Antiabuse Rule Applies to Contributed Property, Allocation Method

Antiabuse Rule Applies to Contributed Property, Allocation Method

Internal Revenue Service

In field attorney advice, the IRS concluded that the requirements of the <a href="/research/federal/usc26/704#cpfs-0000006" resolve="/lr/resolve//cpfs#cpfs-0000006">section 704(c)</a> antiabuse rule are met regarding a contribution of intangible assets to a partnership and the use of the traditional method to account for built-in gain, and that the IRS may use its authority to place the partnership on a method that is reasonable. The IRS Large Business &amp; International Division is currently examining the tax returns of a corporate taxpayer, resulting in questions about contributions made by the taxpayer and its U.S. corporate affiliate of contributed high-value, low-basis intangible property to a foreign unlimited liability company that owned high-value, high-basis property. That foreign entity had converted from an entity disregarded from its owner (a foreign corporation indirectly owned by the taxpayer) to a partnership for U.S. federal income tax purposes because of the contributions. It elected the traditional method with a limited back-end curative gain-on-sale allocation for purposes of applying <a href="/research/federal/usc26/704#cpfs-0000006" resolve="/lr/resolve//cpfs#cpfs-0000006">section 704(c)</a>. LB&amp;I questioned whether the contributions and the selected <a href="/research/federal/usc26/704#cpfs-0000006" resolve="/lr/resolve//cpfs#cpfs-0000006">section 704(c)</a> method were made with a view to shifting the tax consequences of the pre-contribution gain in the intangible property contributed by the taxpayer and its U.S. affiliate to the taxpayer’s indirectly owned foreign affiliate in a way that substantially reduced the present value of the partners’ aggregate federal tax liability, as described in the antiabuse rule of <a href="/research/federal/cfr26/1.704-3#cv0d-0000020" resolve="/lr/resolve//cv0d#cv0d-0000020">reg. section 1.704-3(a)(10)(i)</a>. The partnership was required to adopt a <a href="/research/federal/usc26/704#cpfs-0000006" resolve="/lr/resolve//cpfs#cpfs-0000006">section 704(c)</a> method to account for the built-in gain in the contributed intangible assets over their useful life that was reasonable. The IRS may use its authority to require the partnership to use a different <a href="/research/federal/usc26/704#cpfs-0000006" resolve="/lr/resolve//cpfs#cpfs-0000006">section 704(c)</a> method if the property contribution and allocation of associated tax items are made with a view to shift the tax consequence of the property’s built-in gain in a way that substantially reduces the present value of the partners’ aggregate tax liability. The IRS determined that the requirements of that <a href="/research/federal/usc26/704#cpfs-0000006" resolve="/lr/resolve//cpfs#cpfs-0000006">section 704(c)</a> antiabuse rule allowing it to require the partnership to use a different method are clearly met regarding the contribution of intangible assets to the partnership. In its detailed analysis, the IRS explained how the contribution and the partnership’s use of the traditional method was certain to shift the pre-contribution gain in the property and was highly likely to result in a substantial reduction in the present value of the applicable partners’ aggregate federal tax liability. While the antiabuse rule doesn’t expound on what the “with a view” standard entails, the IRS noted that the standard is a lower threshold than that established by other antiabuse provisions such as the general partnership antiabuse rule. Using analogous provisions as insight, the IRS determined that the contribution and the use of the traditional method (with a curative allocation that was intended to be so limited that it would never be used or effective) were made “with a view to” the income shifting and tax savings described in the advice. The IRS concluded that the partnership’s use of the traditional method to shift built-in gain in the contributed intangible assets to a tax-indifferent party was abusive. Thus, the IRS may exercise its authority under <a href="/research/federal/cfr26/1.704-3#cv0d-0000020" resolve="/lr/resolve//cv0d#cv0d-0000020">reg. section 1.704-3(a)(10)</a> to place the partnership on the curative method regarding the contributed intangible assets and allocate sufficient tax items to eliminate the effect of the ceiling rule distortion.

In field attorney advice, the IRS concluded that the requirements of the section 704(c) antiabuse rule are met regarding a contribution of intangible assets to a partnership and the use of the traditional method to account for built-in gain, and that the IRS may use its authority to place the partnership on a method that is reasonable.

In field attorney advice, the IRS concluded that the requirements of the section 704(c) antiabuse rule are met regarding a contribution of intangible assets to a partnership and the use of the traditional method to account for built-in gain, and that the IRS may use its authority to place the partnership on a method that is reasonable. The IRS Large Business & International Division is currently examining the tax returns of a corporate taxpayer, resulting in questions about contributions made by the taxpayer and its U.S. corporate affiliate of contributed high-value, low-basis intangible property to a foreign unlimited liability company that owned high-value, high-basis property. That foreign entity had converted from an entity disregarded from its owner (a foreign corporation indirectly owned by the taxpayer) to a partnership for U.S. federal income tax purposes because of the contributions. It elected the traditional method with a limited back-end curative gain-on-sale allocation for purposes of applying section 704(c). LB&I questioned whether the contributions and the selected section 704(c) method were made with a view to shifting the tax consequences of the pre-contribution gain in the intangible property contributed by the taxpayer and its U.S. affiliate to the taxpayer’s indirectly owned foreign affiliate in a way that substantially reduced the present value of the partners’ aggregate federal tax liability, as described in the antiabuse rule of reg. section 1.704-3(a)(10)(i). The partnership was required to adopt a section 704(c) method to account for the built-in gain in the contributed intangible assets over their useful life that was reasonable. The IRS may use its authority to require the partnership to use a different section 704(c) method if the property contribution and allocation of associated tax items are made with a view to shift the tax consequence of the property’s built-in gain in a way that substantially reduces the present value of the partners’ aggregate tax liability. The IRS determined that the requirements of that section 704(c) antiabuse rule allowing it to require the partnership to use a different method are clearly met regarding the contribution of intangible assets to the partnership. In its detailed analysis, the IRS explained how the contribution and the partnership’s use of the traditional method was certain to shift the pre-contribution gain in the property and was highly likely to result in a substantial reduction in the present value of the applicable partners’ aggregate federal tax liability. While the antiabuse rule doesn’t expound on what the “with a view” standard entails, the IRS noted that the standard is a lower threshold than that established by other antiabuse provisions such as the general partnership antiabuse rule. Using analogous provisions as insight, the IRS determined that the contribution and the use of the traditional method (with a curative allocation that was intended to be so limited that it would never be used or effective) were made “with a view to” the income shifting and tax savings described in the advice. The IRS concluded that the partnership’s use of the traditional method to shift built-in gain in the contributed intangible assets to a tax-indifferent party was abusive. Thus, the IRS may exercise its authority under reg. section 1.704-3(a)(10) to place the partnership on the curative method regarding the contributed intangible assets and allocate sufficient tax items to eliminate the effect of the ceiling rule distortion. 

Sec. 704 Partner's distributive share

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Antiabuse Rule Applies to Contributed Property, Allocation Method