Regs finalized on foreign person partnership sales

Tax Hot Topics newsletter The IRS released final regulations (TD 9919) related to the gain or loss of foreign persons from the sale or exchange of interests in a partnership that is engaged in the conduct of a trade or business within the United States.

Proposed regulations under Section 864(c)(8) were originally published in 2018, following enactment of Section 864(c)(8) in the Tax Cuts and Jobs Act. The final rules largely retain the basic approach and structure of the proposed regulations (see our previous coverage for more information), which provide guidance for foreign partners in determining what portion of gain or loss is effectively connected with the conduct of a trade or business within the United States as a result of buying, selling, or otherwise disposing of a partnership interest.

In addition, the final regulations provide these updates:

  • Adding rules for addressing situations where partnerships that haven’t existed or held an asset for at least 10 years
  • Including separate look-back rules related to historical data regarding inventory and intangibles
  • Clarifying treaty coordination related to permanent establishment
  • Modifying the proposed regulations so that a distributive share of deemed sale effectively connected gain or loss does not include amounts to which an exception under Section 897 applies (e.g., Section 897(k) or Section 897(l)), provided that the amount is not otherwise treated as effectively connected income under a provision of the Code

The final regulations do not address a few issues that were noted in comments. In particular, the IRS continues to study whether, for purposes of Section 864(c)(8), other Code sections adequately address transactions that rely on Section 731 distributions to reduce the scope of assets subject to U.S. federal income taxation and indicate in the preamble that, if necessary, they will address this issue through future rulemaking.

The IRS previously released proposed regulations under Section 1446(f) (REG-105476-18) in May of 2019 relating to the withholding of tax and information reporting with respect to certain dispositions by a foreign person of an interest in a partnership that is engaged in the conduct of a trade or business within the United States. These corresponding withholding rules under Section 1446(f) need to be considered when a foreign partner transfers a partnership interest, but the regulations under Section 1446(f) are still in proposed form (see our coverage on the proposed regulations for more information). The IRS is expected to address exchanges of information between a partnership and non-controlling partners needed to perform computations under these rules in final regulations on withholding.

In general, these regulations apply to transfers occurring on or after Dec. 26, 2018. While not subject to these final regulations, transfers occurring before Dec. 26, 2018 and on or after Nov. 27, 2017, are nonetheless subject to Section 864(c)(8).

David Sites
Washington National Tax Office
T +1 202 861 4104

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

Yasmin Dirks
Washington National Tax Office
T +1 202 521 1506

Olivia Arnold
Washington National Tax Office
T +1 678 515 2490

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