Transfers of Appreciated Property to Partnerships

Transfers of Appreciated Property to Partnerships

September 10, 2015 | By Keith Martin in Washington, DC

Transfers of appreciated property to partnerships get IRS attention.

The IRS is concerned about situations where appreciated assets are transferred to a partnership in which one of the other partners is a foreign affiliate of the US partner making the transfer. An asset is an appreciated asset if it is worth more than the unrecovered cost basis the US owner has in it at the time of transfer.

The United States used to require any US company contributing appreciated assets to a foreign partnership before 1997 to pay a US toll charge on the contribution.

US tax law requires a partner contributing appreciated assets to any partnership to pay tax on the appreciation, but how quickly the partner does so depends on how the partnership chooses to make something called a “section 704(c) adjustment.” If it uses the “traditional method” to make the adjustment, then the partner may be able to put off being taxed on the appreciation until the partnership liquidates or otherwise sells the assets. If it uses the “remedial method,” then the partner must pay tax on the appreciation over the period the assets are depreciated.

The IRS said in a notice in early August that it will collect a tax on the appreciation when the assets are contributed to a partnership in which a foreign affiliate is a partner unless the partnership uses the remedial method for section 704(c) adjustments and satisfies four other requirements.

The notice is Notice 2015-54.

The four requirements are as follows. The partnership must allocate all income and loss related to use or sale of the contributed assets in a constant fixed ratio until the full appreciation has been taxed. The contribution must be reported to the IRS. The US partner must report any remaining untaxed appreciation after certain “acceleration events.” The partnership must use the same approach for all appreciated property contributed by the US partner and affiliates for at least 60 months or, if earlier, until all the appreciation has been taxed.

The IRS also plans to extend the statute of limitations for tax assessments related to taxes on such appreciation to eight years. Normally, the government has only three years to assess back taxes.

The IRS said it plans eventually to issue regulations to implement the new policy, but the policy is effective as of August 6.

The policy applies to partnerships in which the US partner and related persons own more than 50% of the partnership by share of capital, profits or losses.