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December 20, 2022 The Tax Lawyer

Bristol-Meyers' Disappearing Gain

Vol. 76, No. 1 - Fall 2022

by Karen C. Burke


Recently, an inadvertent Internal Revenue Service disclosure revealed a tax controversy involving Bristol-Myers Squibb’s contribution of zero-basis, high-value intangibles to a related foreign partnership that would potentially save $1.4 billion of tax. The Bristol transaction arguably contravenes a specific anti-abuse rule under section 704(c) issued nearly three decades ago to address similar corporate tax shelters consummated before the effective date of the anti-abuse rule. This Article considers the government’s ongoing efforts, including recent Regulations under section 721(c), to prevent taxpayers from exploiting the ceiling rule under section 704(c) to shift built-in gain to tax-indifferent partners. The Article argues that the Bristol transaction violated the specific anti-abuse rule and that the government’s proposed remedy—reallocating operating income from the related foreign partner to Bristol—is necessary to avoid frustrating the purpose of the anti-abuse rule. Indeed, Congress’ failure to understand the special problem of low-basis, high-value wasting assets used in a partnership’s business suggests an alternative solution: mandatory reallocation of operating income from wasting assets would effectively force the contributor to recognize built-in gain as such property is depreciated or amortized. If the government is powerless to address the Bristol transaction, Congress may finally be forced to require the remedial allocation method for all partnerships.

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