GWU Law School / IRS 30 th Annual Institute

Transcription

1 GWU Law School / IRS 30 th Annual Institute and Washington, DC December 15, 2016 Elena Virgadamo, U.S. Department of Treasury Brian Jenn, U.S. Department of Treasury Jason Smyczek, IRS Office of Chief Counsel Tim Leska, Pepper Hamilton Mark Opper, Deloitte Phillip Gall, Ernst & Young Partnerships with Related Foreign Partners 1 1

2 Background Section 721(a): No gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership. Section 721(c): The Secretary may provide by regulations that Section 721(a) shall not apply to gain realized on the transfer of property to a partnership if such gain, when recognized, will be includible in the gross income of a person other than a United States person. Provision intended as backstop to repeal of excise tax that had been imposed pursuant to former Sections Since enactment, Treasury has not promulgated regulations under Section 721(c). Page 2 Overview: Regulations to be Issued; Effective Dates Released on August 6, Announcing intent to issue regulations pursuant to: Section 721(c) to ensure that, when a U.S. person transfers certain property to a partnership that has partners related to the transferor, income/gain attributable to the property will be taken into account by the transferor either immediately or periodically. Immediate effective date for 721(c) regulations: applies to all transfers made on or after August 6, 2015 and transfers prior to August 6, 2015 resulting from an entity classification filed on or after August 6, 2015 that is effective on or before such date. Section 482 and 6662 applicable to controlled transactions involving partnerships (effective on or after date of publication of regulations). Page 3 2

3 Overview: Reasons for Exercising Authority IRS/Treasury are aware that certain taxpayers purport to be permitted to contribute, consistently with Section 704 and 482, property to a partnership that allocates the income or gain from the contributed property to related partners that are not subject to U.S. tax. Many of these taxpayers choose a 704(c) method other than remedial method. Many of these taxpayers use valuation techniques that are inconsistent with arm s length standard. Remedial allocations can have the effect, in part, of ensuring that pre-contribution gain from contributed property is properly taken into account by the contributing partner. Allocating Section 704(b) book items associated with contributed property in a consistent manner with respect to the contributing partner and any related partner can help ensure that built-in gain associated with contributed property is (A) properly taken into account by contributing partner and (B) income is not inappropriately separated from related deductions. Page 4 Overview: Principal Features Current Gain Recognition: Nonrecognition of Section 721(a) will not apply if a U.S. person contributes certain property with built-in gain to a Section 721(c) Partnership. Gain Deferral Method: Avoid current gain recognition if partnership adopts the Gain Deferral Method. Page 5 3

4 Definitions: In General U.S. Transferor section 7701(a)(3) U.S. person other than a partnership. Built-in Gain excess of section 704(b) book value of contributed property over contributing partner s adjusted tax basis in contributed property. Section 721(c) Property any property with Built-in Gain other than Excluded Property (cash equivalents, certain securities, and tangible property with Built-in Gain that does not exceed $20,000). Related Person a person that is related to U.S. Transferor pursuant to Sections 267(b) or 707(b)(1). Related Foreign Person a Related Person (other than a partnership) that is not a U.S. person. Direct or Indirect Partner a person (other than a partnership) that owns an interest in a partnership directly or indirect through one or more partnerships. Page 6 Definitions: Section 721(c) Partnership Section 721(c) Partnership any partnership, or ; if U.S. Transferor contributes; Section 721(c) Property to the partnership; after the contribution (and any related transactions), a Related Foreign Person is a Direct or Indirect Partner; and after the contribution (and any related transactions), the U.S. Transferor and one or more Related Persons own more than fifty percent of the interests in partnership capital, profits, deductions or losses. Page 7 4

5 General Rule: Current Gain Recognition Regulations will provide that Section 721(a) will not apply when: a U.S. Transferor contributes; item of Section 721(c) Property (or portion thereof); to a Section 721(c) Partnership. Unless: De mimimis exception applies; or Requirements of Gain Deferral Method are satisfied. Page 8 De minimis exception Section 721(a) will continue to apply (if otherwise applicable) if, during U.S. Transferor s taxable year: sum of Built-in Gain for all Section 721(c) Property contributed in that year by U.S. Transferor and all other U.S. Transferors that are Related Persons does not exceed $1 million; and the Section 721(c) Partnership is not applying the Gain Deferral Method with respect to a prior contribution of Section 721(c) Property by the U.S. Transferor or another U.S. Transferor that is a Related Person. Page 9 5

6 Gain Deferral Method Section 721(c) Partnership adopts the remedial allocation method for all Section 721(c) Property contributed pursuant to the same plan by a U.S. Transferor and all other U.S. Transferors that are Related Persons. During any taxable year in which there is remaining Built-in Gain in Section 721(c) Property, partnership allocates all items of Section 704(b) income, gain, loss and deduction with respect to the property in the same proportion. Partnership satisfies reporting requirements. U.S. Transferor recognizes Built-in Gain upon an Acceleration Event. Gain Deferral Method adopted for all Section 721(c) Property subsequently contributed by U.S. Transferor and all other U.S. Transferors that are Related Persons until earlier of date that no Built-In Gain remains or date that is 60 months after date of the initial contribution. U.S. Transferor (and, in certain circumstances, the Section 721(c) Partnership) extend the period on limitations of assessment of tax with respect to all items related to Section 721(c) Property through close of the eighth full taxable year following the taxable year of the contribution (but not for taxable years that end before the date of publication of regulations). Page 10 Gain Deferral Method: Reporting Requirements U.S. Transferor must satisfy reporting requirements of Sections 6038, 6038B, 6046A and the regulations thereunder. Schedule O to Form 8865 will be modified to require additional information with respect to contributions of Section 721(c) Property to Section 721(c) Partnerships. Additional reporting requirements for U.S. Transferor for each taxable year in which Gain Deferral Method is applied e.g. description of Section 721(c) Property, information regarding the amount of income, gain, deduction or loss with respect to the Section 721(c) Property and a description of any Acceleration Events. U.S. Transferors must comply with information return filing requirements of to extent not required under current regulations. Page 11 6

7 Gain Deferral Method: Acceleration Events Acceleration Event defined: any transaction that either would reduce the amount of Built-in Gain that U.S. Transferor would recognize had event not occurred or could defer the recognition of Built-in Gain. Acceleration Event deemed to occur with respect to all Section 721(c) Property for taxable year in which any party fails to comply with all of the requirements for applying the Gain Deferral Method. Exceptions: Section 351(a) contribution or Section 381(a) transaction by a U.S. Transferor of interest in partnership to a corporation, provided transferee corporation steps into shoes of U.S. Transferor. Section 721(c) Partnership transfers interest in a lower-tier partnership that owns Section 721(c) Property to a corporation in a section 351(a) transaction, provided transferee corporation steps into shoes of U.S. Transferor. Section 721(c) Partnership transfers Section 721(c) Property to a corporation in a section 351(a) transaction. Section 721(c) Partnership transfers Section 721(c) Property or interest in a lower-tier partnership with Section 721(c) Property to a corporation to extent Section 721(c) Property treated as being transferred by a U.S. person. Page 12 Tiered Partnerships and Anti-Abuse Rules Tiered Partnerships: Regulations will apply to transactions involving tiered partnerships in a manner consistent with their purpose. U.S. Transferor will be treated as contributing its share of Section 721(c) Property directly to a partnership where U.S. Transferor (i) is a Direct or Indirect Partner in a partnership that contributes Section 721(c) Property to a lower-tier partnership or (ii) contributes an interest in a partnership that owns Section 721(c) Property to a lower-tier partnership. Anti-Abuse Rule: If a U.S. Transferor engages in a transaction (or series of transactions) with a principal purpose of avoiding the application of the regulations, then, for purposes of the regulations, the transaction (or series of transactions) may be disregarded or the arrangement may be recharacterized in accordance with its substance. Page 13 7

8 Example 1 Example 1 Patent has Built-in Gain; thus, 721(c) Property Security is Excluded Property Machine does not have Built-in Gain is U.S. person that is not a partnership; thus, U.S. Transferor is Related Foreign Person and own ; thus, PRS is 721(c) Partnership De minimis rule is n/a as Built-in Gain in patent exceeds $1M; built-in loss in machine not relevant Sec. 721(a) does not apply to contribution of patent, unless Gain Deferral Method applied. $1.5M cash PRS Patent $1.2M value; $0 basis Security $100K value, $20K basis Machine $200K value, $600K basis Page 14 Example 2: Facts Example 2 Year 1, contributes Asset 1, which is 721(c) Property with Built-in Gain of more than $1M. All items from Asset 1 allocated 60% to and 40% to. Parties properly apply Gain Deferral method (including reporting reqs.) Year 4, contributes Asset 2, which is 721(c) Property with Built-in Gain of $100K. All items from Asset 2 allocated 20% to and 80% to, other than deductions, which are allocated 90% to and 10% to. Partnership adopts remedial method for Asset 2. PRS Year 1: 721(c) Property with BIG>$1M (Asset 1) Year 4: 721(c) Property with BIG < $1M (Asset 2) Page 15 8

9 Example 2: Analysis Example 2 De minimis rule n/a to Asset 2 contribution because parties applying Gain Deferral Method with respect to Asset 1. Proportionate allocation requirement not satisfied with respect to Asset 2, so Gain Deferral Method not available. recognizes Built-in Gain with respect to asset 2 on contribution. As Gain Deferral Method does not apply to Asset 2 and Asset 2 contributed within 60 months of Asset 1, Acceleration Event deemed to occur with respect to Asset 1. recognizes remaining Built-in Gain with respect to Asset 1. PRS Year 1: 721(c) Property with BIG>$1M (Asset 1) Year 4: 721(c) Property with BIG < $1M (Asset 2) Page 16 Example 3 Example 3 Same facts as example 2, but Asset 2 not contributed in year 4. In Year 3, partners amend PRS agreement so that all items from Asset 1 allocated 30% to and 70% to, which amendment is accompanied by any consideration required pursuant to Section 482 and allocations have substantial economic effect. As proportionate allocation requirement remains satisfied, Gain Deferral Method continues to apply. Year 1: 721(c) Property with BIG>$1M (Asset 1) PRS Page 17 9

10 Example 4: Year 1 Example 4 Year 1, contributes Asset 1, which is 721(c) Property with Built-in Gain of more than $1M. Gain Deferral Method properly applied. Thus, recognizes no gain on contribution, but will recognize gain pursuant to remedial allocations. Year 1: 721(c) Property with BIG>$1M (Asset 1) USX unrelated PRS Page 18 Example 4: Year 3 Example 4 In Year 3, transfers all of its assets, including its interest in PRS, to USS in a transaction to which Section 381(a) applies. USS is a successor U.S. Transferor and, provided requirements of Gain Deferral Method continue to be satisfied, transfer of s interest in PRS to USS is not an acceleration event. USS USX unrelated PRS Year 1: 721(c) Property with BIG>$1M (Asset 1) Page 19 10

11 Example 4: Year 9 Example 4 In Year 9, when Built-in Gain remains in Asset 1, PRS distributes Asset 1 to. Distribution is an acceleration event because USS will not recognize any remaining Builtin Gain with respect to Asset 1. Therefore, USS must recognize gain = to remaining Built-in Gain that would have been allocated to USS if PRS had sold asset 1 immediately before the distribution for its fair market value. USS USX unrelated PRS Year 1: 721(c) Property with BIG>$1M (Asset 1) Page 20 Example 5: Year 1 Example 5 Same as example 4. Year 1: 721(c) Property with BIG>$1M (Asset 1) USX unrelated PRS Page 21 11

12 Example 5: Year 3 Example 5 In year 3, PRS contributes Asset 1 to FC, a corporation in a transfer described in section 351(a). For purposes of Sec. 367, each partner in PRS that is a U.S. person is treated as having transferred its share of Asset 1 directly to FC. Acceleration event occurs, but not to extent of s and USX s shares of Asset 1 (i.e. to extent of s share of Asset 1). Stock of FC is not subject to Gain Deferral Method. PRS USX unrelated FC Year 3: Asset 1 contributed to FC Page 22 Section 482 Regulations Notice provides general description of guidance proposed to be issued. Regulations will be issued regarding: application to controlled transactions involving partnerships of certain rules currently applicable to cost sharing arrangements (e.g. provide specified method based on specified methods contained in (g)) periodic adjustment rules based on principles of (i)(6), as well as corresponding adjustments to section 704(b) and (c) allocations. Treasury/IRS also considering regulations under (d) to require additional documentation which may require, for example, documentation of projected returns of property contributed to a partnership, and of projected partnership allocations (including remedial allocations) for a specified number of years. Page 23 12

13 2016 Final Regulations Under Section Background 2015 Temporary and Proposed Regs On September 1, 2015, the IRS and Treasury Department issued proposed and temporary regulations under Sections 956 and Temporary Regs address the treatment under Section 956 of certain indirectly held U.S. property of a CFC and certain partnership distributions funded by CFCs Proposed Regs address the treatment under Section 956 of U.S. property held by CFCs in transactions involving partnerships Final and Proposed Regs On November 3, 2016, the IRS and Treasury Department issued final and proposed regulations under Sections 956 and Final Regs generally adopt, with amendments, the 2015 Temporary and Proposed Regs. IRS and Treasury issued additional proposed regulations under section 956. Page 25 13

14 Overview U.S. Property Owned through Partnerships: Consistent with the 2015 Proposed Regs, the 2016 Final Regs provide rules for determining the amount of U.S. property that a CFC partner is treated as holding through a partnership. The 2016 Final Regs treat a CFC partner as holding its share of partnership property based on the partner s liquidation value percentage. Obligations of Foreign Partnerships: Consistent with the 2015 Proposed Regs, the 2016 Final Regs address when CFC loans to partnerships constitute U.S. property within the meaning of Section 956. Unlike the Proposed Regs, the Final Regs use the liquidation value percentage. Pledges and Guarantees of a U.S. Person s Obligation: The 2015 Proposed Regs expanded the pledges and guarantees rules that give rise to U.S. property to transactions involving partnerships. The 2016 Final Regs finalize those rules. Page 26 U.S. Property Owned Through Partnerships Liquidation Value Percentage Prior to 2015 Proposed Regs, former (a)(3) provided that a CFC partner in a partnership holding property that would be U.S. property if held directly by the CFC partner is treated as holding an interest in that property based on the partner s interest in the partnership. There was no specific rule for measuring a CFC partner s interest in the partnership Proposed Regs provide that for purposes of Section 956, a partner is treated as holding its attributable share of property held by the partnership, which is determined in accordance with the partner s liquidation value percentage. liquidation value = cash partner would receive with respect to its interest if partnership sold all assets for 704(b) book value, satisfied its liabilities, and liquidated Final Regs retain this liquidation value percentage method. Under the 2016 Final Regs, the amount of a partnership s U.S. property that is attributed to its partners is based on the partnership s adjusted basis in such property. Rev. Rul has been obsoleted. Thus, taxpayers can no longer rely on outside basis to limit the amount of U.S. property held by a CFC through a partnership (to the extent they were doing so). Page 27 14

15 U.S. Property Owned Through Partnerships Liquidation Value Percentage Special Allocation Rule Under the 2015 Proposed Regs, if there are special allocations that differ from the partner s liquidation value percentage in a particular tax year, that partner s attributable share of partnership property is determined solely in reference to the partner s special allocation with respect to the property, provided the special allocation does not have a principal purpose of avoiding the purposes of Section 956. The 2016 Final Regs retains this rule. In addition, the preamble of the 2016 Final Regs clarify that section 704(c) is not a special allocation. The 2016 Proposed Regs add a new rule for certain controlled partnerships that would eliminate the ability to take into account special allocations when applying the liquidation value method with respect to any partner that controls the partnership. For this purpose, a partner is treated as controlling a partnership if the partner and the partnership are related within the meaning of section 267(b) or section 707(b), substituting at least 80 percent for more than 50 percent. Page 28 U.S. Property Owned Through Partnerships Treas. Reg (b)(3), Example 1 FPRS holds non-depreciable property that would be U.S. property if held by directly with an adjusted basis of $100x. At the close of quarter 1 of year 1, the liquidation value percentage for with respect to FPRS is 25%. There are no special allocations in the FPRS partnership agreement. Under Treas. Reg (b)(2), s attributable share of property held by FPRS is 25% (its liquidation value percentage), and its attributable share of FPRS s basis in the property is $25x. Accordingly, for purposes of determining the amount of U.S. property held by as of the close of quarter 1 of year 1, is treated as holding U.S. property with an adjusted basis of $25x. CFC Liquidation Value Percentage = 25% FPRS foreig n US Property Unrelated AB = $100x Page 29 15

16 U.S. Property Owned Through Partnerships Treas. Reg (b)(3), Example 2 Same facts as Example 1, except the FPRS partnership agreement, which satisfies the requirements of 704(b), specially allocates 80% of the income with respect to U.S. property to. The special allocation does not have a principal purpose of avoiding the purposes of 956. Because of the special allocation, s attributable share of U.S. property is determined in accordance with its special allocation. s special allocation percentage for U.S. property is 80%, and thus s attributable share of U.S. property held by FPRS is 80% and its attributable share of FPRS s basis in U.S. property is $80x. Accordingly, for purposes of determining the amount of U.S. property held by as of the close of quarter 1 of year 1, is treated as holding U.S. property with an adjusted basis of $80x. CFC Liquidation Value Percentage = 80% FPRS foreig n US Property Unrelated AB = $100x Page 30 U.S. Property Owned Through Partnerships Treas. Reg (b)(3), Example 3 FPRS property is anticipated to appreciate in value but generates relatively little income. FPRS partnership agreement, which satisfies the requirements of Section 704(b), specially allocates 80% of income with respect to FPRS property to and 80% of gain with respect to disposition of FPRS property to. The special allocation does not have a principal purpose of avoiding the purposes of 956. Given the income and gain anticipated with respect to the FPRS property, the partners attributable shares of that property are determined in accordance with the special allocations of gain. Accordingly, for purposes of determining the amount of U.S. property held by in each year that FPRS holds FPRS property, s attributable share of the FPRS property is 80% and its attributable share of FPRS s basis in U.S. property is $80x. Thus, is treated as holding U.S. property with an adjusted basis of $80x. Special allocation Of 80% of gain from property CFC FPRS foreig n US Property AB = $100x Special allocation of 80% of income from property Page 31 16

17 Anti-Avoidance Rule 2016 Final Regs Consistent with the 2015 Temp Regs, the 2016 Final Regs expand the scope of the anti-avoidance rule under former Temp. Reg T(b)(4). Specifically, the anti-abuse rule now applies if the CFC funds a controlled partnership. In addition, the anti-abuse rule extends to cases where the funding that was done for section 956 avoidance purposes was funding by any means (i.e., funding through a means other than capital contributions or debt) Final Regs include examples illustrating that sales of property for cash in the ordinary course of business or a repayment of a note are not subject to the anti-abuse rule. In addition, 2016 Final Regs expand the coordination rule preventing a CFC from being treated as holding duplicative amounts of United States property by reason of the anti-abuse rule of Treas. Reg (b)(1)(iii) and attribution rules of Treas. Reg (b) or (c). Page 32 Indirectly Held US Property Treas. Reg (b)(4) Example 7 1 contributes $600x cash to FPRS in exchange for a 60% interest in the partnership, and P contributes real estate located outside the United States ($400x value) to FPRS in exchange for a 40% interest in the partnership. P and 1 are the only partners in FPRS. There are no special allocations in the FPRS partnership agreement. 1 has substantial earnings and profits. FPRS lends $100x to P. Under (b) and (a), 1 is treated as holding U.S. property of $60x (60% x $100x) as a result of the FPRS loan to P. A principal purpose of creating, organizing, or funding FPRS is to avoid the application of 956 with respect to 1. 1 CFC 1 contributes $600x cash in exchange for 60% interest P FPRS foreig n 2 CFC P contributes real estate (FMV=$400x) in exchange for 40% interest (continued on next slide) Page 33 17

18 Indirectly Held US Property Example 7 (con t) Before taking into account (b)(3), because 1 controls FPRS and a principal purpose of creating, organizing, or funding FPRS was to avoid application of 956 with respect to 1, under (b)(1)(iii), 1 is considered to indirectly hold P s $100x obligation that would be U.S. property if held directly by 1. Under (b)(3), however, 1 is treated as holding U.S. property under (b)(1)(iii) only to the extent the amount held indirectly under (b)(1)(iii) exceeds the amount of U.S. property that 1 is treated as holding under (b). The amount of U.S. property that 1 is treated as indirectly holding under (b)(1)(iii) and (a) ($100x) exceeds the amount determined under (b) ($60x) by $40x. Thus, 1 is considered to hold U.S. property within the meaning of 956(c) in the amount of $100x ($60x under (b) and $40x under (b)(1)(iii) and (b)(3)). 1 CFC 1 contributes $600x cash in exchange for 60% interest P FPRS foreig n 2 CFC P contributes real estate (FMV=$400x) in exchange for 40% interest Page 34 Obligations of Foreign Partnerships - Generally 2015 Proposed Regs treated an obligation of a partnership as an obligation of its partners for purposes of 956. Specifically, former Prop. Reg (c)(1) treated an obligation of a partnership as an obligation of the partners to the extent of each partner s share of the obligation, as determined in accordance with the partner s interest in partnership profits Final Regs attribute the obligations of a partnership to its partners by reference to the partner s Liquidation Value Percentage (consistent with how to determine a CFC partner s attributable share of U.S. property held through partnerships). For purposes of applying 956 with respect to a CFC, under the 2015 Proposed Regs, the general rule above did not apply to an obligation of partnerships in which neither the CFC nor any person related to the CFC within the meaning of 954(d)(3) was a partner; such obligations were treated as obligations of the partnership. The 2016 Final Regs retain this exception under Treas. Reg (c)(2). Page 35 18

19 Obligations of Foreign Partnerships Distribution Rule There s a special rule for determining a partner s share of a partnership s obligation under 956 when: (1) the partnership distributes money or property to a partner that s related to the CFC within the meaning of 954(d)(3); (2) the partnership s obligation would be U.S. property if held (or treated as held) by the CFC; and (3) the distribution would not have been made but for a funding of the partnership through an obligation held (or treated as held) by a CFC. When this rule applies, the partner s share of the partnership s obligation is the greater of -- the partner s share of the partnership obligation under the final regs; or the lesser of: (1) the amount of the distribution that would not have been made but for the funding of the partnership or (2) the amount of the obligation (as determined under (e)). The 2016 Final Regs add that a partnership is treated as if it would not have made the distribution but for the funding of the partnership by a related CFC to the extent that, immediately before the distribution, the partnership does not have sufficient liquid assets to make the distribution without taking the obligations into account. Page 36 Obligations of Foreign Partnerships Treas. Reg (b)(4), Example 1 FPRS borrows $100x from. s basis in the FPRS obligation is $100x. For purposes of 956, the obligation of FPRS is treated as obligations of its partners, and X, in proportion to each partner s liquidation value with respect to FPRS. Because, a partner in FPRS, is related to within the meaning of 954(d)(3), the exception under Treas. Reg (c)(2) does not apply. Based on its liquidation value, s attributable share of the FPRS obligation is $90x. Accordingly, $90x of the FPRS obligation held by is treated as an obligation of and is U.S. property within the meaning of 956(c). Therefore, on the date the loan is made, is treated as holding U.S. property of $90x. CFC $100x Loan FPRS foreig n s AB in $100x obligation = $100x 90% Liquidation Value Percentage X unrelated 10% Liquidation Value Percentage Page 37 19

20 Obligations of Foreign Partnerships Treas. Reg (b)(4), Example 2 Facts are the same as in Example 1, except that owns 40% of stock and is not a related person (under 954(d)(3)) with respect to. Y is a U.S. person unrelated to or X, and owns the remaining 60% of. Because neither nor any person related to within the meaning of 954(d)(3) is a partner in FPRS, the exception in Treas. Reg (c)(2) applies to treat the FPRS obligation as an obligation of a partnership. Accordingly, Treas. Reg (c)(1) does not apply and is not treated as holding U.S. property. Y unrelate d US person 60% CFC $100x Loan 40% FPRS foreig n s AB in $100x obligation = $100x 90% Liquidation Value Percentage X unrelated 10% Liquidation Value Percentage Page 38 Obligations of Foreign Partnerships Treas. Reg (b)(4), Example 4 FPRS borrows $100x from and makes a distribution of $80x to. FPRS would not have made the distribution to but for the funding of FPRS by. Because is related to (under 954(d)(3)), the exception in Treas. Reg (c)(2) does not apply. Moreover, an obligation of held by would be U.S. property. s attributable share of the obligation is $70x (determined in accordance with liquidation value percentage). Under (c)(3), s share of the obligation is the greater of (i) s $70x attributable share of the obligation or (ii) the lesser of the $80x distribution or the $100x amount of the obligation. Thus, for purposes of 956, $80x of the FPRS obligation is treated as an obligation of and is U.S. property. On the date the loan is made, is treated as holding U.S. property of $80x. CFC $100x Loan FPRS foreig n 70% Liquidation Value Percentage USC unrelated 30% Liquidation Value Percentage $80x distribution Page 39 20

21 Pledges and Guarantees by CFCs and Partnerships The 2016 Final Regs adopt, without substantial modification, the 2015 Prop Regs with respect to pledges and guarantees by CFCs and partnerships. Treas. Reg (c)(1) provides that any obligation of a U.S. person with respect to which a CFC or a partnership is a pledgor or guarantor is considered to be held by the CFC or the partnership for purposes of Section 956. Under the indirect pledge or guarantee rule of Treas. Reg (c)(2), if the assets of a CFC or a partnership serve at any time, even though indirectly, as security for the performance of an obligation of a U.S. person, then the CFC or partnership is considered a pledgor or guarantor of the obligation under Treas. Reg (c)(1). Treas. Reg (c)(2) further provides, however, that if a partnership is considered a pledgor or guarantor of an obligation, a CFC partner in the partnership will not also be treated as a pledgor or guarantor of the obligation solely as a result of its ownership of an interest in the partnership. The Preamble declined to provide a rule to protect a U.S. person from multiple section 956 inclusions with regard to the same loan, where multiple CFCs serve as pledgors or guarantors with regard to the same section 956 loan. The Preamble states that Treasury and the IRS continue to study this issue. Page 40 Pledges and Guarantees by CFCs and Partnerships Treas. Reg (c)(4), Example 4 There are no special allocations in FPRS partnership agreement. FPRS borrows $100x from Z, an unrelated lender. pledges its assets as security for FPRS s performance of its obligation to repay the $100x loan. s share of the $100x FPRS obligation, determined in accordance with its liquidation value percentage, is $90x. Under Treas. Reg (c), $90x of FPRS obligation is treated as an obligation of for purposes of Section 956. For purposes of 956, under Treas. Reg (c)(1), is considered to hold an obligation of in the amount of $90x. Thus, is treated as holding U.S. property in the amount of $90x. Pledges assets as security for FPRS s $100x loan from Z Z Bank X unrelated 30% $100x Loan CFC 70% 90% FPRS foreig n Y unrelated 10% Page 41 21

22 Additional Issues Addressed Obligations of partnerships are treated as an obligation of a U.S. person for purposes of 956 under Treas. Reg (e). In addition, the exception from the treatment of such an obligation as U.S. property under section 956(c)(2)(L) applies. This rule excludes obligations of U.S. noncorporate persons (e.g., a partnership) that are not U.S. shareholders of, or related persons to, the lending CFC. For purposes of 956, an obligation of a disregarded entity is treated as an obligation of the owner of the disregarded entity under Treas. Reg (a)(3). Page Final and Proposed Regs under Section 956 Effective Dates All but three rules apply with respect to obligations, guarantees, or property acquired after September 1, For these items, the CFC becomes subject to the rules for any taxable year that ends on or after November 3, The rules with different effective dates are: The rule providing that an obligation of a partnership is an obligation of a U.S. person, which applies to property acquired after November 3, Rev. Rul is obsolete effective November 3, The rules that attribute property held by a partnership to its partners under Treas. Reg (b) only apply to a CFC s taxable year that ends on or after November 3, 2016 with regard to property acquired by the partnership on or after November 3, Former Treas. Reg (a)(3) applies for taxable years of a CFC prior to this date. The 2016 Proposed Regs addressing special allocations under the Liquidation Value Method are only effective with respect to taxable years of a CFC ending on or after the publication of the final rule adopting the proposed regulation with respect to property acquired on or after such date. Page 43 22