Treasury to Address Allocation Clashes in Gain Deferral Rule

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Jan. 27 — The Treasury Department is “sympathetic” to partnerships that can't comply with a proportionate allocation rule intended to make sure U.S. partners are recognizing the gain on property because the provision conflicts with other regulations for allocating taxes, an official said.

“That is something we intend to address,” Ossie Borosh, an attorney-adviser in Treasury's Office of Tax Legislative Counsel, said Jan. 26 at a New York State Bar Association tax conference in New York. “We don't want people to try to plan into some sort of regulatory allocations. We do understand the necessity of adapting the rules so it works for allocations that are required.”

The Internal Revenue Service issued Notice 2015-54 in August, which is intended to stop partnerships from moving intangible assets out of the U.S. by attributing income or gain from the property to a foreign partner. The notice outlined a gain deferral method, which requires taxpayers to use a remedial allocation method to ensure U.S. taxpayers don't duck their share of a contributed property's built-in gain (152 DTR G-6, 8/7/15).

The rules also require that in a year when the property has remaining built-in gain, it must be allocated proportionately among partners, which Phillip J. Gall, a principal at EY LLP, said some taxpayers might not be able to do because of certain regulatory allocations, such as allocations of creditable foreign tax expenditures.

The government might be more effective in stopping appreciated property leaving the U.S. through an anti-abuse approach, rather than a broad rule, Gall said.

Price of Being Wrong

“That would have chilling effect on people trying to come up with schemes, allocation regimes that would do something you would be concerned about. The penalty for being wrong on that is full taxation,” he said.
Government officials have said that in the coming months the IRS will issue regulations outlined in the notice under tax code Section 721(c).

“We understand there are questions that taxpayers and practitioners have about the various requirements in the gain deferral method and need comfort that practitioners and clients are within the gain deferral method,” Borosh said.

Notice 2015-54 is effective for transactions occurring on or after Aug. 6, 2015, which is causing some unease among taxpayers. In a Dec. 22 comment letter, the NYSBA Tax Section asked the IRS to exclude partnerships from the rules where there are limited opportunities for nefarious activity (246 DTR G-2, 12/23/15).

“This affects a lot of transactions where people weren't trying to achieve the ‘abuses' that the notice was trying to stop,” Gall said. “I can't really figure out what the purpose of the proportionate allocation rule is. To me it seems like it is the use of an atomic bomb to kill a flea.”

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To contact the editor responsible for this story: Brett Ferguson at