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This document is in the process of being submitted to the Office of the Federal Register (OFR) for publication and will be pending placement on public display at the OFR and publication in the Federal Register. The version of the final regulations released today may vary slightly from the published document if minor editorial changes are made during the OFR review process. The document published in the Federal Register will be the official document.

[4830-01-p] DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 TD 9919 RIN 1545-BO86 Gain or Loss of Foreign Persons from Sale or Exchange of Certain Partnership Interests AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations and temporary regulations. SUMMARY: This document contains regulations that provide guidance for 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 regulations also affect partnerships that, directly or indirectly, have foreign persons as partners. DATES: Effective Date: These regulations are effective on [INSERT DATE OF PUBLICATION IN THE FEDERAL REGISTER].

Applicability Dates: For dates of applicability, see ??1.864(c)(8)-1(j) and 1.897-7(c). FOR FURTHER INFORMATION CONTACT: Chadwick Rowland or Ronald M. Gootzeit, (202) 317-6937 (not a toll-free call). SUPPLEMENTARY INFORMATION: Background

On December 27, 2018, the Department of the Treasury (the "Treasury Department") and the IRS published proposed regulations (REG-113604-18) under section 864(c)(8) in the Federal Register (83 FR 66647) (the "proposed regulations"). Section 864(c)(8) was added to the Internal Revenue Code (the "Code") by the Tax Cuts and Jobs Act, Public Law 115-97 (2017) (the "Act"), which was enacted on December 22, 2017. The proposed regulations provide rules for determining the amount of gain or loss treated as effectively connected with the conduct of a trade or business within the United States ("effectively connected gain" or "effectively connected loss") under section 864(c)(8), including certain rules that coordinate section 864(c)(8) with other relevant sections of the Code.

The Treasury Department and the IRS received written comments with respect to the proposed regulations. All written comments received in response to the proposed regulations are available at or upon request. No public hearing on the proposed regulations was requested or held.

The Treasury Department and the IRS have also published proposed regulations (REG-105476-18) in the Federal Register 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

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United States (the "proposed withholding regulations"). See 84 FR 21198 (May 13, 2019). The Treasury Department and the IRS plan to publish final withholding and information reporting regulations in a later issue of the Federal Register. Summary of Comments and Explanation of Revisions I. Overview

The final regulations retain the basic approach and structure of the proposed regulations with certain revisions. This Summary of Comments and Explanation of Revisions section discusses the comments received in response to the solicitation of comments in the proposed regulations and explains the revisions made in response to those comments. II. Comments and Revisions to Proposed ?1.864(c)(8)-1 A. Determining deemed sale EC gain or deemed sale EC loss

Section 864(c)(8)(A) provides that gain or loss of a nonresident alien individual or foreign corporation (a "foreign transferor") from the sale, exchange, or other disposition ("transfer") of an interest 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 if the partnership had sold all of its assets at fair market value (the deemed sale limitation). The proposed regulations illustrate how to determine the deemed sale limitation described in section 864(c)(8)(B), which the proposed regulations refer to as the aggregate deemed sale EC ("ADSEC") amount. Once the

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ADSEC amount has been determined for each applicable category of gain or loss, the foreign transferor's outside gain or loss in each category is compared to the relevant ADSEC gain or ADSEC loss amount for that category to determine the amount of effectively connected gain or effectively connected loss under section 864(c)(8). In general, this amount is determined through a three-step process. Step one determines the amount of gain or loss from each partnership asset as if the partnership conducted a deemed sale of all of its assets on the date of transfer (these amounts, deemed sale gain or deemed sale loss). Step two determines the amount of the deemed sale gain or loss that would be treated as effectively connected gain or loss with respect to each asset (these amounts are referred to as deemed sale EC gain or deemed sale EC loss). Finally, step three determines the foreign transferor's distributive share of the deemed sale EC gain or deemed sale EC loss amounts determined in step two.

As noted in the preceding paragraph, step two requires the gain or loss from the deemed sale of each partnership asset to be analyzed to determine if the gain or loss is properly characterized as effectively connected gain or effectively connected loss. Sourcing determinations are often material in determining whether gain or loss is effectively connected with the conduct of a trade or business within the United States. See, for example, sections 864(c)(2) and (3). Because the sourcing rules in the Code and regulations are generally fact-specific, the application of these rules in the context of the deemed sale required by section 864(c)(8)(B) is unclear. For example, it is unclear how to apply the sourcing rules and principles contained in sections 865(e)(2)(A) and (e)(3) (and the regulations implementing those sections) (the U.S. office rule) to the deemed sale of partnership property required by section 864(c)(8)(B).

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Specifically, the application of the U.S. office rule depends upon factual determinations made regarding the underlying sale; that is, whether it is attributable to an office or other fixed place of business in the United States, and, with respect to inventory property, whether it is sold for use, disposition, or consumption outside the United States and whether an office or other fixed place of business maintained by the taxpayer in the foreign country materially participated in the sale. In a deemed sale, however, the required facts are generally not determinable because a sale has not actually occurred. Therefore, to address this lack of required facts and provide guidance on how to apply the sourcing provisions to deemed sales, the proposed regulations provide rules that serve as a proxy for the factual determinations that apply for purposes of sourcing deemed sale gain and loss and, in turn, for determining deemed sale EC gain and loss.

In general, proposed ?1.864(c)(8)-1(c)(2)(i) treats all deemed sale gain and loss as attributable to an office or other fixed place of business maintained by the partnership in the United States, and does not treat inventory property 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 participates. Thus, the rule in proposed ?1.864(c)(8)-1(c)(2)(i) provides simplifying factual assumptions that generally treat deemed sale gain and loss as U.S. source. An exception to this rule is provided in the proposed regulations if, during the ten-year period ending on the date of transfer, the asset in question produced no income or gain that 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), and the asset has not been used, or held for use, in the conduct of a

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