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1.721(c)-1 Overview, definitions, and rules of general application
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(a) Overview—(1) In general. This section and §§ 1.721(c)-2 through 1.721(c)-7 (collectively, the section 721(c) regulations) provide rules under section 721(c). This section provides definitions and rules of general application for purposes of the section 721(c) regulations. Section 1.721(c)-2 provides the general operative rules that override section 721(a) nonrecognition of gain upon a contribution of section 721(c) property to a section 721(c) partnership. Section 1.721(c)-3 describes the gain deferral method, which may be applied in order to avoid the immediate recognition of gain upon a contribution of section 721(c) property to a section 721(c) partnership. Section 1.721(c)-4 provides rules regarding acceleration events for purposes of applying the gain deferral method. Section 1.721(c)-5 identifies exceptions to the rules regarding acceleration events provided in § 1.721(c)-4(b). Section 1.721(c)-6 provides procedural and reporting requirements. Section 1.721(c)-7 provides examples illustrating the application of the section 721(c) regulations.
(2) Scope. Paragraph (b) of this section provides definitions. Paragraph (c) of this section describes the treatment of a change in form of a partnership. Paragraph (d) of this section provides an anti-abuse rule. Paragraph (e) of this section provides the dates of applicability.
(b) Definitions. The following definitions apply for purposes of the section 721(c) regulations. Unless otherwise indicated, the definitions apply on a property-by-property basis, as applicable.
(1) Acceleration event. An acceleration event has the meaning provided in § 1.721(c)-4(b).
(2) Built-in gain. Built-in gain is, with respect to property contributed to a partnership, the excess of the book value of the property over the partnership's adjusted tax basis in the property upon the contribution, determined without regard to the application of § 1.721(c)-2(b).
(3) Consistent allocation method. The consistent allocation method is the method described in § 1.721(c)-3(c).
(4) Controlled partnership. A partnership is a controlled partnership with respect to a U.S. transferor if the U.S. transferor and related persons control the partnership. For purposes of this paragraph (b)(4), control is determined based on all the facts and circumstances, except that a partnership will be deemed to be controlled by a U.S. transferor and related persons if those persons, in the aggregate, own (directly or indirectly through one or more partnerships) more than 50 percent of the interests in the partnership capital or profits.
(5) 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.
(6) Excluded property. Excluded property is—
(i) A cash equivalent;
(ii) A security within the meaning of section 475(c)(2), without regard to section 475(c)(4);
(iii) Tangible property with a book value exceeding adjusted tax basis by no more than $20,000 or with an adjusted tax basis in excess of book value; and
(iv) An interest in a partnership in which 90 percent or more of the property (as measured by value) held by the partnership (directly or indirectly through interests in one or more partnerships that are not excluded property) consists of property described in paragraphs (b)(6)(i) through (iii) of this section.
(7) Gain deferral contribution. A gain deferral contribution is a contribution of section 721(c) property to a section 721(c) partnership with respect to which the recognition of gain is deferred under the gain deferral method.
(8) Gain deferral method. The gain deferral method is the method described in § 1.721(c)-3(b).
(9) Partial acceleration event. A partial acceleration event is an event described in § 1.721(c)-5(d)(2) or (3).
(10) Regulatory allocation. A regulatory allocation is—
(i) An allocation pursuant to a minimum gain chargeback, as defined in § 1.704-2(b)(2);
(ii) A partner nonrecourse deduction, as determined in § 1.704-2(i)(2);
(iii) An allocation pursuant to a partner minimum gain chargeback, as described in § 1.704-2(i)(4);
(iv) An allocation pursuant to a qualified income offset, as defined in § 1.704-1(b)(2)(ii)(d);
(v) An allocation with respect to the exercise of a noncompensatory option described in § 1.704-1(b)(2)(iv)(s); and
(vi) An allocation of partnership level ordinary income or loss described in § 1.751-1(b)(3).
(11) Related foreign person. A related foreign person is, with respect to a U.S. transferor, a related person (other than a partnership) that is not a U.S. person.
(12) Related person—(i) In general. A related person is, with respect to a U.S. transferor, a person that is related (within the meaning of section 267(b) or 707(b)(1)) to the U.S. transferor.
(ii) Modification to the application of section 267(b). For purposes of determining if a person is a related person with respect to a U.S. transferor, section 267(b) is applied without regard to section 267(c)(3).
(13) Remaining built-in gain—(i) In general. Remaining built-in gain is, with respect to section 721(c) property subject to the gain deferral method, the built-in gain reduced by decreases in the difference between the property's book value and adjusted tax basis, but, for purposes of this paragraph (b)(13)(i), without taking into account increases or decreases to the property's book value pursuant to § 1.704-1(b)(2)(iv)(f) or (s).
(ii) Special rule for tiered partnerships. If section 721(c) property is described in § 1.721(c)-3(d)(1)(ii), the remaining built-in gain includes the new positive reverse section 704(c) layer described in § 1.721(c)-3(d)(1)(ii), reduced by decreases in the difference between the property's book value and adjusted tax basis, but, for purposes of this paragraph (b)(13)(ii), without taking into account increases or decreases to the property's book value pursuant to § 1.704-1(b)(2)(iv)(f) or (s) that are unrelated to the revaluation described in § 1.721(c)-3(d)(1)(i).
(14) Section 721(c) partnership—(i) In general. A partnership (domestic or foreign) is a section 721(c) partnership if there is a contribution of section 721(c) property to the partnership and, after the contribution and all transactions related to the contribution—
(A) A related foreign person with respect to the U.S. transferor is a direct or indirect partner in the partnership; and
(B) The U.S. transferor and related persons own 80 percent or more of the interests in partnership capital, profits, deductions, or losses.
(ii) Special rule for tiered partnerships. A partnership described in § 1.721(c)-3(d)(1) or (2) is deemed to be a section 721(c) partnership for purposes of the gain deferral method.
(15) Section 721(c) property—(i) In general. Section 721(c) property is property, other than excluded property, with built-in gain that is contributed to a partnership by a U.S. transferor, including pursuant to a contribution described in § 1.721(c)-2(d) (partnership look-through rule). If the U.S. transferor is treated as contributing its share of property to a partnership pursuant to § 1.721(c)-2(d), the entire property will be section 721(c) property.
(ii) Special rule for tiered partnerships. Property described in § 1.721(c)-3(d)(1)(ii) and an interest in a partnership described in § 1.721(c)-3(d)(2)(ii) is deemed to be section 721(c) property.
(16) Successor event. A successor event is an event described in § 1.721(c)-5(c)(2), (3), (4), or (5).
(17) Termination event. A termination event is an event described in § 1.721(c)-5(b)(2), (3), (4), (5), (6), or (7).
(18) U.S. transferor—(i) In general. A U.S. transferor is a United States person within the meaning of section 7701(a)(30) (a U.S. person), other than a domestic partnership.
(ii) Special rule for tiered partnerships. Solely for purposes of applying the consistent allocation method, a U.S. transferor includes a partnership that is treated as a U.S. transferor under § 1.721(c)-3(d)(1)(iii) or (d)(2)(i).
(c) Change in form of a partnership. A mere change in identity, form, or place of organization of a partnership or a recapitalization of a partnership will not cause the partnership to become a section 721(c) partnership.
(d) Anti-abuse rule. If a U.S. transferor engages in a transaction (or series of transactions) or an arrangement with a principal purpose of avoiding the application of the section 721(c) regulations, the transaction (or series of transactions) or the arrangement may be recharacterized (including by aggregating or disregarding steps or disregarding an intermediate entity) in accordance with its substance.
(e) Applicability dates—(1) In general. Except as provided in paragraphs (e)(2) and (3) of this section, this section applies to contributions occurring on or after August 6, 2015, and to contributions that occurred before August 6, 2015 resulting from an entity classification election made under § 301.7701-3 of this chapter that was effective on or before August 6, 2015 but was filed on or after August 6, 2015.
(2) Certain provisions. Except as provided in paragraph (e)(3) of this section, paragraphs (b)(6)(iv) and (c) of this section apply to contributions occurring on or after January 18, 2017, and to contributions that occurred before January 18, 2017 resulting from an entity classification election made under § 301.7701-3 of this chapter that was effective on or before January 18, 2017 but was filed on or after January 18, 2017. Except as provided in paragraph (e)(3) of this section, paragraph (b)(14)(i)(B) of this section applies by replacing “80 percent or more” with “greater than 50 percent” with respect to contributions that occurred on or after August 6, 2015 but before January 18, 2017, and with respect to contributions that occurred before August 6, 2015 resulting from an entity classification election made under § 301.7701-3 of this chapter that was effective on or before August 6, 2015, but was filed on or after August 6, 2015 but before January 18, 2017. Except as provided in paragraph (e)(3) of this section, paragraph (b)(12)(ii) of this section applies to contributions occurring on or after January 17, 2020.
(3) Election to apply the provisions described in paragraph (e)(2) of this section retroactively. Paragraphs (b)(6)(iv) and (c) of this section and paragraph (b)(14)(i)(B) of this section, without the modification described in paragraph (e)(2) of this section, may, by election, be applied to a contribution that occurred on or after August 6, 2015 but before January 18, 2017, and to a contribution that occurred before August 6, 2015 resulting from an entity classification election made under § 301.7701-3 of this chapter that was effective on or before August 6, 2015 but was filed on or after August 6, 2015. The election described in the preceding sentence must have been made by applying paragraph (b)(6)(iv) or (c) as described in paragraph (e)(2) of this section or paragraph (b)(14)(i)(B) of this section, without the modification described in paragraph (e)(2) of this section, as applicable, to the contribution on a timely filed original return (including extensions) or an amended return filed no later than July 18, 2017. Paragraph (b)(12)(ii) of this section, may, by election, be applied to a contribution that occurred on or after August 6, 2015 but before January 17, 2020, and to a contribution that occurred before August 6, 2015 resulting from an entity classification election made under § 301.7701-3 of this chapter that was effective on or before August 6, 2015 but was filed on or after August 6, 2015. The election described in the preceding sentence must be made by applying paragraph (b)(12)(ii) of this section to the contribution on a timely filed original return (including extensions) or an amended return filed no later July 17, 2020.
[85 FR 3839, Jan. 23, 2020]