International Tax Bulletin (August 2015)
Notice 2015-54Toll Charge on
Certain Transfers to Partnerships
with Foreign Affiliates
By Brian M. Blum, a tax partner in the
Washington, D.C. office of Pillsbury Winthrop Shaw Pittman LLP.
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On August 6, 2015, the Treasury and the IRS issued
Notice 2015-54, which implements a Clinton-era tax provision
intended to prevent U.S. taxpayers from using the partnership provisions of the Code to shift built-in
gain on property contributed to a partnership to non-U.S. affiliates of the transferor that are partners
in the transferee partnership. These rules were announced in reaction to Treasury's and the IRS' belief
that U.S. taxpayers have been using partnership structures that adopt section 704(c) methods, special
allocations under section 704(b) and inappropriate valuation techniques with a view towards shifting
income to their foreign affiliates.
- The effective date of the rules described in Notice 2015-54 is August 6, 2015, although the rules
will apply to transactions that are deemed to have occurred prior to August 6, 2015 as a result of a
check-the-box election made after that date.
- Under the rules, if a U.S. taxpayer transfers property with built-in gain to a partnership that
has one or more foreign affiliates of the transferor as partners, and the U.S. taxpayer and the foreign
affiliate or affiliates together own 50 percent or more of the interests in the partnership, the built-in
gain will be taxable to the U.S. taxpayer at the time of the initial contribution unless the partnership
agreement complies with rules designed to insure that the built-in gain will be taxed to the U.S. taxpayer
in the future.
- To avoid current taxation, the partnership must (i) utilize the remedial allocation method under
section 704(c) for the property contributed by the U.S. taxpayer, (ii) allocate each item of income,
gain, loss and deduction with respect to the property contributed by the U.S. taxpayer in the same
proportion (i.e., if a partner receives an allocation of 10 percent of the depreciation from
the contributed property, that partner must receive an allocation of 10 percent of all other tax items
associated with the contributed property), (iii) comply with new reporting requirements, (iv) recognize
the built-in gain on an accelerated basis upon the occurrence of certain events, and (v) apply these
principles to all property contributed to the partnership by the U.S. taxpayer and its U.S. affiliates
during a period beginning with the initial contribution and extending for up to five years.
- There is a de minimis rule for cases where the aggregate built-in gains on the transferred property
are less than $1,000,000but in calculating the threshold parties cannot net built-in losses against
built-in gains. In addition, certain types of assets are excluded from the rulesnamely (i) cash
equivalents, (ii) certain securities, and (iii) assets with built-in gains of less than $20,000.
- The notice also indicates that Treasury and the IRS will adopt additional rules under section 482
to address controlled transactions involving partnerships in cases where they believe that taxpayers
are inappropriately shifting income to related foreign partners.
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