There is a general rule that no gain or loss is 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. However, there may be some opportunities for U.S. persons contributing property to U.S. partnership with foreign partners. The partnership can be either U.S. or foreign. Congress realized that due to the loophole, taxpayers might use a partnership to shift gain to a foreign person.

IRC 721(c) granted the authority to the Secretary to override the non-recognition of gain when a U.S. person transfers the property to such partnership. When the gain is recognized, it would be includible in the gross income of person/s other than U.S. person. In addition, the new Code Section 367(d) enacted in 1997 Act authorized the Secretary to issue regulations in case of transfer of intellectual property to partnerships in certain circumstances.

However, no such regulations have been issued so far. Realizing that partnership could be structured to specifically take advantage of the loophole and thereby using profit shifting and base erosion tactics, in Notice 2015-54, IRS has announced that it plans to issue regulations under both IRC 721(c) and 367(d). The valuation must also meet IRC 482 arms length standards.

According to the Notice, Form 8865, Schedule O or its instructions will change for tax years beginning in 2015 to require supplemental information for certain contributions to Section 721(c) Partnerships.

For detailed information, please see IRS Notice 2015-54.