Treasury, IRS Propose Regulations Implementing Source-of-Income Rules for Foreign Person’s Disposition of Domestic Partnership Interest

Statutory changes made to the federal tax laws by Congress at the end of 2017, unofficially referred to as the Tax Cuts and Jobs Act (TCJA), included new tax code Section 864(c)(8).

Tax code Section 864(c)(8) provides that gain or loss realized from the sale, exchange, or other disposition (each a ‘‘transfer’’) of a partnership interest by a nonresident alien individual or foreign corporation (each a ‘‘foreign transferor’’) is effectively connected with the foreign transferor’s conduct of a trade or business within the U.S. (a ‘‘USTB’’), but only to the extent the partnership’s effectively connected gain or loss would have been allocated to the foreign transferor if the partnership had sold all of its assets at fair market value as of the date of the foreign transferor’s transfer of its partnership interest (the ‘‘deemed sale’’). (Tax code Section 864(c)(8)(A) and (B).) Subject to this limitation, a foreign transferor’s gain from the transfer of its interest in a partnership that is partly or wholly engaged in the conduct of a USTB will be subject to federal income tax.

Tax code Section 864(c)(8) is effective for sales, exchanges, and dispositions occurring on or after Nov. 27, 2017. (TCJA Section 13501(c)(1).) Tax code Section 864(c)(8) directs the Secretary of the Treasury to prescribe such regulations or other guidance as the Secretary determines appropriate. (Tax code Section 864(c)(8)(E).)

The U.S. Department of the Treasury and the Internal Revenue Service have proposed regulations implementing new tax code Section 864(c)(8). (Gain or Loss of Foreign Persons From Sale or Exchange of Certain Partnership Interests (hereinafter ‘‘REG–113604–18’’), 83 Fed. Reg. 66,647–66,655 (Dec. 27, 2018) (to be codified at 26 C.F.R. pt. 1).) 

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