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Individual Comments on International Tax, Partnership Issues

MAR. 22, 2019

Individual Comments on International Tax, Partnership Issues

DATED MAR. 22, 2019
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COMMENTS SUBMITTED TO THE INTERNAL REVENUE SERVICE ON THE INTERSECTION OF INTERNATIONAL TAX AND PARTNERSHIPS ON MARCH 21, 2019

Monte Jackel

March 22, 2019

CONTENTS

1. PART ONE: INTERNATIONAL AND PARTNERSHIP TREATMENT IN GENERAL

2. PART TWO: HYBRID PARTNERSHIP TREATMENT UNDER PROPOSED GILTI REGULATIONS

3. PART THREE: PASSIVE FOREIGN INVESTMENT COMPANIES AND PARTNERSHIPS

PART ONE — INTERNATIONAL AND PARTNERSHIP TREATMENT IN GENERAL

I. SALES OF CFC STOCK BY DOMESTIC PARTNERSHIPS WITH US, FOREIGN OR CFC PARTNERS

A. Treatment under subpart F: Rev. Rul. 69‐124 treats the gain as section 1248 dividend income which is then allocated to the US partners under section 702. Individual US partners can compute income under section 1248(b). If a CFC was a partner, then reg. 1.952-1(g)(1) treats a CFC that is a partner in a partnership (foreign or domestic) as if it received directly its share of the component parts of subpart F income tested as if received directly. However, even if aggregate treatment applies, section 1248 would still apply under section 964(e)(1).

B. Treatment as GILTI income or loss. Proposed GILTI regulations apply reg. 1.952-2 in determining gross tested income. If a CFC partner in a domestic partnership was a US corporation, it would have dividend income. See A above. The dividend income would then be included as foreign personal holding company income. This income would then be excluded from tested income and not part of GILTI. The income on the sale as a dividend can be income of the partnership that determines the CFC partner's share of tangible property of the partnership for non‐directly attributable partnership property income.

C. Treatment as FDII income or loss. A CFC partner should not have FDII income from a partnership because section 250 only applies to domestic corporations or those making a section 962 election. Domestic corporate partners should not have FDII income because it is income from the sale of a “security” under section 475(c)(2) and such income is not an FDDEI sale. Also, if the nature of the income is a dividend rather than a sale of stock at the partnership level, then the income would not be covered by section 250 because it would be subpart F dividend income if the partner was a US corporation. A partnership interest is by default treated as “general property” under the proposed regulations but there is no rule specifically targeting partnership interests (such as a look through rule in determining foreign use).

II. SALES BY US, FOREIGN OR CFC PARTNERS OF DOMESTIC PARTNERSHIP INTERESTS HOLDING CFC STOCK

A. Treatment of US partners. Treatment as ordinary income under section 751 or as just ordinary income is the main issue here. As to the treatment as section 1248 dividend income, the legislative history in 1976 to section 751(c) adding section 1248 refers to the gain as “ordinary income”. The 1977 technical correction refers to the gain as a “dividend”. It is not clear whether entity or aggregate treatment is more appropriate here but there should be a clear rule in this case. Aggregate treatment may not be appropriate, however, given the treatment of sales of foreign partnership interests under reg. 1.1248-1(a)(4) (not treated as a section 1248 dividend).

B. Treatment of Foreign non‐CFC partners. FIRPTA will not apply and section 864(c)(8) should not apply.

C. Treatment of CFC partners. Section 954(c)(1)(B)(ii) would generally treat a sale of any partnership interest (foreign or domestic) as FPHCI. However, if the CFC is a 25‐percent owner of the partnership under section 954(c)(4), the CFC is treated as selling its proportionate share of the partnership assets. Presumably, this would create dividend income under section 964(e)(1).

D. Treatment under GILTI.

(1) There is no rule in the GILTI proposed regulations about how to treat sales of partnership interests. There is a rule that applies aggregate treatment to partners of domestic partnerships that are US Shareholders in their own right and there is also a rule that treats non‐US Shareholder partners who are US persons as receiving their distributive share of domestic partnership income (entity treatment). Controlled domestic partnerships are treated as foreign partnerships and US partners of foreign partnerships holding CFC stock are treated as actually owning such stock under section 958(a)(2).

(2) By analogy to these rules, the sale of a domestic partnership interest could be given the same hybrid aggregate‐entity treatment as the distributive share treatment under the proposed GILTI regulations. Conversely, aggregate treatment could apply to sales of domestic partnership interests by all US partners regardless of whether they are US Shareholders in their own right and the entity treatment for distributive shares of small US partners could be deleted. Sales of foreign partnership interests should be treated as sales of the partners' proportionate interests in the foreign partnership based on section 958(a)(2).

(3) Shares of “income” under the proposed regulations in testing for shares of QBAI refer to “gross income” of the partner in determining shares of partnership tangible property and not section 704(b) income which seems the more appropriate choice. Taxable income taking section 704(c) into account leads to counter‐intuitive results and does not reflect the economic sharing of the partnership property. An approach similar to section 613A(c)(7)(D) and reg. 1.613A‐3(e) seems more appropriate if the term “income” in the GILTI statute can be reconciled with “proportionate share” in section 613A(c)(7)(D)).

(4) The treatment of all partnership interests in this manner seems inappropriate as foreign partnerships are viewed as being owned by its US partners under section 958(a)(2) based on their “proportionate” ownership in the foreign partnership, which is an undefined term but would clearly include capital ownership as well as income sharing.

E. Treatment under FDII. There is no rule in the FDII proposed regulations dealing with sales of partnership interests although, by default, partnership interests are “general property” under the FDII proposed regulations. Rules similar to D.1 above should apply.

III. SALES OF CFC STOCK BY FOREIGN PARTNERSHIPS WITH US, FOREIGN OR CFC PARTNERS

A. Treatment under section 1248.

(1) Reg. 1.1248-1(a)(4) treats the sale as a sale by the partners of their proportionate shares of the stock of the corporation owned by the foreign partnership. For a US partner, section 1248 would apply. A similar rule should apply to sales of foreign partnership interests because it is believed that aggregate treatment was denied in the final regulations for the wrong reason; that is, the assumption that the sale of such an interest would result in ordinary income under section 751(a) which does not appear to be the case because the foreign partnership would be treated as an entity in applying section 751(c).

(2) The final 1248 regulations at reg. 1.1248-1(a)(5), example 4(ii) states that a foreign corporation that is not a CFC partner would have a non‐taxable sale. If the foreign partner is a CFC, section 964(e)(1) should apply.

B. Treatment under GILTI. The proposed GILTI regulations default to the section 951 treatment of shares of foreign partnership income and that treatment is prescribed under section 958(a)(2) as the partners owning their proportionate shares of the property and income of the foreign partnership. Section 964(e)(1) should treat such income as a section 1248 dividend which should be excluded from GILTI tested income.

C. Treatment under FDII.

(1) A partnership interest is “general property” under the proposed FDII regulations. The proposed regulations treat the distributive share of any domestic or foreign partnership by a US corporate partner in testing for the qualified income under section 250. The appropriate treatment for foreign partnerships would seem to be the treatment that follows the treatment under section 958(a)(2) and the aggregate treatment under the proposed regulations, meaning aggregate treatment looking to the partners' proportionate shares of assets and income of the foreign partnership.

(2) The US corporate partner's share of QBAI is based on the treatment of how the “income” is allocated. Partnerships, whether domestic or foreign, are treated as “persons” in testing for FDII sales and purchases and the rendering of services.

D. Treatment under FTC.

(1) Reg. 1.904-5(h)(3) generally treats sales of partnership interests (foreign or domestic) as passive category income to the partner unless the partner is a 25‐percent owner of the partnership (under the principles of section 954(c)(4)) in which case look‐through treatment applies in determining the foreign tax credit income categories.

(2) With respect to shares of income of a partnership (foreign or domestic), reg. 1.904-5(h)(1) treats the partners' distributive shares of income from the partnership (foreign or domestic) as the income is characterized at the partnership level. However, if a limited partner or a corporate general partner owns less than 10 percent of the value of a partnership (generally 10 percent of capital and profits), the distributive share is considered passive income.

(3) This entity type treatment of these types of partners is not uncommon in the subchapter N regulations. See reg. 1.861-8T(e) for similar rules in determining a partner's share of interest expense of a partnership (domestic or foreign) in determining the allocation and apportionment of interest expense under the section 861‐8 regulations.

IV. SALES BY US, FOREIGN OR CFC PARTNERS OF FOREIGN PARTNERSHIP INTERESTS HOLDING CFC STOCK

A. Treatment under section 1248 as dividend income or as ordinary income or as capital gain to a US partner. The preamble to T.D. 9345 states that the sale is not covered by section 1248 because it would otherwise be ordinary income under section 751(a) but this assumption may be incorrect because section 751(c) looks to a hypothetical sale by the foreign partnership of the CFC stock.

B. Foreign partners are treated as selling a partnership interest where the partnership is not ETB in the US and so the sale is not taxable.

C. CFC partners generally have passive income unless they are 25‐ percent owners in which case they should be treated as selling CFC stock resulting in a dividend under section 964(e)(1).

V. SALES OF PROPERTY OTHER THAN CFC STOCK BY DOMESTIC PARTNERSHIPS WITH US, FOREIGN OR CFC PARTNERS

A. Treatment under subpart F. Same treatment as prescribed at part II.C above.

B. Treatment under GILTI. Same treatment as prescribed at part II.D.1 above.

C. Treatment under FDII. Same treatment as prescribed at part II.E above.

D. Treatment under FIRPTA. See reg. 1.897-1(e) and section 897(c)(4)(B) treatment of partners as holding a proportionate share of the property of the partnership (foreign or domestic), and section 897(g) for dispositions of partnership interests whether foreign or domestic.

E. Treatment under FTC. Same as treatment under part III.D above.

VI. SALES BY US, FOREIGN OR CFC PARTNERS OF DOMESTIC PARTNERSHIP INTERESTS HOLDING PROPERTY OTHER THAN CFC STOCK

A. Treatment under subpart F, etc. Same as treatment under part II.C above. The treatment to US partners is governed by sections 741 and 751. The treatment of foreign partners is now governed by section 864(c)(8) whether the partnership is foreign or domestic. See, also, Grecian Magnesite, on appeal to the D.C. Circuit.

B. Treatment under GILTI. Same as treatment under part II.D.1 above.

C. Treatment under FDII. Same as treatment under part II.E above.

D. Treatment under FIRPTA. Same as treatment under part V.D above.

E. Treatment under FTC. Same as treatment under part III.D above.

VII. SALES OF PROPERTY OTHER THAN CFC STOCK BY FOREIGN PARTNERSHIPS WITH US, FOREIGN OR CFC PARTNERS

A. Treatment under subpart F, etc.

(1) A US partner should take into account its distributive share of income or losses of the partnership regardless of whether the foreign partnership files a form 1065. In determining whether a foreign partnership is required to file form 1065, there is an issue with the application of section 865(i)(5) which sources sales of personal property at the partner level for sales of personal property by the partnership (because sales of partnership interests are already sourced at the partner level). The issue is whether the income of the partnership that is sourced at the partner level creates a filing obligation by a foreign partnership if it has no other US source or ECI.

(2) A non‐CFC foreign partner should, under section 875(1), take into account the ECI of the partnership. Special rules apply to the FDAP of the foreign partnership.

(3) CFC partners take into account their distributive shares in determining subpart F income under reg. 1.952-1(g)(1).

B. Treatment under GILTI. Same as part III.B above except that a US Shareholder should be treated as directly selling its share of the property sold by the foreign partnership in testing for GILTI.

C. Treatment under FDII. Same as part III.C above.

D. Treatment under FIRPTA. Same as part V.D above.

E. Treatment under FTC. Same as part III.D above.

VIII. SALES BY US, FOREIGN OR CFC PARTNERS OF FOREIGN PARTNERSHIP INTERESTS HOLDING PROPERTY OTHER THAN CFC STOCK.

A. Treatment under subpart F, etc. Same as treatment under part VI.A above.

B. Treatment under GILTI. Same as part II.D above.

C. Treatment under FDII. Same as part II.E above.

D. Treatment under section 871 or 882. Same as part VI.A above.

E. Treatment under FTC. Same as part III.D above.

IX. CONTRIBUTIONS BY US OR FOREIGN PARTNERS OF PROPERTY OTHER THAN CFC STOCK TO DOMESTIC OR FOREIGN PARTNERSHIP

A. Application of section 721(a) or (c).

X. DISTRIBUTIONS BY DOMESTIC OR FOREIGN PARTNERSHIPS OF PROPERTY OTHER THAN CFC STOCK TO US OR FOREIGN PARTNERS

A. Application of section 751(b).

XI. CONTRIBUTIONS BY US OR FOREIGN PARTNERS OF CFC STOCK TO DOMESTIC OR FOREIGN PARTNERSHIP

A. Application of section 721(a) or (c).

XII. DISTRIBUTIONS BY DOMESTIC OR FOREIGN PARTNERSHIP OF CFC STOCK TO US OR FOREIGN PARTNERS

A. Application of section 751(b).

PART TWO — HYBRID PARTNERSHIP TREATMENT UNDER PROPOSED GILTI REGULATIONS

FACTS

Assume the following facts. US1 and US2 are domestic corporations that own, respectively, 5% and 95% of a partnership (the TA story does not say it is domestic but it must be to be consistent with the GILTI proposed regulations). The partnership (PRS) owns 100% of CFC1. US2 owns 100% of CFC2.

I. PRS IS A DOMESTIC PARTNERSHIP

A. Treatment of PRS As An Entity for allocations.

1. Reg. 1.701-2(f), example 3, treats a domestic partnership as an entity for purposes of applying the rules relating to controlled foreign corporations for purposes of section 904(d).

2. Despite this mandate, the proposed GILTI regulations (“proposed regulations”) treat a domestic partnership as a hybrid treating small US partners as holding an entity interest in the domestic partnership but for US Shareholder partners who are US Shareholders in their own right, the domestic partnership is treated as an aggregate.

3. The policy considerations of GILTI favor an aggregate approach because the GILTI inclusion is done at the US Shareholder level. Without this general aggregate treatment, complex adjustments would be necessary at the partner level to coordinate the GILTI regime with the GILTI inclusion flowing from the domestic partnership. The treatment of FDII for domestic corporation differs from the GILTI computation and so a pure aggregate approach can be applied.

4. If the domestic partnership was treated as an aggregate, US1 would not have a subpart F or GILTI inclusion because it only owns 5% of CFC 1. You could even posit a case where there are 11 unrelated US persons who are partners. An aggregate approach in that case would result in no partner having a subpart F or GILTI inclusion. Is that the right answer if PRS is a bona fide partnership with a good business purposes and not formed or availed of for abusive purposes? See below for sale of partnership interests for both subpart F and GILTI.

B. Treatment of PRS As An Entity for sales of partnership interests.

1. There are no rules in the proposed regulations for sales of partnership interests.

2. The sale of a domestic partnership interest where the partnership owns CFC stock most likely does not generate any section 1248 income for the selling partner even if the selling partner is a US Shareholder in its own right.

3. This non‐dividend treatment for sales of domestic partnership interests arguably should not be the case for sellers who are US Shareholders in their own right because although section 751(a) gives them ordinary income on the sale and arguably not dividend treatment (although legislative history in 1977 references this inclusion as a dividend but when section 751(c) was amended in 1976 to add section 1248, the gain is only referenced as ordinary income), it appears inappropriate to require a subpart F inclusion on an allocation but not give dividend treatment on a sale.

4. If a US person who is not a US Shareholder in his own right sells an interest in a domestic partnership, the gain is ordinary under section 751(a) but it is not clear on the treatment of the seller as having 1248 dividend treatment or not. On sales of partnership interests where economically the selling partner is selling a share of CFC1 stock, the gain should not be covered under section 1248 because that shareholder would not be subject to section 1248 if he owned the stock directly. Same for 11 unrelated US partners of a domestic partnership who all sell their partnership interests‐the gain is ordinary because section 751(c) tests whether section 1248 applies at the partnership level.

5. Section 958(b) applies constructive ownership rules for CFC stock held through a partnership by generally applying the rules under section 318. Since section 958(a)(2) treats ownership through a foreign partnership as indirect ownership, Congress appears to have meant to treat domestic partnerships as entities under subpart F. One can argue that the same treatment and reasoning should apply for GILTI purposes as well.

C. Treatment of PRS As An Aggregate for allocations.

1. If the domestic partnership is an aggregate for all partners, whether or not US Shareholders in their own right, then US1 should not have either subpart F or GILTI income on an allocation because they are not US Shareholders. In the case of 11 unrelated US partners, this would also mean that none of the partners have either subpart F or GILTI income.

D. Treatment of PRS As an aggregate for sales of partnership interests. If aggregate treatment applied, as noted above, the sale by US 1 would appear to be treated in a similar manner to the case where PRS is treated as an entity‐there would not be a dividend under section 1248. Applying this rationale to subpart F and GILTI, there should be no inclusion in that case from a domestic partnership.

E. Authority for new rule treating distributive share of subpart F income as subpart F income

1. Reg. 1.952-1(g)(1) treats the distributive share of income of the partnership (domestic or foreign) as if earned directly by a CFC partner in testing for subpart F income of the CFC. There are specific rules under the so‐called Brown Group regulations at regs. 1.954‐1(g), 1.954‐2(a)(5), 1.954‐3(a)(6) and 1.954‐4(b)(2)(iii), but there is no rule in the subpart F regulations that definitely classifies income as subpart F income at the partnership level and then allocations of that subpart F income are treated as subpart F income for purposes of applying the subpart F rules to partners of a domestic partnership, whether US Shareholders in their own right or not.

2. The CFC blocker notices (Notices 2009‐7 and 2010‐41) implicitly rely on the absence of such a rule in subpart F by treating the partnership as a foreign partnership in such a case. Special rules for “controlled domestic partnerships” are contained in the final section 965 regulations and the proposed GILTI regulations to deal with this issue.

3. If the controlled domestic partnership rules are not upheld as a valid exercise of regulatory power because the 1997 legislative history to section 7701(a)(4) says that treating a partnership as foreign or domestic based on a criteria other than place of organization can only apply to partnership formed after the regulations are issued, then the answer to the blocker question will need to be answered. What is the position on that?

II. PRS IS A FOREIGN PARTNERSHIP

A. Treatment of PRS As An Entity for allocations.

1. Section 958(a)(2) states that ownership through foreign entities such as a foreign partnership are treated as if owned by the partners based on “proportionate” ownership, an undefined term. It seems clear that US1 would not have a subpart F or GILTI inclusion in such a case because US1 owns only 5% of CFC1. The same would hold true if there were 11 unrelated US partners of a foreign partnership. Why should the tax treatment for the partners on an allocation be different if the partnership is domestic as compared to it being foreign? One can argue there should be no inclusion of GILTI or subpart F in either case.

2. Reg. 1.1248-1(a)(4) treats a sale of stock of a corporation as a proportionate sale by the partners of their shares of such stock. However, US1 would not be subject to section 1248 either if the foreign partnership sells CFC1 stock because US1 does not own 10% or more of CFC1. The same would hold true for 11 unrelated US partners in a foreign partnership.

B. Treatment of PRS As An Entity for sales of partnership interests.

1. T.D. 9345, the final regulations to reg. 1.1248-1(a)(4), states that sales of foreign partnership interests, even by US Shareholder partners in their own right, do not generate section 1248 dividend income. This position was premised on section 751(a) and 751(c) treating the sale as ordinary income. The problem with this is that section 751(c) applies an entity level test to determine if section 1248 would apply and on that basis, section 1248 would not apply and so section 751(a) would not apply. If section 1248 dividend treatment is denied, it appears that the US sellers, whether or not US Shareholders in their own right, will not have section 1248 income but, rather, capital gain on the sale.

2. This non‐section 1248 treatment makes little sense for partners who are US Shareholders either in their own right or because of section 958(a)(2) because such shareholders would have a subpart F or GILTI inclusion.

3. Treatment of PRS As An Aggregate for allocations. This is the treatment mandated by section 958(a)(2).

4. Treatment of PRS As an aggregate for sales of partnership interests. This is the treatment mandated by section 958(a)(2).

5. Authority for new rule treating distributive share of subpart F income as subpart F income. This is not relevant because of section 958(a)(2).

PART THREE — PASSIVE FOREIGN INVESTMENT COMPANIES AND PARTNERSHIPS

1. Sections 1298(a)(1) and 1298(a)(3) treat stock owned, directly or indirectly, by or for a partnership (whether domestic or foreign), as being owned proportionately by its partners (whether domestic or foreign). An indirect shareholder is defined at reg. 1.1291-1(b)(8)(i) as one who owns stock in a PFIC through certain entities and reg. 1.1291-1(b)(8)(iii)(A) states that if a foreign or domestic partnership directly or indirectly owns stock, the partners of the partnership are considered to own such stock proportionately in accordance with the ownership interest in the partnership.

2. Section 1298(b)(5)(A) provides that, under regulations, any disposition by the US person or the person owning such stock which results in the US person being treated as no longer holding such stock shall be treated as a disposition by the US person of the PFIC stock. Section 1298(b)(5)(B) treats as PTI amounts included under section 1298(b)(5)(A) and 1293(a).

3. The regs under section 1295 (reg. 1.1295-1(d)(2)(i)(A)) and 1.1293-1(c)(1) say that a domestic partnership makes the 1295 Qualified Electing Fund (QEF) election and that shareholders owning stock in the QEF by reason of holding an interest in the partnership takes the section 1293 inclusions into account “under the rules applicable to inclusions of income from the partnership.” The reference to those “applicable rules” could include section 704(c) but the problem with that view is that the section 1293 inclusion is not basis derivative of the QEF shares.

4. If, on the other hand, the partnership is foreign, the US partner makes the QEF election and it applies only to that partner. This seems to disregard the partnership much like section 958(a)(1)(B) and 958(a)(2) does for indirect ownership through a foreign entity. Transfers to the foreign partnership seem to be treated for this purpose as not being transfers at all for tax purposes in this case. I would conclude the same for transfers of CFC stock to foreign partnerships for that same reason.

5. But transfers of CFC stock to domestic partnerships can trigger the transaction of interest on using domestic partnership blockers for CFC subpart F income and continues to raise the question of how to treat transfers of CFC stock to them. The problem lies in the fact that reg. 1.701-2(f), example 3, treats the US partnership as a US person and can create a CFC whereas ownership by the partners may not.

6. Reg. 1.1293-1(c)(2)(i) addresses the case where QEF stock is transferred to a domestic partnership which then makes a section 1295 election. This regulation tells you that the domestic partnership is free to make or not make the section 1295 election. If the domestic partnership makes the section 1295 election, the shareholder contributing partner continues to take into account its “pro rata share” under generally applicable rules under subchapter K. But the QEF inclusion is not basis derivative and so now, what are the “generally applicable rules” in this case?

7. However, if in paragraph 6 above the domestic partnership does not make the section 1295 election, reg. 1.1293-1(c)(2)(ii) states that the shareholder contributing partner continues to be subject to the original section 1295 election and to the inclusion under section 1293, thereby implying that the transfer to the domestic partnership in that case is disregarded completely. This seems to also imply that there is no gain recognition on the transfer to the domestic partnership no matter whether only the contributor or both the contributor and the domestic partnership make the section 1295 election, and that section 721(a) applies, although nothing says so expressly.

8. If the fund was not pedigreed, meaning that the rules of section 1291 apply, then prop. reg. 1.1291-6(c)(3)(i) says that the transfer qualifies for nonrecognition under 721(a) but only to the extent that the contributor is treated as owning that stock under prop. Reg. 1.1291-1(b)(8)(iii)(A) (this was withdrawn in 2013 and is now final at reg. 1.1291-1(b)(8)(iii)(A)) which states that partners in domestic or foreign partnerships are considered to own PFIC stock “in accordance with their ownership interests in the partnership.” Again, nothing says that this ownership includes section 704(c) and there is no guidance that tells you whether the excess distribution section 1291 inclusion should be considered basis derivative. (The other inclusion is a disposition of the PFIC stock itself, which would be section 704(c) gain if the partnership is deemed to exist for PFIC and subchapter K purposes).

9. Prop. Reg. 1.1291-3(a) states that any direct or indirect disposition of PFIC stock is taxable to the extent provided in prop. regs. 1.1291-2 and 1.1291-6. Prop. reg. 1.1291-2(c) states that except as provided in reg. 1.1291-6, a direct shareholder of a section 1291 fund recognizes all gain that it realizes on a disposition of the stock of such fund. Prop. reg. 1.1291-2(e)(1) provides that except as provided in ‐2(e) and ‐6, an indirect shareholder of a section 1291 fund is taxable under section 1291 on an indirect disposition of stock of the fund. Prop.reg. 1.1291-6(b)(1) provides that unless provided in ‐6(c), a shareholder recognizes gain on a direct or indirect disposition of stock in a section 1291 fund regardless of whether the disposition is as a result of a nonrecognition transfer. And prop. reg. 1.1291-6(c)(3)(i) provides that gain is not recognized to a shareholder on a disposition of stock of a section 1291 fund that results from a transfer to a partnership (foreign or domestic) but only to the extent that the shareholder is treated as owning such stock immediately after the transfer through the indirect ownership rules.

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