Proposed International Tax Bill Could Dramatically Change Transfers of Intangibles to Partnerships


This post (see relates to proposed legislation described in a Tax Notes story this morning (see below) on a proposed tax shelter anti-abuse set of bills recently made public. (The two proposed bill are below). The proposal creates a potential severe conflict between current section 721(c) and its regulations with the proposed amended section 721(d). The former mandates use of the remedial method but the proposal mandates a deemed sale for royalties. Two sides of the same coin but that raises conflicts. If this comes up suddenly as potentially real law, it should be vetted now (assuming that has not yet occurred). The article I have coming out in Tax Notes on March 29 on reforming subchapter K will help alleviate such conflicts. 

The proposal targets partnerships, domestic or foreign. The proposal would repeal section 367(d)(3) (authorizing regulations to apply section 367 to transfers of intangibles to partnerships) and would amend section 721(d) to apply section 367(d)(2) (deemed sale of intangibles to corporation for contingent payments) to transfers of intangibles to partnerships with a foreign partner who has a distributive share of intangible property income allocable to that person. Regulations can provide otherwise.

The proposal does not purport to repeal or amend section 721(c) of which there is already an extensive set of regulations. (See my article below). There would be overlap and conflict between sections 721(c) and 721(d). The 721(c) regulations apply to mostly all property, both tangible or intangible, but only if there is a controlled relationship between the domestic transferor and the foreign partner (50%/80%). Section 721(c)’s regulations mandate remedial allocations but proposed 721(d) would mandate a deemed sale to the partnership for deemed royalties unless regulations provide otherwise.

Since the section 721(c) regulations have such a broad scope, it is unclear what is intended to be added by the proposal. The key differences between 721(c)’s regulations and the proposal  are (1) deemed royalties instead of remedial income, and (2) non-controlled partnerships are covered by the statute but not by the 721(c) regulations. It is possible that the goal is parity with transfers to foreign corporations. But, if so, any legislative history if this proposal progresses should address what is to be moved out of 721(c) into 721(d).

Note: From Ben Willis (contributing editor, Tax Notes) comment (see on my LinkedIn post this am:

“The forced remedial method aims to preserve gain as the old section 367(a)(3) rules did. While U.S. taxing rights to the built-in gain from “offshored” assets were generally preserved under both corporate and passthrough regimes, Congress sought to tax those transfers for corporations through the TCJA and Treasury never sought to align the section 721(c) rules, which allows corporations to skirt the new anti-offshoring rules with partnerships. There is indeed a disconnect in looking to section 721(d) to address the slack Treasury gave partnerships under the section 721(c) regulations. Intangibles are the larger concern for partnerships now due largely to QBAI benefits for corporations, although that could change if the 10% tax-free return under GILTI does. I’m glad to see that parity among entities is being pursued and hope there is more in that direction for taxing provisions like these as well as for benefits, including the many deductions afforded to corporations (but not partnerships) through the TCJA.”

Comments are closed.