Addressing challenges of tiered partnership structures in computing gain or loss

05 March, 2021

Ilene Fine
International Tax Services, PwC US

Recently, several of our US inbound clients with tiered partnership structures have sought guidance on computing their Section 864(c)(8) amount because the information is difficult to obtain. Read my latest blog for suggestions, which include clearly documenting their efforts.

Section 864(c)(8) and the regulations thereunder (released last September) pose unique issues in the inbound space for foreign partners in tiered partnership structures. Section 864(c)(8) generally 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 that is directly or indirectly engaged in a US trade or business (USTB) is treated as effectively connected to such trade or business.

US Inbound Tax

The regulations generally provide guidance on determining the effectively connected amount through a three-step process based on the fair market value of the underlying assets of the partnership interest being sold. In the context of tiered partnerships, the regulations contain a ‘bottom-up’ approach where the three-step process starts at the lowest-tiered partnership that has a USTB and is applied up the chain. In sec. 1.864(c)(8)-2, the regulations set forth a notification procedure that generally requires a ‘specified partnership’ to provide the relevant calculation on a K-1.

However, in the context of tiered partnerships, it may be difficult to obtain the relevant information from the partnership that has a USTB. Additional difficulties may arise when the foreign person is not a direct partner in the partnership that sold its partnership interest. The selling partnership may have no knowledge that it has an indirect foreign partner and therefore would have no reason to request a Section 864(c)(8) computation from the lower-tier partnership. Furthermore, the preamble to the Section 864(c)(8) regulations rejected an approach that would have allowed taxpayers to estimate the Section 864(c)(8) amount.

Observation: Accordingly, foreign taxpayers (including partnerships that may have a Section 1446(a) liability) should document all efforts to obtain the relevant information. In light of the potential difficulties of obtaining information from lower-tier partnerships, some foreign taxpayers may be considering alternative ways to compute their Section 864(c)(8) amount in seeking to at least comply with the ‘spirit’ of the law. However, foreign taxpayers should take into account the impact of taking positions inconsistent with their K-1 and contrary to the Section 864(c)(8) regulations.

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Ken Kuykendall

Ken Kuykendall

Tax Managing Partner, PwC US

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Shawn Panson

Private Company Services Leader, PwC US

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Kelley McLaughlin

US Tax Marketing Leader, PwC US

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