SECTION 4. REGULATIONS TO

ADDRESS CERTAIN TRANSFERS OF PROPERTY TO PARTNERSHIPS WITH RELATED FOREIGN PARTNERS

.01 Definitions

(1) U.S. Transferor A U.S. Transferor is a United States person within the meaning of section 7701(a)(30) (U.S. person), other than a domestic partnership.

(2) Built-in Gain With respect to an item of property contributed to a partnership, Built-in Gain is the excess section 704(b) book value of the property over the contributing partner’s adjusted tax basis in the property at the time of the contribution (and does not include gain created when a partnership revalues partnership property).

(3) Section 721(c) Property Section 721(c) Property is property, other than Excluded Property, with Built-in Gain.

(4) Excluded Property Excluded Property is (i) cash equivalents, (ii) any asset that is a security within the meaning of section 475(c)(2), without regard to section 475(c)(4), and (iii) any item of tangible property with Built-in Gain that does not exceed $20,000.

(5) Section 721(c) Partnership A partnership (domestic or foreign) is a Section 721(c) Partnership if a U.S. Transferor contributes Section 721(c)

Property to the partnership, and, after the contribution and any transactions related to the contribution, (i) a Related Foreign Person is a Direct or Indirect Partner in the partnership, and (ii) 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.

(6) Related Person A Related Person is a person that is related (within the meaning of section 267(b) or section 707(b)(1)) to a U.S. Transferor.

(7) Related Foreign Person A Related Foreign Person is a Related Person (other than a partnership) that is not a U.S. person.

(8) Direct or Indirect Partner A Direct or Indirect Partner is a person (other than a partnership) that owns an interest in a partnership directly or indirectly through one or more partnerships.

(9) Gain Deferral Method The Gain Deferral Method is the method described in section 4.03 of this notice.

(10) Acceleration Event An Acceleration Event has the meaning provided in section 4.05 of this notice.

.02 General Rule – Current Gain Recognition

The Treasury Department and the IRS intend to issue regulations providing that section 721(a) will not apply when a U.S. Transferor contributes an item of Section 721(c) Property (or portion thereof) to a Section 721(c) Partnership, unless the Gain Deferral Method described in section 4.03 of this notice is applied with respect to the Section 721(c) Property. The regulations will include a de minimis rule providing that section 721(a) (if otherwise applicable) will continue to apply (without regard to whether the requirements of the Gain Deferral Method are satisfied) if during the U.S. Transferor’s taxable year (1) the sum of the Built-In Gain with respect to all Section 721(c) Property contributed in that year to the Section 721(c) Partnership by the U.S. Transferor and all other U.S. Transferors that are Related Persons does not exceed $1 million, and (2) the Section 721(c) Partnership is not applying the Gain Deferral Method with respect to a prior con

tribution of Section 721(c) Property by the U.S. Transferor or another U.S. Transferor that is a Related Person.

.03 Gain Deferral Method

The requirements for applying the Gain Deferral Method are as follows:

(1) The Section 721(c) Partnership adopts the remedial allocation method described in § 1.704–3(d) for Built-in Gain with respect to all Section 721(c) Property contributed to the Section 721(c) Partnership pursuant to the same plan by a U.S. Transferor and all other U.S. Transferors that are Related Persons.

(2) During any taxable year in which there is remaining Built-In Gain with respect to an item of Section 721(c) Property, the Section 721(c) Partnership allocates all items of section 704(b) income, gain, loss, and deduction with respect to that Section 721(c) Property in the same proportion (for example, if income with respect to an item of Section 721(c) Property is allocated 60 percent to the U.S Transferor and 40 percent to a Related Foreign Person in a taxable year, then gain, deduction, and loss with respect to that Section 721(c) Property must also be allocated 60 percent to the U.S. Transferor and 40 percent to the Related Foreign Person).

(3) The reporting requirements described in section 4.06 of this notice are satisfied.

(4) The U.S. Transferor recognizes Built-in Gain with respect to any item of Section 721(c) property upon an Acceleration Event described in section 4.05 of this notice.

(5) The Gain Deferral Method is adopted for all Section 721(c) Property subsequently contributed to the Section 721(c) Partnership by the U.S. Transferor and all other U.S. Transferors that are Related Persons until the earlier of: (i) the date that no Built-in Gain remains with respect to any Section 721(c) Property to which the Gain Deferral Method first applied; or (ii) the date that is 60 months after the date of the initial contribution of Section 721(c) Property to which the Gain Deferral Method first applied.

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.04 Tiered Partnerships

The regulations described in this notice will apply to transactions involving tiered partnerships in a manner consistent with the purpose of these rules as described in section 3 of this notice. Thus, for example, (i) if a U.S. Transferor is a Direct or Indirect Partner in a partnership and that partnership contributes Section 721(c) Property to a lower-tier partnership, or (ii) if a U.S. Transferor contributes an interest in a partnership that owns Section 721(c) Property to a lower-tier partnership, then the rules described in this notice will apply as though the U.S. Transferor contributed its share of the Section 721(c) Property directly.

.05 Rules Regarding Acceleration Events

(1) Acceleration Event defined Except as otherwise provided in this section 4.05, an Acceleration Event with respect to an item of Section 721(c) Property is any transaction that either would reduce the amount of remaining Built-in Gain that a U.S. Transferor would recognize under the Gain Deferral Method if the transaction had not occurred or could defer the recognition of the Built-in Gain. Furthermore, an Acceleration Event is deemed to occur with respect to all Section 721(c) Property of a Section 721(c) Partnership for the taxable year of the Section 721(c) Partnership in which any party fails to comply with all of the requirements for applying the Gain Deferral Method.

(2) Gain recognized upon an Acceler- ation Event

Upon an Acceleration Event with respect to an item of Section 721(c) Property, a U.S. Transferor must recognize gain in an amount equal to the remaining Built-in Gain that would have been allocated to the U.S. Transferor if the Section 721(c) Partnership had sold the item of Section 721(c) Property immediately before the Acceleration Event for its fair market value. The regulations will provide for corresponding adjustments to the basis of the Section 721(c) Property and the U.S. Transferor’s partnership interest to reflect the recognition of the remaining Built-In Gain. An Acceleration Event with respect to an item of Section 721(c) Property may require a U.S. Transferor to rec

ognize only a portion of the remaining Built-in Gain. For example, if a U.S. Transferor sold only part of its interest in a Section 721(c) Partnership, the U.S. Transferor would have an Acceleration Event only to the extent of the Section 721(c) Property attributable to the partnership interest sold.

(3) Transfer of partnership interest to a domestic corporation

An Acceleration Event will not occur if (i) a U.S. Transferor transfers an interest in a Section 721(c) Partnership to a domestic corporation in a transaction to which either section 351(a) or section 381(a) applies, or (ii) a Section 721(c) Partnership transfers an interest in a lower-tier partnership that owns Section 721(c) Property to a domestic corporation in a transaction to which section 351(a) applies, provided that in both cases the parties continue to apply the Gain Deferral Method by treating the transferee domestic corporation as the U.S. Transferor for all purposes of this notice.

(4) Special rules for certain transfers of Section 721(c) Property described in section 351(a)

An Acceleration Event will not occur if a Section 721(c) Partnership transfers Section 721(c) Property to a domestic corporation in a transaction to which section 351(a) applies. If a Section 721(c) Partnership transfers Section 721(c) Property (or an interest in a partnership that owns Section 721(c) Property) to a foreign corporation in a transaction described in section 351(a), an Acceleration Event will not occur to the extent the Section 721(c) Property is treated as being transferred by a U.S. person (other than a domestic partnership) pursuant to § 1.367(a)–1T(c)(3)(i) or (ii).

The stock in a transferee corporation received by a Section 721(c) Partnership in a transaction described in this section 4.05(4) will not be subject to the Gain Deferral Method.

.06 Reporting Requirements

(1) Reporting required for taxable years beginning in 2015

If a Section 721(c) Partnership is a foreign partnership, a U.S. Transferor (or a domestic partnership in which a U.S. Transferor is a Direct or Indirect Partner) must fulfill any reporting requirements

imposed under sections 6038, 6038B, and 6046A and the existing regulations thereunder with respect to the contribution of the Section 721(c) Property to the Section 721(c) Partnership. The IRS intends to modify Schedule O, Transfer of Property to a Foreign Partnership, of Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships), or its instructions, for taxable years beginning in 2015 to require supplemental information for contributions of Section 721(c) Property to Section 721(c) Partnerships.

(2) Reporting regulations to be issued The Treasury Department and the IRS intend to issue regulations describing additional reporting requirements for a U.S. Transferor for each taxable year in which the Gain Deferral Method applies. The regulations will not require any new filings for taxable years that end before the date of publication of the regulations.

The regulations will require taxpayers to report certain information concerning Section 721(c) Property subject to the Gain Deferral Method (regardless of whether the Section 721(c) Partnership is a domestic or foreign partnership). The Treasury Department and the IRS anticipate that the requested information will include a description of the 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. The new information reporting requirements will be coordinated with the information reporting requirements under sections 6038, 6038B, and 6046A, including amending the regulations under those sections or relevant IRS forms and instructions, as necessary.

The regulations will require certain U.S. Transferors that contribute Section 721(c) Property to a Section 721(c) Partnership that is a foreign partnership to comply with the information return filing requirements described in § 1.6038–3 to the extent not required under current regulations.

(3) Extension of statute of limitations The Treasury Department and the IRS intend to issue regulations providing that, as an additional requirement for applying the Gain Deferral Method, a U.S. Transferor (and, in certain cases, a Section 721(c) Partnership) must extend the period on limitations of assessment of tax

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celeration Event because USS will not recognize any remaining Built-In Gain with respect to Asset 1 under the Gain Deferral Method following the distribution. Therefore, USS must recognize gain in an amount equal to the 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.

Example 5 . (i) Facts. The facts are the same as in Example 4 except that in Year 3, instead of USP transferring its assets to USS, PRS instead contributes Asset 1 to FC, a foreign corporation, in a transfer described in section 351(a). There is no distribution in Year 9.

(ii) Analysis. For purposes of section 367(a) and (d), each partner in PRS that is a U.S. person is treated as having transferred its share of the Section 721(c) Property directly to FC (see § 1.367(a)–1T(c)(3)(i)). An Acceleration Event occurs, but not to the extent of USP’s and USX’s shares of the Section 721(c) Property. The FC stock received by PRS in the transaction is not subject to the Gain Deferral Method.

.08 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 described in this notice, then, for purposes of those regulations, the transaction (or series of transactions) may be disregarded or the arrangement may be recharacterized (including disregarding an intermediate entity) in accordance with its substance.