Paul L. Caron

Wednesday, January 12, 2022

Burke: Transfers Of Zero-Basis Intangibles To A Partnership

Karen C. Burke (Florida), Transfers of Zero-Basis Intangibles to a Partnership, 174 Tax Notes Fed. 25 (Jan. 3, 2022):

Tax Notes Federal (2020)In this report, Burke examines the problem of contributed zero-basis intangibles in light of the IRS’s inadvertent disclosure of a transaction structured by Bristol-Myers Squibb to shift billions of dollars of built-in gain to a related foreign partner.

The section 197 regulations provide that if zero-basis intangibles are contributed to a partnership, the partnership may not amortize the intangible unless it was amortizable in the hands of the contributor or the partnership elects the remedial method. If the partnership chooses the traditional method for an asset, such as self-created goodwill, that was non-amortizable in the contributor’s hands, reg. section 1.197-2(g)(4)(ii) should be read as prohibiting both book and tax amortization of the contributed intangible. In the case of contributed self-created goodwill, the partnership should not be permitted to amortize the asset for purposes of section 704(b) or to make section 704(c) allocations of amortization (unless the remedial method is elected). When the gain deferral method applies under section 721(c), the partnership amortizes the intangible for both book and tax purposes, but a related partner may not receive remedial tax deductions for anti-churning property. If the Bristol transaction is not caught by the section 704(c) antiabuse rule,87 Congress should consider requiring the remedial method to prevent taxpayers from exploiting flexible choice of section 704(c) methods. Unless the specific antiabuse rule is effective, retaining the traditional method under section 704(c) can no longer be justified on grounds of avoiding complexity.

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