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Modified results for partnership interest sale by foreign partner

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October 2020


Treasury and the IRS on September 21 released Final Regulations under Section 864(c)(8) (the Final Regulations). Section 864(c)(8) provides that all or a portion of the gain or loss derived by a foreign person from the sale or exchange of a partnership interest is treated as gain or loss effectively connected with the conduct of a US trade or business (ECI). The amount of effectively connected gain or loss is determined by reference to the amount of effectively connected gain or loss that the foreign person would have been allocated had the partnership sold all its assets at fair market value as of the date of the sale or exchange of the partnership interest.

Section 864(c)(8) was added by the 2017 tax reform act in apparent response to the holding in Grecian Magnesite Mining, Ind. & Shipping Co. v. Commissioner, 149 T.C. 63 (2017), aff’d, 926 F.3d 819 (D.C. Cir. 2019). The Tax Court applied entity principles to a foreign partner’s sale of an interest in a partnership engaged in the active conduct of a trade or business within the United States and, therefore, did not treat gain as effectively connected to the conduct of that trade or business subject to tax. Grecian Magnesite Mining invalidated Rev. Rul. 91-32, which relied on a look-through approach similar to the approach subsequently taken in Section 864(c)(8). 

Section 864(c)(8) not only is relevant to foreign persons that directly sell partnership interests, but also affects partnerships that dispose of a partnership interest and that, directly or indirectly, have foreign persons as partners (tiered partnerships). Tiered partnerships face the additional challenge of obtaining necessary information from lower-tier partnerships in which they directly or indirectly hold interests.

The Final Regulations adopt the basic approach and structure of the Proposed Regulations that were published in December 2018, but they respond with modifications and clarifications to comments to the Proposed Regulations.

This Tax Insight addresses provisions of the Final Regulations that focus on the substantive rules of Section 864(c)(8). Shortly after the issuance of the Final Regulations, the IRS issued final regulations addressing notification and reporting requirements under Section 864(c)(8) (Treas. Reg. sec. 1.864(c)(8)-2) and addressing withholding, reporting, and paying tax under Section 1446(f) upon the sale, exchange, or other disposition of certain partnership interests. PwC is reviewing the second set of final regulations and plans to publish a separate Tax Insight addressing those final regulations.

The takeaway

The Final Regulations generally retain the basic structure and framework of the Proposed Regulations. However, the Final Regulations provide additional detail and clarity in response to taxpayer comments. Additional detail has been added to the Final Regulations expanding methods for sourcing gain or loss from sales of inventory and intangible assets. Since the Final Regulations apply retroactively, taxpayers who sold a partnership interest should review the Final Regulations to determine whether the amount of outside gain treated as ECI may be different in light of the modifications made by the Final Regulations as of their applicability date.

Contact us

Todd McArthur

Principal, M&A Tax, PwC US

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