[Federal Register Volume 64, Number 248 (Tuesday, December 28, 1999)]
[Rules and Regulations]
[Pages 72555-72558]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32696]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8851]
RIN 1545-AK75


Return Requirement for United States Persons Acquiring or 
Disposing of an Interest in a Foreign Partnership, or Whose 
Proportional Interest in a Foreign Partnership Changes

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under section 6046A 
of the Internal Revenue Code relating to the requirement that United 
States persons, in certain circumstances, file a return if they acquire 
or dispose of an interest in a foreign partnership, or if their 
proportional interest in a foreign partnership changes.

DATES: Effective Date: December 29, 1999.
    Applicability Dates: For dates of applicability of Sec. 1.6046A-1, 
see Sec. 1.6046A-1(j).

FOR FURTHER INFORMATION CONTACT: Eliana Dolgoff, (202) 622-3860 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-1646. Responses to this collection 
of information are mandatory.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    The burden of complying with the collection of information required 
to be reported on Form 8865 is reflected in the burden for Form 8865, 
``Return of U.S. Persons With Respect to Certain Foreign 
Partnerships.''
    Suggestions for reducing the burden associated with this rule 
should be sent to the Internal Revenue Service, Attn: IRS Reports 
Clearance Officer, OP:FS:FP, Washington, DC 20224, and to the Office of 
Management and Budget, Attn: Desk Officer of the Department of the 
Treasury, Office of Information and Regulatory Affairs, Washington, DC 
20503.
    Books or records relating to this collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    On September 9, 1998, the IRS published in the Federal Register (63 
FR 48154) proposed regulations under section 6046A. A public hearing on 
the proposed regulations was held on November 10, 1998, even though no 
requests to speak at the hearing were received. Though no comments were 
made at the hearing, written comments were received. After 
consideration of all of the written comments, the proposed regulations 
under section 6046A are adopted as revised by this Treasury decision. 
The revisions are discussed below.

Explanation of Provisions and Summary of Comments

    Commentators requested that section 6046A reporting not be required 
of United States persons that are indirect partners in a partnership. 
For example, a United States person would not be required to report 
under section 6046A with respect to an interest in a foreign 
partnership that the person owned indirectly through another 
partnership. Unlike section 6038, section 6046A reporting may apply 
with respect to any foreign partnership, not just foreign partnerships 
controlled by U.S. persons. Accordingly, the IRS agrees that reporting 
should not be required for indirect acquisitions, dispositions, and 
changes in proportional foreign partnership interests, because it would 
be burdensome and difficult for some partners to discover and keep 
track of such events. Additionally, if section 6046A reporting were 
required for changes in indirectly owned foreign partnership interests, 
then a transfer of an interest in one entity in a chain of entities at 
the bottom of which is a foreign partnership could result in multiple, 
duplicative, section 6046A reporting obligations.
    Thus, the final regulations substantially reduce the burden section 
6046A would have imposed on taxpayers under the proposed regulations. 
The final regulations provide that under Sec. 1.6046A-1(a)(1), a United 
States person is only required to report pursuant to section 6046A if 
that person has a ``reportable event.'' A person can only have a 
reportable event with respect to a particular foreign partnership if 
that person owns a direct interest in the partnership. More 
specifically, the United States person must acquire or dispose of a 
direct interest in the foreign partnership, or have a change in its 
direct proportional interest, in order to have a reportable event under 
section 6046A. See Sec. 1.6046A-1(b)(1).
    Some commentators also requested that the final regulations exempt 
state and local government employee retirement plans from the section 
6046A reporting requirements. The final regulations provide that trusts 
relating to state and local government employee retirement plans are 
not required to report under section 6046A, unless required to do so in 
the instructions to Form 8865, ``Return of U.S. Persons With Respect To 
Certain Foreign Partnerships.'' The IRS and Treasury invite comments 
regarding whether the section 6046A reporting obligation should also be 
reduced for other tax-exempt entities.
    A United States person required to report information pursuant to 
section 6046A must do so by completing and filing Form 8865. A final 
version of Form 8865 will be released prior to January 1, 2000. 
Taxpayers will be able to download a copy of the form and its 
instructions from the IRS Internet website located at 
www.irs.ustreas.gov.
    The final regulations apply to reportable events that occur on or 
after January 1, 2000. Acquisitions and dispositions of foreign 
partnership interests, and changes in proportional foreign partnership 
interests, occurring before January 1, 2000, are not required to be 
reported under section 6046A.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required.
    This Treasury decision finalizes a notice of proposed rulemaking 
published September 9, 1998. It has been determined that section 553(b) 
of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply 
to the final regulations issued pursuant to the notice of proposed 
rulemaking published on September 9, 1998. It is hereby certified that 
this Treasury decision will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that the amount of time required to complete the form and file 
the information required under these regulations is brief and will not 
have a significant impact on those small entities that are required to 
provide notification. Furthermore, the

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number of small entities that will be required to file the form is not 
substantial. Accordingly, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
    Pursuant to section 7805(f) of the Internal Revenue Code, the 
notice of proposed rulemaking preceding these regulations was submitted 
to the Small Business Administration for comment on its impact on small 
business.
    Drafting information. The principal author of these final 
regulations is Eliana Dolgoff of the Office of Associate Chief Counsel 
(International). However, other personnel from the IRS and the Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Par. 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.6046A-1 also issued under 26 U.S.C. 6046A. * * *

    Par. 2. Section 1.6046A-1 is added to read as follows:


Sec. 1.6046A-1  Return requirement for United States persons who 
acquire or dispose of an interest in a foreign partnership, or whose 
proportional interest in a foreign partnership changes substantially.

    (a) Return requirement--(1) General rule. If a United States person 
has a reportable event (as defined in paragraph (b)(1) of this section) 
during the person's tax year, then, except as provided in paragraph (f) 
of this section, the United States person is required to complete and 
file Form 8865, ``Return of U.S. Persons With Respect To Certain 
Foreign Partnerships,'' containing the information described in 
paragraph (c) of this section.
    (2) Separate return for each partnership. If a United States person 
has a reportable event with respect to an interest in more than one 
foreign partnership, the United States person must file a separate Form 
8865 for each foreign partnership.
    (b) Definitions--(1) Reportable event. There are three categories 
of reportable events under section 6046A: acquisitions, dispositions, 
and changes in proportional interests.
    (i) Acquisitions. A United States person that acquires a foreign 
partnership interest has a reportable event if--
    (A) The person did not own a ten-percent or greater direct interest 
in the partnership and as a result of the acquisition the person owns a 
ten-percent or greater direct interest in the partnership. For purposes 
of this paragraph (b)(1)(i)(A), an acquisition includes an increase in 
a person's direct proportional interest; or
    (B) Subject to paragraph (b)(2) of this section, compared to the 
person's direct interest when the person last had a reportable event, 
after the acquisition the person's direct interest has increased by at 
least a ten-percent interest.
    (ii) Dispositions. A United States person that disposes of a 
foreign partnership interest has a reportable event if--
    (A) The person owned a ten-percent or greater direct interest in 
the partnership before the disposition and as a result of the 
disposition the person owns less than a ten-percent direct interest. 
For purposes of this paragraph (b)(1)(ii)(A), a disposition includes a 
decrease in a person's direct proportional interest; or
    (B) Subject to paragraph (b)(2) of this section, compared to the 
person's direct interest when the person last had a reportable event, 
after the disposition the person's direct interest has decreased by at 
least a ten-percent interest.
    (iii) Changes in proportional interests not otherwise reportable as 
acquisitions or dispositions under paragraph (b)(1)(i)(A) or 
(b)(1)(ii)(A) of this section. A United States person has a reportable 
event if, subject to paragraph (b)(2) of this section, compared to the 
person's direct proportional interest the last time the person had a 
reportable event, the person's direct proportional interest has 
increased or decreased by at least the equivalent of a ten-percent 
interest.
    (2) Special rule for foreign partnership interests owned on 
December 31, 1999. If a United States person owned a ten-percent or 
greater direct interest in a foreign partnership on December 31, 1999, 
then to determine whether the person has a reportable event under 
paragraph (b)(1)(i)(B), (b)(1)(ii)(B), or (b)(1)(iii) of this section, 
the comparison should be made to the person's direct interest on 
December 31, 1999. Once the person has a reportable event after 
December 31, 1999, future comparisons should be made by reference to 
the last reportable event.
    (3) Change in a proportional interest. A partner's proportional 
interest in a foreign partnership may change for a number of reasons, 
for example, the change may be caused by changes in other partners' 
interests resulting from a partner withdrawing from the partnership. A 
proportional change may also occur by operation of the partnership 
agreement, for example, if the partnership agreement provides that a 
partner's interest in profits will change on a set date or when the 
partnership has earned a specified amount of profits and one of those 
events occurs.
    (4) Ten-percent interest. Under section 6046A(d) and this section, 
a ten-percent interest in a foreign partnership, as described in 
section 6038(e)(3)(C) and the regulations thereunder, means an interest 
equal to ten percent of the capital interest in such partnership, an 
interest equal to ten percent of the profits interest in such 
partnership, or an interest to which ten percent of the deductions or 
losses of such partnership are allocated.
    (5) United States person. United States person means a person 
described in section 7701(a)(30).
    (6) Foreign partnership. Foreign partnership means any partnership 
that is a foreign partnership under sections 7701(a)(2) and (5).
    (7) Examples. The rules of paragraph (a) of this section and this 
paragraph (b) are illustrated by the following examples:

    Example 1. Acquisition of an indirect interest. FP, a foreign 
partnership, has two partners, FC1 and FC2, both foreign 
corporations. FC1 owns a 40% interest in FP, and FC2 owns a 60% 
interest in FP. No United States person owns an interest in FP, 
either directly, or constructively under section 6038(e)(3)(C) and 
section 267(c). On January 1, 2001, US, a United States person and 
calendar year taxpayer, acquires by purchase 100% of FC2's stock. US 
has acquired an indirect interest of 60% in FP. See sections 
6038(e)(3)(C) and 267(c)(1). However, US is not required to report 
the January 1, 2001 indirect acquisition under section 6046A. US did 
not own a 10% or greater direct interest in FP before the 
acquisition, and US does not own a 10% or greater direct interest as 
a result of the acquisition. (US must, however, comply with the 
reporting requirements under section 6038 (controlled foreign 
corporation and controlled foreign partnership reporting) with 
respect to FC2 and FP.)
    Example 2. Acquisition of direct interests. (i) Assume the same 
facts as Example 1. In addition, on June 1, 2001, US purchases a 5% 
direct interest in FP from FC1. US did not own a 10% or greater 
direct interest in FP before the acquisition. After the acquisition,

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US does not own a direct interest of 10% or more. US owns a 10% or 
greater total interest (direct and indirect), but only a 5% direct 
interest. Therefore, US is not required to report the June 1, 2001, 
acquisition under section 6046A.
    (ii) On September 1, 2001, US purchases a 7% direct interest in 
FP from FC1. The September 1, 2001 acquisition constitutes a 
reportable event under paragraph (b)(1)(i)(A) of this section. 
Before the September 1 acquisition, US did not own a 10% or greater 
direct interest in FP. After the September 1 acquisition, US owns a 
12% direct interest, and therefore, as a result of the September 1 
acquisition, US now owns a 10% or greater direct interest in FP. 
Consequently, US must report its September 1 acquisition under 
section 6046A on Form 8865 filed with US's 2001 income tax return.
    (iii) On December 1, 2001, US acquires an additional 4% direct 
interest in FP from FC1, so that US's total direct interest has 
increased from 12% to 16%. This acquisition does not constitute a 
reportable event. Compared to US's direct interest when US last had 
a reportable event (12% on September 1, 2001), after acquiring the 
4% interest US's direct interest has not increased by at least a 10% 
direct interest (i.e., its direct interest increased by only 4%). 
Therefore, US does not have to report the December 1, 2001, 
acquisition under section 6046A. On April 1, 2002, FC2 distributes a 
6% direct interest in FP to US. US now owns a 22% direct interest in 
FP. Compared to US's direct interest when US last had a reportable 
event (12% on September 1, 2001), after the April 1 acquisition US's 
direct interest has increased by at least a 10% interest (12% to 
22%). US must report the April 1, 2002 acquisition on a Form 8865 
attached to US's 2002 income tax return.
    Example 3. Change in proportional interest resulting from 
withdrawal of a partner. Assume the same facts as Example 3. In 
addition, on January 5, 2003, FC2 withdraws entirely from FP. As a 
result, the direct interests of US and FC1 in FP each increase by at 
least the equivalent of 10% interests. Compared to US's direct 
interest the last time US had a reportable event (22% on April 1, 
2002), US's direct interest has increased by at least the equivalent 
of a ten percent interest. Therefore, US has had a reportable event 
pursuant to paragraph (b)(1)(iii) of this section, and US must 
report the change in its interest resulting from FC2's withdrawal 
from the partnership on US's Form 8865 filed with US's 2003 tax year 
income tax return.
    Example 4. Change in proportional interest constituting an 
acquisition. FP is a foreign partnership that has no United States 
persons as direct or constructive partners. US is a United States 
person and a calendar year taxpayer. On January 1, 2001, US 
purchases an 8% direct interest in FP. US is not required to report 
this acquisition. US did not own a 10% or greater direct interest in 
FP, and US does not own a 10% or greater direct interest as a result 
of the acquisition. On March 1, 2001, FC, a foreign partner of FP, 
withdraws from FP, and as result, US's direct interest in FP 
increases by a 7% interest. The increase in US's direct interest is 
considered an acquisition of an interest under paragraph 
(b)(1)(i)(A) of this section. US did not own a 10% or greater direct 
interest in FP before FC withdrew, and as a result of the increase 
in US's direct interest because of FC's withdrawal from FP, US now 
owns a 10% or greater direct interest in FP. Therefore, US must 
report under section 6046A the increase in US's direct interest 
resulting from the withdrawal of FC from FP on Form 8865 filed with 
US's tax return for US's 2001 tax year.

    (c) Content of return. The Form 8865 that must be filed under 
paragraph (a)(1) of this section must contain the following information 
in such form and manner and to the extent that Form 8865 and its 
instructions prescribe--
    (1) The name, address, and taxpayer identification number of the 
United States person required to file the return;
    (2) Information about other persons (foreign or domestic) whose 
interests in the foreign partnership the person reporting under section 
6046A is considered to own under section 6038(e)(3)(C) and section 
267(c);
    (3) Information about all foreign entities that were disregarded as 
entities separate from their owners under Secs. 301.7701-2 and 
301.7701-3 of this chapter that were owned by the foreign partnership 
during the partnership's tax year ending with or within the tax year of 
the person filing Form 8865 pursuant to section 6046A;
    (4) For each reportable event, the date of the event, the type of 
event (acquisition, disposition, or change in proportional interest), 
and the United States person's direct percentage interest in the 
foreign partnership immediately before and immediately after the event;
    (5) The fair market value of the interest acquired or disposed of;
    (6) Information about partnerships (foreign and domestic) in which 
the foreign partnership owned a direct interest, or a constructive 
interest of ten percent or more under sections 267(c)(1) and (5) and 
the regulations thereunder, during the partnership's tax year ending 
with or within the tax year of the person filing Form 8865 pursuant to 
section 6046A; and
    (7) Any other information required to be submitted by Form 8865 and 
its instructions.
    (d) Time and manner for filing returns. The Form 8865 must be filed 
with the timely filed (including extensions) income tax return of the 
United States person for the tax year in which the reportable event 
occurs. If the United States person is not required to file an income 
tax return for its tax year in which the reportable event occurs, but 
is required to file an information return for that year (for example, 
Form 1065, ``U.S. Partnership Return of Income,'' or Form 990, ``Return 
of Organization Exempt from Income Tax''), the United States person 
should attach the Form 8865 to its information return filed for that 
tax year.
    (e) Duplicate returns. If required by the instructions to Form 
8865, a duplicate Form 8865 (including attachments and schedules) must 
also be filed.
    (f) Persons excepted from filing return--(1) Section 6038B overlap. 
If a United States person acquires an interest in a foreign partnership 
as a result of a section 721 contribution required to be reported under 
section 6038B, and the person properly reports the contribution under 
section 6038B, then the United States person is not required to report 
the acquisition of the partnership interest under section 6046A(a) 
should it constitute a reportable event under paragraph (b)(1) of this 
section. The acquisition will still constitute a reportable event for 
purposes of making future comparisons pursuant to paragraphs 
(b)(1)(i)(B), (b)(1)(ii)(B) and (b)(1)(iii) of this section. A person 
that fails to properly report the section 721 contribution under 
section 6038B and the regulations thereunder and that fails to properly 
report the acquisition of the partnership interest under section 6046A 
may be subject to the penalties applicable to a failure to comply with 
the requirements of section 6038B, as well as the penalties applicable 
for a failure to comply with the requirements of section 6046A. See 
paragraph (h) of this section for more information about the penalties 
for failure to comply with the requirements of section 6046A.
    (2) Trusts relating to state and local government employee 
retirement plans. The return requirement of section 6046A does not 
apply to trusts relating to state and local government employee 
retirement plans, unless the instructions to Form 8865 provide 
otherwise.
    (3) Reporting under this section not required of partnerships 
excluded from the application of subchapter K. The reporting 
requirements of this section will not apply to any United States person 
in respect of an eligible partnership as described in Sec. 1.761-2(a) 
in which that United States person is a partner, if such partnership 
has validly elected to be excluded from all of the provisions of 
subchapter K of chapter 1 of the Internal Revenue Code in the manner 
specified in Sec. 1.761-2(b)(2)(i), or is deemed to have elected to be 
excluded from all of the provisions of subchapter K of chapter 1 of the 
Internal Revenue Code in accordance with the provisions of Sec. 1.761-
2(b)(2)(ii).

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    (4) Exclusion for satellite organizations. The return requirement 
of section 6046A does not apply to the International Telecommunications 
Satellite Organization (or a successor organization) or the 
International Maritime Satellite Organization (or a successor 
organization).
    (g) Method of reporting. Except as otherwise provided on Form 8865, 
or the accompanying instructions, any amounts required to be reported 
under section 6046A and this section must be expressed in United States 
dollars, with a statement of the exchange rates used. All statements 
required on or with Form 8865 pursuant to this section must be in 
English.
    (h) Penalties for violating section 6046A. For penalties for 
violating section 6046A, see sections 6679 and 7203.
    (i) Statute of limitations. For exceptions to the limitations on 
assessment in the event of a failure to provide information under 
section 6046A, see section 6501(c)(8).
    (j) Effective date. This section applies to reportable events 
occurring after December 31, 1999. No reporting under section 6046A is 
required for reportable events occurring on or before December 31, 
1999.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 3 The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 4. In Sec. 602.101, paragraph (b) is amended by adding an 
entry in numerical order to the table to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
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                  *        *        *        *        *
1.6046A.................................................       1545-1646
 
                  *        *        *        *        *
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Robert Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: December 9, 1999.

Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 99-32696 Filed 12-27-99; 8:45 am]
BILLING CODE 4830-01-U