships with foreign partners that are related to the U.S. transferor. Specifically, these rules will apply for transfers to a partnership with direct or indirect foreign partners that are related to the U.S. transferor when the U.S. transferor, together with persons related to the U.S. transferor, directly or indirectly own more than 50% of the partnership interests.
A related person is defined as a family member of the U.S. individual transferor, or an entity controlled directly or indirectly by the U.S. transferor. For this purpose, the family of the U.S. transferor is defined to include his or her brothers and sisters, spouse, ancestors and lineal decedents.
The Notice applies a de minimis rule which restricts its application to larger transactions. Specifically, the rules of the Notice will not apply to aggregate transfers of property with less than $1 million of built-in gain. The built-in gain will generally be equal to the fair-market value of the property on the date of the transfer over the adjusted basis of the property in the hands of the U.S. transferor immediately prior to the transfer. However, this de minimis rule will not apply if the partnership is already applying the Gain Deferral Method (referred to above) to a previous transfer of property to the partnership.
Transfers of securities are generally exempted from the application of the Notice. Rather, the Notice is aimed at intellectual property, such as patents, although it also can apply to tangible property.
The rules of the Notice are applicable immediately, even though the Notice indicates that implementing regulations will be issued in the future.