On September 21, 2020, the IRS released final and temporary regulations implementing §864(c)(8)1 a provision that was enacted by the Tax Cuts and Jobs Act of 2017 (TCJA)2 to tax non-U.S. partners who sell their interests in U.S. partnerships engaged in a U.S. trade or business. This article discusses key considerations for foreign partners and U.S. partnerships affected by these regulations, as well as final regulations under §1446(f), which provide a withholding mechanism through which the tax imposed by §864(c)(8) is collected.


For many years, foreign partners in U.S. partnerships engaged in a U.S. trade or business took the position that the sale of their partnership equity interests, without the sale by the partnership of the assets used in its U.S. trade or business, did not result in gain that is subject to U.S. federal income taxation. In Rev. Rul. 91-32, the IRS challenged that position and took the position that the sale of an equity interest in a partnership that is engaged in a U.S. trade or business is deemed to be a proportionate sale of the partnership's assets used in that trade or business and any resulting gain (or loss) would be taxable as gain (or loss) that is effectively connected with the conduct of a U.S. trade or business.

In the summer of 2017, the Tax Court in, Grecian Magnesite Mining v. Commissioner,3 overruled Rev. Rul. 91-32. The Tax Court held that gain (or loss) on the sale by a foreign person of a partnership interest is foreign source gain (or loss) based on the residence of the selling partner because the gain on the sale of the partnership interest is not attributable to the partnership's assets and activities.


In December 22, 2017, as part of the revenue raisers in the TCJA, Congress enacted §864(c)(8), over- turning the Tax Court decision in Grecian. New §864(c)(8), provides that gain or loss of a non-resident alien individual or foreign corporation (foreign seller) from the sale of a partnership interest is treated as effectively connected with the conduct of a trade or business within the United States to the extent the seller 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. In other words, a partner who sells his or her partnership interest is deemed to have sold his or her proportionate share of the assets the partnership uses in its U.S. trade or business.

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* Ronald counsels clients on matters relating to inbound and outbound business structures, cross-border mergers and acquisi- tions, real estate holdings and transactions, international portfolio investments, passive foreign investment companies and controlled foreign corporations, information reporting, withholding tax re- gimes, transfer pricing, international assignments, voluntary dis- closures, expatriate planning, and international tax controversies, among other matters. Ronald's clients include corporations, part- nerships, hedge and private equity funds, non-profit organizations, and high net worth individuals across a wide range of industries, including real estate, software and technology, food and beverage, furniture manufacturing, and more.


1 All section references herein are to the Internal Revenue Code of 1986, as amended (the ''Code''), or the Treasury regulations promulgated thereunder, unless otherwise indicated.

2 Pub. L. No. 115-97.

3 149 T.C. 63 (2017), aff'd, No. 17-1268 (D.C. Cir. June 11, 2019). Although the D.C. Circuit Court Appeals affirmed the Tax Court's decision in Grecian after §864(c)(8) was enacted by the TCJA, its appellate decision is relevant to transactions that oc- curred before November 27, 2017, which are not affected by §864(c)(8) (i.e., transactions that occurred before the November 27, 2017, effective date of §864(c)(8)).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.