Tax News

CCH (cch.taxgroup.com) reports:

The IRS has proposed regulations providing that the Code Sec. 704(c)
anti-abuse rule take into account the tax liabilities of both the partners in a partnership and certain direct and indirect owners of such partners. The proposed regulations also provide that a 704(c)
allocation method cannot be used to achieve tax results that are inconsistent with the intent of subchapter K of the Code.
Under Code Sec. 704(c), a partnership must allocate items of income, gain, loss and deduction attributable to contributed property to take into account any variation between the property's adjusted tax basis and its fair market value at the time of contribution. The regulations provide three allocation methods that are generally reasonable and consistent with the purposes of 704(c): the traditional method, the traditional method with curative allocations and the remedial method. Under the anti-abuse rule, an allocation method or combination of methods is not reasonable if the property contribution (or event that results in reverse 704(c)
allocations) and the corresponding allocation of tax items regarding the property are made with a view to shifting the tax consequences of built-in gain or loss among the partners in a manner that substantially reduces the present value of the partners' aggregate tax liability.
The proposed regulations provide that, for purposes of the anti-abuse rule, the tax effect of an allocation method or combination of methods on both direct and indirect partners is considered. An "indirect partner" is any direct or indirect owner of a partnership, S corporation or controlled foreign corporation (CFC), or a direct or indirect beneficiary of a trust or estate, that is a partner in the partnership, and any consolidated group of which the partner in the partnership is a member. However, an owner of a CFC is treated as an indirect partner only regarding the allocation of items that enter into the computation of a U.S shareholder's gross income inclusion with respect to the CFC, or into any person's income attributable to a U.S shareholder's gross income inclusion with respect to the CFC, or would enter into those computations if the items were allocated to the CFC. Failure to consider a substantial reduction in the present value of an indirect partner's tax liability is inconsistent with the purposes of 704(c), because it would allow a partnership to adopt an allocation method if the method's tax advantages accrued to an indirect partner rather than a direct partner.
The proposed regulations also provide that the principles of 704(c), together with the three allocation methods listed above, apply only with respect to contributions of property to the partnership. Even though a transaction may satisfy the literal words of the statute or regulations, the IRS may recast it to avoid tax results inconsistent with the intent of subchapter K, including but not limited to: (1) disregarding purported partnerships in whole or part so that partnership assets are treated as owned by the partner; (2) disregarding one or more contributions; or (3) disregarding one or more purported partners. In determining whether a contribution should be recast, one factor that may be relevant is use of the remedial allocation method in situations where allocations of remedial tax items are made to one partner and allocations of offsetting remedial items are made to a related partner.
Written or electronic comments and requests for a public hearing must be received by August 18, 2008.
Proposed Regulations, NPRM REG-100798-06, 2008FED ¶49,803
Other References:
Code Sec. 704
CCH Reference - 2008FED ¶25,134BC
Tax Research Consultant
CCH Reference - PART: 9,152