Federal Register / Vol. 83, No. 247 / Thursday, December 27, 2018 / Proposed Rules 66647 

Issued in Washington, DC, on December 

17, 2018. 

Scott M. Rosenbloom, 

Acting Manager, Airspace Policy Group. 

[FR Doc. 2018–28114 Filed 12–26–18; 8:45 am] 

BILLING CODE 4910–13–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–113604–18] 

RIN 1545–BO86 

Gain or Loss of Foreign Persons From 

Sale or Exchange of Certain 

Partnership Interests 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations implementing 

section 864(c)(8) of the Internal Revenue 

Code. The proposed regulations affect 

certain foreign persons that recognize 

gain or loss from the sale or exchange 

of an interest in a partnership that is 

engaged in a trade or business within 

the United States. The proposed 

regulations also affect partnerships that, 

directly or indirectly, have foreign 

persons as partners. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by February 25, 2019. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–113604–18), 

Internal Revenue Service, Room 5203, 

P.O. Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

may be hand-delivered Monday through 

Friday between the hours of 8 a.m. and 

4 p.m. to CC:PA:LPD:PR (REG–113604– 

18), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue NW, 

Washington, DC 20224, or sent 

electronically via the Federal 

eRulemaking Portal at http://

www.regulations.gov (IRS REG–113604– 

18). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Ronald M. Gootzeit or Chadwick 

Rowland, (202) 317–6937; concerning 

submissions of comments or requests for 

a public hearing, Regina L. Johnson, 

(202) 317–6901 (not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Background 

A foreign partner in a partnership that 

is engaged in the conduct of a trade or 

business within the United States is 

itself considered to be so engaged. See 

section 875. Under a 1991 revenue 

ruling, in determining the tax 

consequences of the sale or exchange of 

a foreign partner’s interest in a 

partnership engaged in the conduct of a 

trade or business within the United 

States, the IRS held that the 

partnership’s property located in the 

United States that is used or held for use 

in the partnership’s trade or business 

within the United States is used to 

determine the extent to which income 

derived from the sale or exchange of the 

partnership interest is effectively 

connected with the conduct of the 

partner’s trade or business within the 

United States. Rev. Rul. 91–32, 1991–1 

C.B. 107. Under the ruling, if there is 

unrealized gain or loss in partnership 

assets that would be treated as 

effectively connected with the conduct 

of the partnership’s trade or business 

within the United States if those assets 

were sold by the partnership, some or 

all of the foreign person’s gain or loss 

from the sale or exchange of a 

partnership interest may be treated as 

effectively connected with the partner’s 

conduct of a trade or business within 

the United States. However, a 2017 Tax 

Court case held instead that, generally, 

gain or loss on the sale or exchange by 

a foreign person of an interest in such 

a partnership is foreign source gain or 

loss based on the residence of the 

selling partner because gain on the sale 

of the partnership interest is not 

attributable to the partnership’s assets 

and activities. As a result, such gain or 

loss generally would not be treated as 

effectively connected with the conduct 

of a trade or business. Grecian 

Magnesite Mining v. Commissioner, 149 

T.C. No. 3 (2017), appeal argued, No. 

17–1268 (D.C. Cir. Oct. 9, 2018). 

Section 864(c)(8), which was added to 

the Internal Revenue Code (the ‘‘Code’’) 

by section 13501 of the Tax Cuts and 

Jobs Act, Public Law 115–97 (2017) (the 

‘‘Act’’), generally overturns the result of 

Grecian Magnesite Mining v. 

Commissioner by providing that gain or 

loss of a nonresident alien individual or 

foreign corporation (a ‘‘foreign 

transferor’’) from the sale, exchange, or 

other disposition (‘‘transfer’’) of a 

partnership interest is treated as 

effectively connected with the conduct 

of a trade or business within the United 

States (‘‘effectively connected gain’’ or 

‘‘effectively connected loss’’) to the 

extent that the transferor would have 

had effectively connected gain or loss if 

the partnership had sold all of its assets 

at fair market value as of the date of the 

sale or exchange (‘‘deemed sale’’). 

Section 864(c)(8)(E) generally 

provides that the Secretary shall 

prescribe such regulations or other 

guidance as the Secretary determines 

appropriate for the application of 

section 864(c)(8). Section 864(c)(8) is 

effective for sales, exchanges, and 

dispositions on or after November 27, 

2017. 

New section 1446(f) was also added to 

the Code by section 13501 of the Act. 

Section 1446(f)(1) requires that the 

transferee of a partnership interest 

withhold 10 percent of the amount 

realized on the transferor’s disposition 

of the partnership interest (if any 

portion of the gain would be treated as 

effectively connected gain) unless the 

transferor certifies that the transferor is 

not a foreign person. Section 1446(f) is 

effective for sales, exchanges, and 

dispositions after December 31, 2017. 

On December 29, 2017, the 

Department of the Treasury (the 

‘‘Treasury Department’’) and the IRS 

released Notice 2018–08, 2018–7 I.R.B. 

352 (the ‘‘PTP Notice’’). The PTP Notice 

temporarily suspends the requirement 

to withhold on amounts realized in 

connection with the sale, exchange, or 

disposition of certain interests in 

publicly traded partnerships (‘‘PTPs’’) 

in response to stakeholder concerns that 

applying section 1446(f) to dispositions 

of interests in PTPs without guidance 

presented significant practical 

problems. On April 2, 2018, the 

Treasury Department and the IRS 

released Notice 2018–29, 2018–16 I.R.B. 

495, which announced an intent to issue 

proposed regulations under section 

1446(f) that apply in the case of a 

disposition of a partnership interest that 

is not publicly traded and provided 

temporary guidance. 

Explanation of Provisions 

I. Gain or Loss on the Transfer of a 

Partnership Interest 

Section 864(c)(8)(A) provides that 

gain or loss of a foreign transferor from 

the transfer of an interest, owned 

directly or indirectly, in a partnership 

that is engaged in any trade or business 

within the United States is treated as 

effectively connected gain or loss to the 

extent such gain or loss does not exceed 

the amount determined under section 

864(c)(8)(B). In general, section 

864(c)(8)(B) limits the amount of 

effectively connected gain or loss to the 

portion of the foreign transferor’s 

distributive share of gain or loss that 

would have been effectively connected 

gain or loss if the partnership had sold 

all of its assets at fair market value. The 

proposed regulations set forth rules for 

determining gain or loss described in 

section 864(c)(8)(A) and the limitation 

described in section 864(c)(8)(B), each 


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66648 Federal Register / Vol. 83, No. 247 / Thursday, December 27, 2018 / Proposed Rules 

of which is discussed in this section I 

of this Explanation of Provisions. 

A. Determination of Gain or Loss 

Described in Section 864(c)(8)(A) 

To determine the amount of gain or 

loss described in section 864(c)(8)(A), 

generally, the proposed regulations 

require that a foreign transferor first 

determine its gain or loss on the transfer 

of a partnership interest (‘‘outside gain’’ 

and ‘‘outside loss’’). For this purpose, 

the proposed regulations provide that 

outside gain or loss is determined under 

all relevant provisions of the Code and 

the regulations thereunder. As described 

in section I.A.1 of this Explanation of 

Provisions, a foreign transferor may 

recognize capital gain or loss (‘‘outside 

capital gain’’ or ‘‘outside capital loss’’) 

and ordinary gain or loss (‘‘outside 

ordinary gain’’ or ‘‘outside ordinary 

loss’’) on the transfer of its partnership 

interest and must separately apply 

section 864(c)(8) with respect to its 

capital gain or loss and its ordinary gain 

or loss. 

1. Interaction With Sections 741 and 

751 

Section 864(c)(8) provides rules 

regarding the treatment of gain or loss 

on the transfer of a partnership interest 

as effectively connected gain or loss, but 

it does not address the computation of 

the amount of gain or loss to a partner 

upon the transfer. Rather, applicable tax 

law, including subchapter K, determines 

the amount and character of outside 

gain or loss on the transfer of a 

partnership interest. For example, the 

reduction in a transferor’s share of 

partnership liabilities is treated as an 

amount realized on the transfer of the 

partnership interest under section 1001 

and the regulations thereunder. See 

section 752(d) and § 1.752–1(h). 

Section 741 provides that on a sale or 

exchange of an interest in a partnership, 

gain or loss is recognized by the 

transferor, and shall be considered 

capital gain or loss except as otherwise 

provided in section 751. Section 751 

provides that an amount received by a 

transferor of a partnership interest that 

is attributable to unrealized receivables 

or inventory items of the partnership 

(‘‘section 751 property’’) is considered 

ordinary income or loss. As a result of 

sections 741 and 751 and the 

regulations thereunder, gain or loss on 

a sale or exchange of a partnership 

interest can comprise capital gain, 

capital loss, ordinary income, or 

ordinary loss (or a combination thereof). 

See §§ 1.741–1(a) and 1.751–1(a). 

In general, the proposed regulations 

provide that a foreign transferor must 

determine the portion of its capital gain 

or loss, and the portion of its ordinary 

income or loss from section 751 

property, that must each be 

characterized as effectively connected 

gain or loss under section 864(c)(8). See 

proposed § 1.864(c)(8)–1(b). As 

provided in section 864(c)(8)(A) and 

further described in section I.B of this 

Explanation of Provisions, the proposed 

regulations provide that a foreign 

partner’s effectively connected gain or 

loss will not exceed its outside gain or 

loss on the sale of the interest as 

determined under sections 741 and 751 

and the regulations thereunder. Thus, 

the amount of gain or loss determined 

under section 741 (before application of 

section 751) is not a limitation on the 

amount of gain or loss characterized as 

effectively connected with the conduct 

of a trade or business within the United 

States under the proposed regulations. 

2. Nonrecognition Transactions 

The proposed regulations provide that 

the gain or loss on the transfer of a 

partnership interest that is subject to tax 

as effectively connected gain or loss is 

limited to gain or loss otherwise 

recognized under the Code. See 

proposed § 1.864(c)(8)–1(b)(2)(ii). When 

a nonrecognition provision results in a 

foreign transferor recognizing only a 

portion of its gain or loss on the transfer 

of an interest in a partnership, section 

864(c)(8) may apply with respect to the 

portion of the gain or loss recognized. 

Although section 864(c)(8)(E) 

authorizes regulations or other guidance 

with respect to the application of 

section 864(c)(8) to nonrecognition 

transactions, the proposed regulations 

do not contain special rules applicable 

to nonrecognition transactions. The 

Treasury Department and the IRS 

recognize, however, that certain 

nonrecognition transactions may have 

the effect of reducing gain or loss that 

would be taken into account for U.S. 

federal income tax purposes. For 

example, if a partnership that conducts 

a trade or business within the United 

States owns property not subject to tax 

under section 871(b) or 882(a) in the 

hands of a foreign partner, the 

partnership may distribute that property 

to the foreign partner rather than a U.S. 

partner. The Treasury Department and 

the IRS continue to consider, and 

comments are requested regarding, 

whether other Code provisions 

adequately address transactions that 

rely on section 731 distributions to 

reduce the scope of assets subject to 

U.S. federal income taxation, and may 

propose rules addressing these types of 

transactions. 

B. Determination of Deemed Sale Gain 

or Loss 

1. In General 

After outside gain and loss are 

determined under proposed 

§ 1.864(c)(8)–1(b), the proposed 

regulations set forth three amounts that 

a foreign transferor must determine to 

derive the limitation in section 

864(c)(8)(B) against which the outside 

gain or loss is compared: (1) With 

respect to each asset held by the 

partnership, the amount of gain or loss 

that the partnership would recognize in 

connection with a deemed sale to an 

unrelated party in a fully taxable 

transaction for cash equal to the asset’s 

fair market value immediately before the 

partner’s transfer of its partnership 

interest; (2) the amount of that gain or 

loss that would be treated as effectively 

connected gain or loss (‘‘deemed sale EC 

gain’’ and ‘‘deemed sale EC loss’’); and 

(3) the foreign transferor’s distributive 

share of the ordinary and capital 

components of any deemed sale EC gain 

and deemed sale EC loss. The proposed 

regulations refer to the separate sums of 

the foreign transferor’s distributive 

shares of the ordinary and capital 

components of deemed sale EC gain and 

deemed sale EC loss items for all assets, 

determined at the level of the foreign 

transferor, as ‘‘aggregate deemed sale EC 

capital gain,’’ ‘‘aggregate deemed sale 

EC capital loss,’’ ‘‘aggregate deemed sale 

EC ordinary gain,’’ and ‘‘aggregate 

deemed sale EC ordinary loss.’’ 

After each of these aggregate amounts 

is determined, the proposed regulations 

implement the limitation described in 

section 864(c)(8)(B), generally, by 

comparing the foreign transferor’s 

outside gain or loss amounts with the 

relevant aggregate deemed sale EC gain 

or loss. This determination is made 

separately with respect to capital gain or 

capital loss and gain or loss treated as 

ordinary income or ordinary loss. Thus, 

for example, a foreign transferor would 

compare its outside capital gain to its 

aggregate deemed sale EC capital gain, 

treating the former as effectively 

connected gain only to the extent it does 

not exceed the latter. See proposed 

§ 1.864(c)(8)–1(b)(3). 

2. Treatment of Deemed Sale Gain or 

Loss as Effectively Connected Gain or 

Loss 

As described in Part I.B.1 of this 

Explanation of Provisions, the proposed 

regulations require a foreign transferor 

to determine the amount of gain or loss 

that would arise in a deemed asset sale 

that would be treated as effectively 

connected gain or loss. In general, gain 

or loss on the sale of personal property 


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Federal Register / Vol. 83, No. 247 / Thursday, December 27, 2018 / Proposed Rules 66649 

is effectively connected with the 

conduct of a trade or business within 

the United States if the gain is from 

sources within the United States and it 

satisfies the requirements of section 

864(c) and the regulations thereunder. 

Accordingly, the proposed regulations 

provide that section 864 and the 

regulations thereunder apply for 

purposes of determining whether gain 

or loss that would arise in a deemed 

asset sale would be treated as effectively 

connected gain or loss. See proposed 

§ 1.864(c)(8)–1(c)(2)(i). 

The determination as to whether gain 

or loss from a deemed asset sale by the 

partnership would be from sources 

within or without the United States, and 

whether that income would be treated 

as effectively connected gain or loss, is 

based on certain factual determinations, 

including whether the gain or loss 

results from a sale that is attributable to 

an office or other fixed place of business 

in the United States. The proposed 

regulations provide that, for purposes of 

determining whether gain or loss 

recognized in connection with a deemed 

asset sale by the partnership would be 

from sources within or without the 

United States, and thus whether that 

income would be treated as effectively 

connected gain or loss, the deemed asset 

sale is treated as attributable to an office 

or fixed place of business in the United 

States maintained by the partnership. 

As a result, deemed sale gain or loss 

generally would be treated as from 

sources within the United States. To 

prevent this rule from potentially 

converting gain or loss from assets with 

no connection to the partnership’s trade 

or business within the United States 

into effectively connected gain or loss, 

the proposed regulations provide that 

gain or loss from the deemed sale of a 

partnership asset is not treated as 

effectively connected gain or loss if (1) 

no income or gain previously produced 

by the asset was taxable as effectively 

connected with the conduct of a trade 

or business within the United States by 

the partnership (or a predecessor of the 

partnership) during the ten-year period 

ending on the date of the transfer, and 

(2) the asset was not used, or held for 

use, in the conduct of a trade or 

business within the United States by the 

partnership (or a predecessor of the 

partnership) during the ten-year period 

ending on the date of transfer. See 

proposed § 1.864(c)(8)–1(c)(2)(ii). 

Comments are requested as to whether 

additional guidance is needed regarding 

the source of gain or loss resulting from 

a deemed sale by the partnership, 

including rules coordinating this rule 

with section 865(e)(2)(B). 

3. Determining Distributive Share of 

Deemed Sale EC Gain and Deemed Sale 

EC Loss 

The flush language of section 

864(c)(8)(B) provides that a transferor 

partner’s distributive share of gain or 

loss on the deemed sale is determined 

in the same manner as the transferor 

partner’s distributive share of the nonseparately stated taxable income or loss 

of the partnership. The term ‘‘nonseparately stated taxable income or loss 

of the partnership’’ is not defined in the 

Code or regulations. The proposed 

regulations provide that a partner’s 

distributive share of gain or loss from 

the deemed sale is determined under all 

applicable Code sections (including 

section 704), taking into account 

allocations of tax items applying the 

principles of section 704(c), including 

any remedial allocations under § 1.704– 

3(d), and any section 743 basis 

adjustment pursuant to § 1.743–1(j)(3). 

The Treasury Department and IRS 

propose this approach because applying 

section 704 more closely ties the results 

of the deemed sale with regard to the 

selling foreign partner to the economic 

results of an actual sale, as compared 

(for example) to an approach that did 

not consider special allocations or 

considered only a partner’s share of 

ordinary business income, which would 

distort the economic agreement among 

the partners. See proposed § 1.864(c)(8)– 

1(c)(3)(i). 

The Treasury Department and the IRS 

are considering whether section 704 and 

the regulations thereunder adequately 

prevent the avoidance of the purposes of 

section 864(c)(8) through allocations of 

effectively connected gain or loss to 

specific partners. For example, 

immediately before a foreign transferor 

sells its interest in a partnership, 

adjustments could be made to 

partnership allocations that would 

result in the foreign transferor 

recognizing less effectively connected 

gain from the deemed sale by the 

partnership. While statutory and 

regulatory provisions, as well as judicial 

doctrines, may limit the extent to which 

inappropriate results may be obtained in 

that transaction or similar transactions, 

the Treasury Department and the IRS 

are considering whether additional 

guidance is necessary to prevent abuse. 

Comments are requested as to whether 

there are specific situations in which 

the purposes of section 864(c)(8) may be 

avoided and specific suggestions for 

additional guidance to address those 

situations. 

C. Source 

Neither section 864(c)(8) nor the 

proposed regulations address the source 

of gain or loss from the transfer of a 

partnership interest. Section 864(c)(4) 

provides that, except as enumerated in 

section 864(c)(4)(B) and (C), no income, 

gain, or loss from sources without the 

United States is treated as effectively 

connected gain or loss. Section 

864(c)(8)(A) and the proposed 

regulations, however, apply 

‘‘[n]otwithstanding any other provision 

of [subtitle A of the Code],’’ such that 

gain or loss recognized on the transfer 

of an interest in a partnership that is 

engaged in a trade or business within 

the United States may be treated as 

effectively connected gain or loss even 

if it is from sources without the United 

States. Comments are requested as to 

whether, and what, additional guidance 

is necessary regarding the source of gain 

or loss subject to section 864(c)(8). 

D. Provision Is Non-Exclusive 

The proposed regulations clarify that 

they do not apply to prevent any portion 

of gain or loss recognized on the transfer 

of a partnership interest from being 

treated as effectively connected gain or 

loss under other provisions of the Code 

(subject to a special rule coordinating 

the application of section 864(c)(8) and 

section 897). Thus, if a foreign transferor 

maintains an office or fixed place of 

business in the United States, and sells 

a partnership interest in a transaction 

that generates gain or loss attributable to 

that office, gain or loss recognized in 

connection with that transfer may be 

United States source income under 

section 865(e)(2), and may be treated as 

effectively connected income under 

section 864(c)(2). If the amount of gain 

or loss recognized that would be treated 

as effectively connected gain or loss 

under section 864(c)(2) exceeds the 

amount of gain that would be treated as 

effectively connected gain under section 

864(c)(8), then the larger amount would 

be treated as effectively connected gain. 

See proposed § 1.864(c)(8)–1(b)(1). 

II. Coordination With Section 897 

Section 897(g) generally provides that, 

under regulations prescribed by the 

Secretary, the amount realized by a 

nonresident alien individual or foreign 

corporation in exchange for all or part 

of its interest in a partnership is, to the 

extent attributable to United States real 

property interests (as defined in section 

897(c)), considered as an amount 

received from the sale or exchange in 

the United States of such property. 

Accordingly, section 897(g) generally 

provides the same result for United 


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66650 Federal Register / Vol. 83, No. 247 / Thursday, December 27, 2018 / Proposed Rules 

States real property interests as Revenue 

Ruling 91–32 provides for property 

used, or held for use, in a trade or 

business in the United States. In 

general, section 864(c)(8)(C) provides 

that if a partnership described in section 

864(c)(8)(A) holds any United States 

real property interest at the time of the 

transfer of the partnership interest, then 

the gain or loss treated as effectively 

connected gain or loss under section 

864(c)(8)(A) is reduced by the amount 

treated as effectively connected gain or 

loss with respect to that United States 

real property interest under section 897. 

The effect of section 864(c)(8)(C) is to 

prevent gain or loss from a United States 

real property interest that is taxed under 

section 897 from being taken into 

account a second time under section 

864(c)(8). 

In the proposed regulations, the 

limitation on effectively connected gain 

or loss in section 864(c)(8)(B) is based 

on a deemed sale by the partnership of 

all of its assets, including all United 

States real property interests held by the 

partnership, which are treated as 

effectively connected assets under 

section 897. See proposed § 1.864(c)(8)– 

1(c)(2)(i). To coordinate the taxation of 

United States real property interests 

under sections 897(g) and 864(c)(8), the 

proposed regulations provide that when 

a partnership holds United States real 

property interests and is also subject to 

section 864(c)(8) because it is engaged 

in the conduct of a trade or business 

within the United States without regard 

to section 897, the amount of the foreign 

transferor’s effectively connected gain or 

loss will be determined under section 

864(c)(8) and not under section 897(g). 

Therefore, the reduction called for by 

section 864(c)(8)(C) is not necessary. See 

proposed § 1.864(c)(8)–1(d). 

The regulations include a proposed 

rule in regulations under section 897, 

which serves as a cross-reference to this 

coordination rule. See section V of this 

Explanation of Provisions for a 

discussion of a proposed anti-stuffing 

rule that also applies in the context of 

section 897. Further, comments are 

requested as to the interaction of this 

rule with other rules in the regulations 

under section 897, including the special 

rule for publicly traded partnerships in 

§ 1.897–1(c)(2)(iv). 

III. Tiered Partnerships 

Section 864(c)(8) applies to a foreign 

nonresident alien individual or foreign 

corporation that owns an interest in a 

partnership directly or indirectly. 

Consistent with section 12 of Notice 

2018–29, the proposed regulations 

provide that if a foreign transferor 

transfers an interest in an upper-tier 

partnership that owns, directly or 

indirectly, an interest in one or more 

lower-tier partnerships that are engaged 

in the conduct of a trade or business 

within the United States, then the 

deemed sale gain or loss must be 

computed with respect to each lowertier partnership, the amount of 

effectively connected gain or loss that 

would be allocated to the upper-tier 

partnership must be determined, and 

the amount of gain or loss recognized by 

a foreign transferor that is treated as 

effectively connected gain or loss under 

proposed § 1.864(c)(8)–1(c) must be 

determined by reference to the 

transferor’s distributive share of 

effectively connected gain or loss arising 

from each lower-tier partnership. See 

proposed § 1.864(c)(8)–1(e)(1). 

The proposed regulations also clarify 

that when a foreign transferor is a 

partner in an upper-tier partnership and 

the upper-tier partnership transfers an 

interest in a lower-tier partnership that 

is engaged in the conduct of a trade or 

business within the United States, the 

upper-tier partnership must determine 

its effectively connected gain or loss by 

applying the principles of the proposed 

regulations, including the tiered 

partnership rules described in proposed 

§ 1.864(c)(8)–1(e)(1). 

IV. Treaties 

The business profits articles of many 

U.S. income tax treaties limit the 

taxation of income that is otherwise 

treated as effectively connected with the 

conduct of a trade or business within 

the United States under the Code to 

income and gain attributable to a 

permanent establishment in the United 

States. The applicable gains articles of 

many U.S. income tax treaties allow the 

country in which a permanent 

establishment is located to tax gains 

from the alienation of movable property 

forming part of the business property of 

a permanent establishment, including 

gains from the alienation of a permanent 

establishment, alone or with the whole 

enterprise of which it is a part. In 

general, the permanent establishment of 

a partnership in the United States is 

considered a permanent establishment 

of the partners of the partnership. See 

Donroy, Ltd. v. United States, 196 

F.Supp. 54 (N.D. Cal. 1961), aff’d 301 

F.2d 200 (9th Cir. 1962), and Unger v. 

Comm’r, T.C. Memo. 1990–15, 58 TCM 

1157, aff’d 936 F.2d 1316 (DC Cir. 

1991). 

The proposed regulations provide that 

the disposition of a foreign partner’s 

interest in a partnership, in whole or in 

part, is a disposition of all or part of a 

partner’s permanent establishment. 

Thus, to the extent the partnership’s 

assets form part of a foreign partner’s 

permanent establishment in the United 

States, the permanent establishment 

paragraph of the gains article would 

generally preserve the United States’ 

taxing jurisdiction over the gain on the 

transfer of a partnership interest that is 

subject to tax under section 864(c)(8). In 

addition, if an income tax treaty has a 

gains article that permits the United 

States to apply its domestic laws to tax 

gains or does not have a gains article, 

the treaty does not prevent the 

application of section 864(c)(8). 

Gains articles of treaties also 

frequently have special provisions 

covering certain assets, regardless of 

whether the assets form part of a 

permanent establishment, such as gains 

from dispositions of United States real 

property interests and ships and aircraft 

used in international traffic. If a gains 

article of an income tax treaty prohibits 

taxation of the gain from the disposition 

of any asset, such as ships or aircraft 

used in international traffic, the gains 

and losses from those assets will not be 

considered assets that form part of the 

permanent establishment, nor will they 

be taken into account in determining 

deemed sale EC gain or deemed sale EC 

loss, for purposes of computing the 

section 864(c)(8)(B) limitation. If the 

gains article of an applicable income tax 

treaty allows the taxation of gain from 

the disposition of a United States real 

property interest, the transfer of an 

interest in a partnership that holds a 

United States real property interest 

remains subject to section 897(g) even if 

the transfer is not subject to section 

864(c)(8) (because the partnership’s 

assets are not treated as forming part of 

a permanent establishment in the 

United States). See proposed 

§ 1.864(c)(8)–1(d). 

V. Anti-Stuffing Rule 

The proposed regulations include an 

anti-stuffing rule applicable to both 

these regulations and section 897. This 

rule is included to prevent 

inappropriate reductions in amounts 

characterized as effectively connected 

with the conduct of a trade or business 

within the United States under section 

864(c)(8) or section 897. A crossreference to this rule is also included in 

the proposed regulation under section 

897. 

VI. Section 1446(f) Guidance 

The proposed regulations do not 

provide guidance under section 1446(f). 

The Treasury Department and the IRS 

intend to issue guidance under section 

1446(f) expeditiously. 


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Applicability Dates 

The proposed regulations apply to 

transfers occurring on or after November 

27, 2017, the effective date of section 

864(c)(8). See section 7805(b)(2). If any 

provision is finalized after June 22, 

2019, the Treasury Department and the 

IRS expect that such provision will 

apply only to transfers occurring on or 

after December 26, 2018. See section 

7805(b)(1)(B). 

Special Analyses 

Executive Orders 13771, 13563, and 

12866 direct agencies to assess costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits, 

including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and equity. 

Executive Order 13563 emphasizes the 

importance of quantifying both costs 

and benefits, reducing costs, 

harmonizing rules, and promoting 

flexibility. 

These proposed regulations have been 

designated by the Office of Management 

and Budget’s Office of Information and 

Regulatory Affairs (OIRA) as subject to 

review under Executive Order 12866 

pursuant to the Memorandum of 

Agreement (April 11, 2018) between the 

Treasury Department and the Office of 

Management and Budget regarding 

review of tax regulations. OIRA has 

determined that the proposed 

rulemaking is significant and subject to 

review under E.O. 12866 and section 

1(b) of the Memorandum of Agreement. 

Accordingly, the proposed regulations 

have been reviewed by the Office of 

Management and Budget. 

The Treasury Department and the IRS 

have assessed the benefits and costs of 

the proposed regulations relative to a 

no-action baseline reflecting anticipated 

tax-related behavior and other economic 

behavior in the absence of these 

proposed regulations. Because the 

proposed regulations generally provide 

taxpayers with additional certainty on 

the amount and character of gain or loss 

treated as effectively connected income 

as a result of section 864(c)(8) and 

concurrently coordinate section 

864(c)(8) with other provisions in the 

Code, the Treasury Department and the 

IRS anticipate only minimal economic 

or revenue effects from the proposed 

regulations. The Treasury Department 

and the IRS estimate that between 5,000 

and 10,000 taxpayers are potentially 

affected by section 864(c)(8), with only 

a fraction of these taxpayers having gain 

or loss from disposition of a partnership 

in any one year. The Treasury 

Department and the IRS estimate that 

the affected taxpayers would see a 

minimal difference in treatment 

between these proposed regulations and 

Revenue Ruling 91–32. Comments are 

requested regarding these assessments. 

The Treasury Department and the IRS 

have assessed that the proposed 

regulations do not establish a new 

collection of information nor modify an 

existing collection that requires the 

approval of the Office of Management 

and Budget under the Paperwork 

Reduction Act (44 U.S.C. chapter 35). 

The Treasury Department and the IRS 

seek comments on this assessment. 

Section 864(c)(8) and the proposed 

regulations generally apply to 

nonresident alien individuals and 

foreign corporations on the transfer of 

an interest in a partnership that is 

engaged in a trade or business within 

the United States, and not directly to the 

trade or business the partnership 

conducts in the United States. Under 

section 605 of the Regulatory Flexibility 

Act (5 U.S.C. chapter 6), the Treasury 

Department and the IRS certify that the 

proposed regulations will not have a 

significant economic impact on a 

substantial number of small entities. 

The reason is that the proposed 

regulations generally apply to 

nonresident alien individuals and 

foreign corporations on the transfer of 

an interest in a partnership and not 

directly to a domestic small business. 

Pursuant to section 7805(f), this notice 

of proposed rulemaking has been 

submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on their 

impact on small business. 

Comments and Requests for Public 

Hearing 

Before the proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

comments that are submitted timely to 

the IRS as prescribed in this preamble 

under the ADDRESSES heading. The 

Treasury Department and the IRS 

request comments on all aspects of the 

proposed regulations, and specifically 

on the issues identified in sections 

I.A.2, I.B, and I.C of the Explanations of 

Provisions. All comments will be 

available at www.regulations.gov or 

upon request. A public hearing will be 

scheduled if requested in writing by any 

person that timely submits written 

comments. If a public hearing is 

scheduled, then notice of the date, time, 

and place for the public hearing will be 

published in the Federal Register. 

Drafting Information 

The principal authors of the proposed 

regulations are Ronald M. Gootzeit and 

Chadwick Rowland, Office of Associate 

Chief Counsel (International). However, 

other personnel from the Treasury 

Department and the IRS participated in 

their development. 

Statement of Availability of IRS 

Documents 

IRS Revenue Procedures, Revenue 

Rulings, notices, and other guidance 

cited in this document are published in 

the Internal Revenue Bulletin (or 

Cumulative Bulletin) and are available 

from the Superintendent of Documents, 

U.S. Government Printing Office, 

Washington, DC 20402, or by visiting 

the IRS website at http://www.irs.gov. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by adding entries 

in numerical order to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

Section 1.864(c)(8)–1 also issued under 26 

U.S.C. 864(c)(8) and 897(g). 

* * * * * 

Section 1.897–7 also issued under 26 

U.S.C. 897(g). 

* * * * * 

■ Par. 2. Section 1.864(c)(8)–1 is added 

to read as follows: 

§ 1.864(c)(8)–1 Gain or loss by foreign 

persons on the disposition of certain 

partnership interests. 

(a) Overview. This section provides 

rules and definitions under section 

864(c)(8). Paragraph (b) of this section 

provides the general rule treating gain or 

loss recognized by a nonresident alien 

individual or foreign corporation from 

the sale or exchange of a partnership 

interest as effectively connected gain or 

effectively connected loss. Paragraph (c) 

of this section provides rules for 

determining the limitation on the 

amount of effectively connected gain or 

effectively connected loss under section 

864(c)(8) and paragraph (b) of this 

section. Paragraph (d) of this section 

provides rules regarding coordination 

with section 897. Paragraph (e) of this 

section provides rules regarding certain 

tiered partnerships. Paragraph (f) of this 

section provides rules regarding U.S. 


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income tax treaties. Paragraph (g) of this 

section provides definitions. Paragraph 

(h) of this section provides a rule 

regarding certain contributions of 

property to a partnership. Paragraph (i) 

of this section contains examples 

illustrating the rules set forth in this 

section. Paragraph (j) of this section 

provides the applicability date. 

(b) Gain or loss treated as effectively 

connected gain or loss—(1) In general. 

Notwithstanding any other provision of 

subtitle A of the Internal Revenue Code, 

if a foreign transferor owns, directly or 

indirectly, an interest in a partnership 

that is engaged in the conduct of a trade 

or business within the United States, 

outside capital gain, outside capital loss, 

outside ordinary gain, or outside 

ordinary loss (each as defined in 

paragraph (b)(2) of this section) 

recognized by the foreign transferor on 

the transfer of all (or any portion) of the 

interest is treated as effectively 

connected gain or effectively connected 

loss, subject to the limit described in 

paragraph (b)(3) of this section. Except 

as provided in paragraph (d) of this 

section, this section does not apply to 

prevent any portion of the gain or loss 

that is otherwise treated as effectively 

connected gain or effectively connected 

loss under provisions of the Internal 

Revenue Code other than section 

864(c)(8) from being so treated. 

(2) Determination of outside gain and 

loss—(i) In general. The amount of gain 

or loss recognized by the foreign 

transferor in connection with the 

transfer of its partnership interest is 

determined under all relevant 

provisions of the Internal Revenue Code 

and the regulations thereunder. See, 

e.g., §§ 1.741–1(a) and 1.751–1(a)(2). For 

purposes of this section, the amount of 

gain or loss that is treated as capital gain 

or capital loss under sections 741 and 

751 is referred to as outside capital gain 

or outside capital loss, respectively. The 

amount of gain or loss that is treated as 

ordinary gain or ordinary loss under 

sections 741 and 751 is referred to as 

outside ordinary gain or outside 

ordinary loss, respectively. 

(ii) Nonrecognition provisions. A 

foreign transferor’s gain or loss 

recognized in connection with the 

transfer of its partnership interest does 

not include gain or loss to the extent 

that the gain or loss is not recognized by 

reason of one or more nonrecognition 

provisions of the Internal Revenue 

Code. 

(3) Limitations. This paragraph (b)(3) 

limits the amount of gain or loss 

recognized by a foreign transferor that 

may be treated as effectively connected 

gain or effectively connected loss. 

(i) Capital gain limitation. Outside 

capital gain recognized by a foreign 

transferor is treated as effectively 

connected gain to the extent it does not 

exceed aggregate deemed sale EC capital 

gain determined under paragraph 

(c)(3)(ii)(B) of this section. 

(ii) Capital loss limitation. Outside 

capital loss recognized by a foreign 

transferor is treated as effectively 

connected loss to the extent it does not 

exceed aggregate deemed sale EC capital 

loss determined under paragraph 

(c)(3)(ii)(B) of this section. 

(iii) Ordinary gain limitation. Outside 

ordinary gain recognized by a foreign 

transferor is treated as effectively 

connected gain to the extent it does not 

exceed aggregate deemed sale EC 

ordinary gain determined under 

paragraph (c)(3)(ii)(A) of this section. 

(iv) Ordinary loss limitation. Outside 

ordinary loss recognized by a foreign 

transferor is treated as effectively 

connected loss to the extent it does not 

exceed aggregate deemed sale EC 

ordinary loss determined under 

paragraph (c)(3)(ii)(A) of this section. 

(c) Amount treated as effectively 

connected with the conduct of a trade 

or business within the United States. 

This paragraph (c) describes the steps to 

be followed in computing the 

limitations described in paragraph (b)(3) 

of this section. 

(1) Step 1: Determine deemed sale 

gain and loss. Determine the amount of 

gain or loss that the partnership would 

recognize with respect to each of its 

assets (other than interests in 

partnerships described in paragraph (e) 

of this section) upon a deemed sale of 

all of the partnership’s assets on the 

date of the transfer of the partnership 

interest described in paragraph (b)(1) of 

this section (deemed sale). For this 

purpose, a deemed sale is a hypothetical 

sale by the partnership to an unrelated 

person of each of its assets (tangible and 

intangible) in a fully taxable transaction 

for cash in an amount equal to the fair 

market value of each asset (taking into 

account section 7701(g)) immediately 

before the partner’s transfer of the 

interest in the partnership. For rules 

concerning the deemed sale of certain 

partnership interests, see paragraph (e) 

of this section. 

(2) Step 2: Determine deemed sale EC 

gain and loss—(i) In general. With 

respect to each asset deemed sold in 

paragraph (c)(1) of this section, 

determine the amount of gain or loss 

from the deemed sale that would be 

treated as effectively connected gain or 

effectively connected loss (including by 

reason of section 897, taking into 

account any exceptions thereto, such as 

section 897(k) or section 897(l)). Gain 

described in this paragraph (c)(2) is 

referred to as deemed sale EC gain, and 

loss described in this paragraph (c)(2) is 

referred to as deemed sale EC loss. 

Section 864 and the regulations 

thereunder apply for purposes of 

determining whether gain or loss that 

would arise in a deemed asset sale 

would be treated as effectively 

connected gain or loss. For purposes of 

this paragraph (c)(2)(i), gain or loss from 

the deemed sale of an asset is treated as 

attributable to an office or other fixed 

place of business maintained by the 

partnership in the United States, and is 

not treated as sold for use, disposition, 

or consumption outside the United 

States in a sale in which an office or 

other fixed place of business maintained 

by the partnership in a foreign country 

materially participated in the sale. 

(ii) Exception. Gain or loss from the 

deemed sale of an asset described in 

paragraph (c)(2)(i) of this section (other 

than a United States real property 

interest) is not treated as deemed sale 

EC gain or deemed sale EC loss if— 

(A) No income or gain produced by 

the asset was taxable as income that was 

effectively connected with the conduct 

of a trade or business within the United 

States by the partnership (or a 

predecessor of the partnership) during 

the ten-year period ending on the date 

of the transfer; and 

(B) The asset has not been used, or 

held for use, in the conduct of a trade 

or business within the United States by 

the partnership (or a predecessor of the 

partnership) during the ten-year period 

ending on the date of the transfer. 

(3) Step 3: Determine the foreign 

transferor’s distributive share of deemed 

sale EC gain or deemed sale EC loss— 

(i) In general. Determine the foreign 

transferor’s distributive share of deemed 

sale EC gain and deemed sale EC loss. 

A foreign transferor’s distributive share 

of deemed sale EC gain or deemed sale 

EC loss with respect to each asset is the 

amount of the deemed sale EC gain and 

deemed sale EC loss determined under 

paragraph (c)(2) of this section that 

would have been allocated to the foreign 

transferor by the partnership under all 

applicable Code sections (including 

section 704) upon the deemed sale 

described in paragraph (c)(1) of this 

section, taking into account allocations 

of tax items applying the principles of 

section 704(c), including any remedial 

allocations under § 1.704–3(d), and any 

section 743 basis adjustment pursuant 

to § 1.743–1(j)(3)). 

(ii) Aggregate deemed sale EC items— 

(A) Ordinary gain or loss. A foreign 

transferor’s aggregate deemed sale EC 

ordinary gain (if the aggregate results in 

a gain) or aggregate deemed sale EC 


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ordinary loss (if the aggregate results in 

a loss) is the sum of— 

(1) The portion of the foreign 

transferor’s distributive share of deemed 

sale EC gain and deemed sale EC loss 

that is attributable to the deemed sale of 

the partnership’s assets that are section 

751(a) property; and 

(2) Deemed sale EC gain and deemed 

sale EC loss from the sale of assets that 

are section 751(a) property that would 

be allocated to the foreign transferor 

with respect to interests in partnerships 

that are engaged in the conduct of a 

trade or business within the United 

States under paragraph (e)(1)(ii) of this 

section upon the deemed asset sales 

described in paragraph (e)(1)(i) of this 

section. 

(B) Capital gain or loss. A foreign 

transferor’s aggregate deemed sale EC 

capital gain (if the aggregate of the 

foreign transferor’s distributive share of 

the deemed sale EC capital gain and loss 

results in a gain) or aggregate deemed 

sale EC capital loss (if the aggregate of 

the foreign transferor’s distributive 

share of the deemed sale EC capital gain 

and loss results in a loss) is the sum of— 

(1) The portion of the foreign 

transferor’s distributive share of deemed 

sale EC gain and deemed sale EC loss 

that is attributable to the deemed sale of 

assets that are not section 751(a) 

property; and 

(2) Deemed sale EC gain and deemed 

sale EC loss from the sale of assets that 

are not section 751(a) property and that 

would be allocated to the foreign 

transferor with respect to all interests in 

partnerships that are engaged in the 

conduct of a trade or business within 

the United States under paragraph 

(e)(1)(ii) of this section upon the 

deemed asset sales described in 

paragraph (e)(1)(i) of this section. 

(iii) Partial transfers. If a foreign 

transferor transfers less than all of its 

interest in a partnership, then for 

purposes of paragraph (c)(3)(i) of this 

section, the foreign transferor’s 

distributive share of deemed sale EC 

gain and deemed sale EC loss is 

determined by reference to the amount 

of deemed sale EC gain or deemed sale 

EC loss determined under paragraph 

(c)(3)(i) of this section that is 

attributable to the portion of the foreign 

transferor’s partnership interest that was 

transferred. 

(d) Coordination with section 897. If 

a foreign transferor transfers an interest 

in a partnership in a transfer that is 

subject to section 864(c)(8), and the 

partnership owns one or more United 

States real property interests (as defined 

in section 897(c)), then the foreign 

transferor determines its effectively 

connected gain and effectively 

connected loss under this section, and 

not pursuant to section 897(g). 

Accordingly, with respect to a transfer 

described in the preceding sentence, 

section 864(c)(8)(C) does not reduce the 

amount of gain or loss treated as 

effectively connected gain or loss under 

this section. For rules regarding a 

transfer not subject to section 864(c)(8) 

of an interest in a partnership that owns 

one or more United States real property 

interests, see section 897(g) and the 

regulations thereunder. 

(e) Tiered partnerships—(1) Transfers 

of upper-tier partnerships. Assets sold 

in a deemed sale described in paragraph 

(c)(1) of this section do not include 

interests in partnerships that are 

engaged in the conduct of a trade or 

business within the United States or 

interests in partnerships that hold, 

directly or indirectly, partnerships that 

are engaged in the conduct of a trade or 

business within the United States. 

Rather, if a foreign transferor transfers 

an interest in a partnership (upper-tier 

partnership) that owns, directly or 

indirectly, an interest in one or more 

partnerships that are engaged in the 

conduct of a trade or business within 

the United States, then— 

(i) Beginning with the lowest-tier 

partnership that is engaged in the 

conduct of a trade or business within 

the United States in a chain of 

partnerships and going up the chain, 

each partnership that is engaged in the 

conduct of a trade or business within 

the United States is treated as selling its 

assets in a deemed sale in accordance 

with the principles of paragraph (c)(1) of 

this section; and 

(ii) Each partnership must determine 

its deemed sale EC gain and deemed 

sale EC loss in accordance with the 

principles of paragraph (c)(2) of this 

section, and determine the distributive 

share of deemed sale EC gain and 

deemed sale EC loss for each partner 

that is either a partnership (in which the 

foreign transferor is a direct or indirect 

partner) or a foreign transferor, in 

accordance with the principles of 

paragraph (c)(3)(i) of this section. 

(2) Transfers by upper-tier 

partnerships. If a foreign transferor is a 

direct or indirect partner in an uppertier partnership and the upper-tier 

partnership transfers an interest in a 

partnership that is engaged in the 

conduct of a trade or business within 

the United States (including a 

partnership held indirectly through one 

or more partnerships), then the 

principles of this section (including 

paragraph (e)(1) of this section) apply 

with respect to the gain or loss on the 

transfer that is allocated to the foreign 

transferor by the upper-tier partnership. 

(3) Coordination with section 897. For 

purposes of this paragraph (e), a lowertier partnership that holds one or more 

United States real property interests is 

treated as engaged in the conduct of a 

trade or business within the United 

States. 

(f) Income tax treaties—(1) In general. 

This paragraph (f) describes how the 

provisions of a U.S. income tax treaty 

apply to the transfer by a foreign 

transferor that is eligible for benefits 

under the treaty of an interest in a 

partnership that is engaged in the 

conduct of a trade or business within 

the United States. 

(2) Application of gains article. Treaty 

provisions applicable to gains from the 

alienation of property forming part of a 

permanent establishment, including 

gains from the alienation of a permanent 

establishment in the United States, 

apply to the transfer by a foreign 

transferor of an interest in a partnership 

with a permanent establishment in the 

United States. 

(3) Coordination rule. For purposes of 

applying paragraph (c) of this section to 

gains described in paragraph (f)(2) of 

this section, a foreign transferor’s 

distributive share of deemed sale EC 

gain and deemed sale EC loss are 

determined with respect to the assets of 

the partnership that form part of the 

partnership’s permanent establishment 

in the United States and that are not 

otherwise exempt from U.S. taxation 

under the treaty. 

(g) Definitions. The following 

definitions apply for purposes of this 

section. 

(1) Effectively connected gain. The 

term effectively connected gain means 

gain that is treated as effectively 

connected with the conduct of a trade 

or business within the United States. 

(2) Effectively connected loss. The 

term effectively connected loss means 

loss treated as effectively connected 

with the conduct of a trade or business 

within the United States. 

(3) Foreign transferor. The term 

foreign transferor means a nonresident 

alien individual or foreign corporation. 

(4) Section 751(a) property. The term 

section 751(a) property means 

unrealized receivables described in 

section 751(c) and inventory items 

described in section 751(d). 

(5) Transfer. The term transfer means 

a sale, exchange, or other disposition, 

and includes a distribution from a 

partnership to a partner to the extent 

that gain or loss is recognized on the 

distribution, as well as a transfer treated 

as a sale or exchange under section 

707(a)(2)(B). 

(h) Anti-stuffing rule. If a foreign 

transferor (or a person that is related to 


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a foreign transferor within the meaning 

of section 267(b) or 707(b)) transfers 

property (including another partnership 

interest) to a partnership in a 

transaction with a principal purpose of 

reducing the amount of gain treated as 

effectively connected gain, or increasing 

the amount of loss treated as effectively 

connected loss, under section 864(c)(8) 

or section 897, the transfer is 

disregarded for purposes of section 

864(c)(8) or section 897, as appropriate, 

or otherwise recharacterized in 

accordance with its substance. 

(i) Examples. This paragraph provides 

examples that illustrate the rules of this 

section. For purposes of this paragraph, 

unless otherwise provided, the 

following facts are presumed. FP is a 

foreign corporation. USP is a domestic 

corporation. PRS is a partnership that 

was formed on January 1, 2018, when 

FP and USP each contributed $100x in 

cash. PRS has made no distributions 

and received no contributions other 

than those described in paragraph 

(i)(1)(iii) of this section. FP’s adjusted 

basis in its interest in PRS is $100x. X 

is a foreign corporation that is unrelated 

to FP, USP, or PRS. Upon the formation 

of PRS, FP and USP entered into an 

agreement providing that all income, 

gain, loss, and deduction of PRS will be 

allocated equally between FP and USP. 

PRS is engaged in the conduct of a trade 

or business within the United States 

(the U.S. Business) and an unrelated 

business in Country A (the Country A 

Business). In a deemed sale described in 

paragraph (c)(1) of this section, gain or 

loss on assets of the U.S. Business 

would be treated as effectively 

connected gain or effectively connected 

loss, and gain or loss on assets of the 

Country A Business would not be so 

treated (including by reason of 

paragraph (c)(2)(ii) of this section). PRS 

has no liabilities. FP does not qualify for 

the benefits of an income tax treaty 

between the United States and another 

country. 

(1) Example 1. Deemed sale limitation—(i) 

Facts. On January 1, 2019, FP sells its entire 

interest in PRS to X for $105x. Immediately 

before the sale, PRS’s balance sheet appears 

as follows: 

Adjusted basis Fair market 

value 

U.S. Business capital asset ..................................................................................................................................... $100x $104x 

Country A Business capital asset ............................................................................................................................ 100x 106x 

Total .................................................................................................................................................................. 200x 210x 

(ii) Analysis—(A) Outside gain or loss. FP 

is a foreign transferor (within the meaning of 

paragraph (g)(3) of this section) and transfers 

(within the meaning of paragraph (g)(5) of 

this section) its interest in PRS to X. FP 

recognizes a $5x capital gain under section 

741, which is an outside capital gain within 

the meaning of paragraph (b)(2)(i) of this 

section. Under paragraph (b)(1) of this 

section, FP’s $5x capital gain is treated as 

effectively connected gain to the extent that 

it does not exceed the limitation described in 

paragraph (b)(3)(i) of this section, which is 

FP’s aggregate deemed sale EC capital gain. 

(B) Deemed sale. FP’s aggregate deemed 

sale EC capital gain is determined according 

to the three-step process set forth in 

paragraph (c) of this section. First, the 

amount of gain or loss that PRS would 

recognize with respect to each of its assets 

upon a deemed sale described in paragraph 

(c)(1) of this section is a $4x gain with 

respect to the U.S. Business capital asset and 

a $6x gain with respect to the Country A 

Business capital asset. Second, under 

paragraph (c)(2) of this section, PRS’s 

deemed sale EC gain is $4x. PRS recognizes 

no deemed sale EC gain or loss with respect 

to the Country A Business capital asset under 

section 864 and paragraph (c)(2)(ii) of this 

section. Third, under paragraph (c)(3)(ii)(B) 

of this section, FP’s aggregate deemed sale EC 

capital gain is $2x (that is, the aggregate of 

its distributive share of deemed sale EC gain 

attributable to the deemed sale of assets that 

are not section 751(a) property, which is 50% 

of $4x). 

(C) Limitation. Under paragraph (b)(3)(i) of 

this section, the $5x outside capital gain 

recognized by FP is treated as effectively 

connected gain to the extent that it does not 

exceed FP’s $2x aggregate deemed sale EC 

capital gain. Accordingly, FP recognizes $2x 

of capital gain that is treated as effectively 

connected gain. 

(2) Example 2. Outside gain limitation—(i) 

Facts. On January 1, 2019, FP sells its entire 

interest in PRS to X for $110x. Immediately 

before the sale, PRS’s balance sheet appears 

as follows: 

Adjusted basis Fair market 

value 

U.S. Business capital asset ..................................................................................................................................... $100x $150x 

Country A Business capital asset ............................................................................................................................ 100x 70x 

Total .................................................................................................................................................................. 200x 220x 

(ii) Analysis—(A) Outside gain or loss. FP 

is a foreign transferor (within the meaning of 

paragraph (g)(3) of this section) and transfers 

(within the meaning of paragraph (g)(5) of 

this section) its interest in PRS to X. FP 

recognizes a $10x capital gain under section 

741, which is an outside capital gain within 

the meaning of paragraph (b)(2)(i) of this 

section. Under paragraph (b)(1) of this 

section, FP’s $10x capital gain is treated as 

effectively connected gain to the extent that 

it does not exceed the limitation described in 

paragraph (b)(3)(i) of this section, which is 

FP’s aggregate deemed sale EC capital gain. 

(B) Deemed sale. FP’s aggregate deemed 

sale EC capital gain is determined according 

to the three-step process set forth in 

paragraph (c) of this section. First, the 

amount of gain or loss that PRS would 

recognize with respect to each of its assets 

upon a deemed sale described in paragraph 

(c)(1) of this section is a $50x gain with 

respect to the U.S. Business capital asset and 

a $30x loss with respect to the Country A 

Business capital asset. Second, under 

paragraph (c)(2) of this section, PRS’s 

deemed sale EC gain is $50x. PRS recognizes 

no deemed sale EC gain or loss with respect 

to the Country A Business capital asset under 

section 864 and paragraph (c)(2)(ii) of this 

section. Third, under paragraph (c)(3) of this 

section, FP’s aggregate deemed sale EC 

capital gain is $25x (that is, the aggregate of 

its distributive share of deemed sale EC gain 

attributable to the deemed sale of assets that 

are not section 751(a) property, which is 50% 

of $50x). 

(C) Limitation. Under paragraph (b)(3)(i) of 

this section, the $10x outside capital gain 

recognized by FP is treated as effectively 

connected gain to the extent that it does not 

exceed FP’s $25x aggregate deemed sale EC 

capital gain. Accordingly, FP recognizes $10x 

of capital gain that is treated as effectively 

connected gain. 

(3) Example 3. Interaction with section 

751(a)—(i) Facts. On January 1, 2019, FP 

sells its entire interest in PRS to X for $95x. 

Through both its U.S. Business and its 

Country A Business, PRS holds inventory 

items that are section 751 property (as 


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Federal Register / Vol. 83, No. 247 / Thursday, December 27, 2018 / Proposed Rules 66655 

defined in § 1.751–1(a)). Immediately before the sale, PRS’s balance sheet appears as 

follows: 

Adjusted basis Fair market 

value 

U.S. Business capital asset ..................................................................................................................................... $20x $50x 

U.S. Business inventory .......................................................................................................................................... 30x 50x 

Country A Business capital asset ............................................................................................................................ 100x 80x 

Country A Business inventory ................................................................................................................................. 50x 10x 

Total .................................................................................................................................................................. 200x 190x 

(ii) Analysis—(A) Outside gain or loss. FP 

is a foreign transferor (within the meaning of 

paragraph (g)(3) of this section) and transfers 

(within the meaning of paragraph (g)(5) of 

this section) its interest in PRS to X. Under 

sections 741 and 751, FP recognizes a $10x 

ordinary loss and a $5x capital gain. See 

§ 1.751–1(a). Under paragraph (b)(2)(i) of this 

section, FP has outside ordinary loss equal to 

$10x and outside capital gain equal to $5x. 

Under paragraph (b)(1) of this section, FP’s 

outside ordinary loss and outside capital gain 

are treated as effectively connected loss and 

effectively connected gain to the extent that 

each does not exceed the applicable 

limitation described in paragraph (b)(3) of 

this section. In the case of FP’s outside 

ordinary loss, the applicable limitation is 

FP’s aggregate deemed sale EC ordinary loss. 

In the case of FP’s outside capital gain, the 

applicable limitation is FP’s aggregate 

deemed sale EC capital gain. 

(B) Deemed sale. FP’s aggregate deemed 

sale EC ordinary loss and aggregate deemed 

sale EC capital gain are determined according 

to the three-step process set forth in 

paragraph (c) of this section. 

(1) Step 1. The amount of gain or loss that 

PRS would recognize with respect to each of 

its assets upon a deemed sale described in 

paragraph (c)(1) of this section is as follows: 

Asset Gain/(loss) 

U.S. Business capital asset .. $30x 

U.S. Business inventory ....... 20x 

Country A Business capital 

asset .................................. (20x) 

Country A Business inventory .................................... (40x) 

(2) Step 2. Under paragraph (c)(2) of this 

section, PRS’s deemed sale EC gain and 

deemed sale EC loss must be determined 

with respect to each asset. The amounts 

determined under paragraph (c)(2) of this 

section are as follows: 

Asset Deemed sale 

EC gain/(loss) 

U.S. Business capital asset .. $30x 

U.S. Business inventory ....... 20x 

Country A Business capital 

asset .................................. 0 

Country A Business inventory .................................... 0 

(3) Step 3. Under paragraph (c)(3) of this 

section, FP’s aggregate deemed sale EC 

capital gain is $15x (that is, the aggregate of 

its distributive share of deemed sale EC gain 

that is attributable to the deemed sale of 

assets that are not section 751(a) property, 

which is 50% of $30x) and FP’s aggregate 

deemed sale EC ordinary loss is $0 (that is, 

the aggregate of its distributive share of 

deemed sale EC loss that is attributable to the 

deemed sale of assets that are section 751(a) 

property). 

(C) Limitation—(i) Capital gain. Under 

paragraph (b)(3)(i) of this section, the $5x 

outside capital gain recognized by FP is 

treated as effectively connected gain to the 

extent that it does not exceed FP’s $15x 

aggregate deemed sale EC capital gain. 

Accordingly, the amount of FP’s capital gain 

that is treated as effectively connected gain 

is $5x. 

(ii) Ordinary loss. Under paragraph 

(b)(3)(iv) of this section, the $10x outside 

ordinary loss recognized by FP is treated as 

effectively connected loss to the extent that 

it does not exceed FP’s $0 aggregate deemed 

sale EC ordinary loss. Accordingly, the 

amount of FP’s ordinary loss that is treated 

as effectively connected loss is $0. 

(j) Applicability date. This section applies 

to transfers occurring on or after November 

27, 2017. 

■ Par. 3. Section 1.897–7 is added to 

read as follows: 

§ 1.897–7 Treatment of certain partnership 

interests, trusts and estates under section 

897(g). 

(a) through (b) [Reserved]. For further 

guidance, see § 1.897–7T(a) through (b). 

(c) Coordination with section 

864(c)(8). Except as provided in 

§ 1.864(c)(8)–1, the amount of any 

money, and the fair market value of any 

property, received by a nonresident 

alien individual or foreign corporation 

in exchange for all or part of its interest 

in a partnership, trust, or estate shall, to 

the extent attributable to United States 

real property interests, be considered as 

an amount received from the sale or 

exchange in the United States of such 

property. See also § 1.864(c)(8)–1(h) for 

an anti-stuffing rule that may apply to 

transactions subject to section 897. This 

paragraph applies to transfers occurring 

on or after November 27, 2017. 

■ Par. 4. Section 1.897–7T is amended 

by adding paragraph (c) to read as 

follows: 

§ 1.897–7T Treatment of certain 

partnership interests as entirely U.S. real 

property interests under sections 897(g) 

and 1445(e) (temporary). 

* * * * * 

(c) Coordination with section 

864(c)(8). [Reserved]. For further 

guidance, see § 1.897–7(c). 

Kirsten Wielobob, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 2018–28167 Filed 12–26–18; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF EDUCATION 

34 CFR Chapter II 

[Docket ID ED–2018–OESE–0122] 

Proposed Definitions and 

Requirements—Alaska Native 

Education Program 

AGENCY: Office of Elementary and 

Secondary Education, Department of 

Education. 

ACTION: Proposed definitions and 

requirements. 

SUMMARY: The Assistant Secretary for 

the Office of Elementary and Secondary 

Education proposes definitions and 

requirements under the Alaska Native 

Education (ANE) program, Catalog of 

Federal Domestic Assistance (CFDA) 

number 84.356A. These definitions and 

requirements would clarify the 

eligibility requirements for the program, 

based upon changes that the Every 

Student Succeeds Act (ESSA) made to 

the Elementary and Secondary 

Education Act of 1965 (ESEA). 

DATES: We must receive your comments 

on or before January 28, 2019. 

ADDRESSES: Submit your comments 

through the Federal eRulemaking Portal 

or via postal mail, commercial delivery, 

or hand delivery. We will not accept 

comments submitted by fax or by email 

or those submitted after the comment 

period. To ensure that we do not receive 

duplicate copies, please submit your 

comments only once. In addition, please 


khammond on DSK30JT082PROD with PROPOSAL