- First, the Section 721(c) partnership is required to adopt the remedial allocation method for built-in gain with respect to Section 721(c) property. Other allocation methods which might defer or shift the tax burden with respect to that property may not be adopted with respect to any Section 721(c) property, regardless of whether that property is ceiling-rule limited or not. Assume, for example, that a U.S. transferor contributed “property A” to the Section 721(c) partnership and that property A has built-in gain and is ceiling-rule limited (e.g., there are insufficient tax items to correspond to book allocations to the non-contributing partner). Under Notice 2015-54, the partnership must adopt the remedial method with respect to property A. Next, assume that the U.S. transferor contributes multiple built-in gain assets, only one of which is ceiling-rule limited. Under the notice, all of the contributed built-in gain assets are Section 721(c) assets, and the remedial method must be used for all such assets, regardless of whether the ceiling rule applies. The single ceiling-rule-limited asset is arguably the asset intended to be covered by the notice. Nevertheless, the remedial method must be adopted for all of the built-in gain assets, else non-recognition treatment is lost.
- Second, as long as there is any remaining built-in gain with respect to Section 721(c) property, the Section 721(c) partnership is required to allocate all items of Code Section 704(b) income, gain, loss and deduction with respect to the Section 721(c) property in the same proportion. The notice provides little guidance with respect to interpretation of this mandate. It seems clear that the rule was intended to prevent partners from unraveling the impact of remedial allocations through special allocations which might otherwise be respected. That is, to the extent the partnership has Section 721(c) property, there will no longer be any ability to “specially” allocate income and loss among the partners with respect to that property. It is less clear, however, how this rule should be applied to other partnerships falling within the Section 721(c) umbrella. For example, it is not clear how this rule would apply to preferred partnership interests when the allocation scheme is designed to protect preferred capital. It is also not clear how the rules will apply when an allocation is mandated as the partnership complies with certain regulatory allocations.
- Third, if the Section 721(c) partnership is a foreign partnership, a U.S. transferor must comply with the reporting requirements imposed under Code Sections 6038, 6038B, and 6046A. Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships) will be modified to include information with respect to contributions of Section 721(c) property to Section 721(c) partnerships.
- Fourth, the U.S. transferor will recognize built-in gain with respect to Section 721(c) property on the occurrence of an acceleration event (any transaction that would either reduce the amount of remaining built-in gain that the U.S. transferor would recognize, a distribution of the built-in gain property to a person other than the U.S. transferor, or the failure to comply with the requirements for applying the Gain Deferral Method). Certain transactions are not treated as acceleration events. For example, the contribution of Section 721(c) property by a Section 721(c) partnership with U.S. partners to a domestic corporation, is not an acceleration event. Additionally, the contribution of Section 721(c) property by a Section 721(c) partnership with U.S. partners to a foreign corporation is not an acceleration event if Code Section 367 and the regulations thereunder would apply to the transfer.
- Fifth, the Gain Deferral Method must be adopted for all Section 721(c) property subsequently contributed to the Section 721(c) partnership by the U.S. transferor and all other U.S. transferors that are related persons until the earlier of (i) the date that no built-in gain remains with respect to any Section 721(c) property to which the Gain Deferral Method first applied; or (ii) the date that is 60 months after the date of the initial contribution of Section 721(c) property to which the Gain Deferral Method first applied.