Page 343 - TaxAdviser_2022

TAX CLINIC

Question 1: Which assets should be consid- be considered relevant in determining transferred corporation continue to
ered in determining whether a triggering whether a triggering event under Regs. be relevant for determining whether
event under Regs. Sec. 1.367(a)-8(j)(2) Sec. 1.367(a)-8(j)(2) has occurred with subsequent dispositions could result in
has occurred? respect to the new FC1 GRA. Because a disposition of “substantially all” of the
In the example, if FC1 did not obtain FC1 no longer directly holds the FC1 assets of the transferred corporation.
any additional assets after the initial year 1 assets, perhaps it could be argued From Emily Arjani Barnhart, CPA, and
outbound transfer, then its contribution that it would not be appropriate to Jonathan Silverstein, J.D., Washington,
of the FC1 year 1 assets would be con- consider those assets in determining D.C.
sidered a disposition of “substantially all” whether “substantially all” of the assets
of its assets for purposes of Regs. Sec. of FC1 have been disposed of. Under
1.367(a)-8(j)(2). On the other hand, if this line of reasoning, only the assets Partners & Partnerships
FC1 had acquired additional assets after that FC1 directly holds, including the
the initial outbound transfer (the after- Fsub1 stock, would be considered. Nonliquidating distributions:
acquired assets) it is less clear which as- On the other hand, perhaps it could Ways to determine basis
sets should be considered in determining be argued that because the FC1 year 1 A partnership that distributes a partial
whether FC1 disposed of “substantially assets were those that FC1 held when interest in partnership property must
all” of its assets. For example, should USCorp initially transferred FC1 to FC2 apportion the tax basis in the property
all of the assets, including the after- — and the GRA regulations do not in- between the portion transferred and the
acquired assets, be taken into account? dicate that the FC1 year 1 assets should portion retained. The Sec. 61 regulations
Additionally — and irrespective of cease to be considered assets of FC1 generally require that basis be “equitably
whether only the FC1 year 1 assets — only the FC1 year 1 assets should apportioned” but do not provide a work-
should be considered — if less than all be considered relevant for determining ing definition. One way to apportion
of FC1’s assets are disposed of, it will be whether “substantially all” of FC1’s assets a property’s basis in a nonliquidating
necessary to calculate the assets disposed have been disposed of. Moreover, exam- distribution is to use fair market value
of relative to those that FC1 continues ining the assets that FC1 directly holds (FMV), but this can result in distortion
to hold. would seem superfluous because, under under certain circumstances. This item
It is unclear how assets that are Regs. Sec. 1.367(a)-8(k)(4), a disposi- considers to what extent taxpayers may
disposed of should be measured relative tion of the stock that FC1 received (or be able to apportion basis instead under
to assets that FC1 continues to hold. is deemed to have received) in exchange Sec. 704(c) principles.
For example, should taxpayers make this for the FC1 year 1 assets (i.e., the Fsub1 The following example illustrates the
“substantially all” determination based stock) must be designated as a triggering basis apportionment issue that can arise
on either the assets’ fair market values event in the new FC1 GRA. in a nonliquidating distribution.
(FMVs) or adjusted tax bases? Moreover,
if the assets’ FMVs are used, it is unclear Additional guidance needed Example: Partner A contributes $100
which valuation dates should be used. Considering the different answers to Partnership AB, which uses the
Specifically, if only the FC1 year 1 assets that could be provided for the ques- cash to purchase 100 shares of corpo-
are considered in determining whether tions posed in the example, taxpayers rate stock ($1 per share). Partner B is
a disposition of “substantially all” of the would benefit from guidance pertaining a general partner with a 20% profits
assets has occurred, should the values on to the asset composition (including interest. In year 1, the corporate stock
the date of the initial outbound transfer after-acquired assets) that should be appreciates in value to $200, creating
be used, or should the values on the date considered in determining whether $100 of economic gain, of which $80
in year 2 when the assets are contributed “substantially all” of the assets of the is allocable to Partner A and $20 is
to Fsub1 be used? transferred corporation (i.e., FC1 in the allocable to Partner B. Partnership
example discussed previously) have been AB then distributes $20 worth of cor-
Question 2: How should the FC1 year 1 disposed of. Taxpayers also would benefit porate stock (i.e., 10 shares) to Part-
assets be tracked and treated after they have from guidance clarifying whether, after ner B in a nonliquidating distribution
been contributed to Fsub1? the occurrence of a triggering event with respect to its profits interest.
If, after FC1’s contribution of the described in Regs. Sec. 1.367(a)-8(j)(2)
FC1 year 1 assets to Fsub1, Fsub1 and application of the triggering event Alternative approaches
disposed of the FC1 year 1 assets, it is exception in Regs. Sec. 1.367(a)-8(k)(4), In this example, there may be alterna-
unclear whether this disposition would the assets formerly held directly by the tive methods to determine the basis

12 July 2022 The Tax Adviser