[Federal Register Volume 86, Number 70 (Wednesday, April 14, 2021)]
[Proposed Rules]
[Pages 19585-19599]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-06143]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-121095-19]
RIN 1545-BP50
Requirements for Certain Foreign Persons and Certain Foreign-
Owned Partnerships Investing in Qualified Opportunity Funds and
Flexibility for Working Capital Safe Harbor Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations that include
requirements that certain foreign persons and certain foreign-owned
partnerships must meet in order to elect the Federal income tax
benefits provided by section 1400Z-2 of the Internal Revenue Code
(Code). This document also contains proposed regulations that allow,
under certain circumstances, for the reduction or elimination of
withholding under section 1445, 1446(a), or 1446(f) of the Code on
transfers that give rise to gain that is deferred under section 1400Z-
2(a). Finally, this document contains additional guidance regarding the
24-month extension of the working capital safe harbor in the case of
Federally declared disasters. The proposed regulations affect qualified
opportunity funds and their investors.
[[Page 19586]]
DATES: Written or electronic comments and requests for a public hearing
must be received by June 11, 2021. Requests for a public hearing must
be submitted as prescribed in the ``Comments and Requests for Public
Hearing'' section.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-121095-
19) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The IRS expects to have limited personnel available to
process public comments that are submitted on paper through the mail.
Until further notice, any comments submitted on paper will be
considered to the extent practicable. The Department of the Treasury
(Treasury Department) and the IRS will publish for public availability
any comment submitted electronically, and to the extent practicable on
paper, to its public docket. Send paper submissions to: CC:PA:LPD:PR
(REG-121095-19), Room 5203, Internal Revenue Service, PO Box 7604, Ben
Franklin Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning proposed Sec. Sec.
1.1400Z2(a)-2 and 1.1445-3, Milton Cahn at (202) 317-4934; concerning
proposed Sec. Sec. 1.1446-3, 1.1446-6 and 1.1446-7, Ronald Gootzeit at
(202) 317-4953; concerning proposed Sec. 1.1446(f)-2, Subin Seth at
(202) 317-5003; concerning proposed Sec. Sec. 1.1400Z2(a)-1(a),
1.1400Z2(b)-1(c), and 1.1400Z2(d)-1(d), Erika Reigle at (202) 317-7006;
concerning submissions of comments and/or requests for a public
hearing, Regina L. Johnson, (202) 317-5177 (not toll free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to 26 CFR part 1 under
sections 1400Z-2, 1445, and 1446 (proposed regulations). Section 13823
of Public Law 115-97, 131 Stat. 2054, 2184 (2017), commonly referred to
as the Tax Cuts and Jobs Act (TCJA), added sections 1400Z-1 and 1400Z-2
to the Code. The purposes of section 1400Z-2 and the section 1400Z-2
regulations (that is, the final regulations set forth in Sec. Sec.
1.1400Z2(a)-1 through 1.1400Z2(f)-1, 1.1502-14Z, and 1.1504-3) are to
provide specified Federal income tax benefits to owners of qualified
opportunity funds (QOFs) to encourage the making of longer-term
investments, through QOFs and qualified opportunity zone businesses, of
new capital in one or more qualified opportunity zones designated under
section 1400Z-1 and to increase economic growth in such qualified
opportunity zones. See Sec. 1.1400Z2(f)-1(c)(1) (describing the
purposes of section 1400Z-2 and the section 1400Z-2 regulations; Notice
2018-48, 2018-28 I.R.B. 9, and Notice 2019-42, 2019-29 I.R.B. 352
(setting forth the combined list of population census tracts designated
as qualified opportunity zones).
Section 1400Z-1 provides the procedural rules for designating
qualified opportunity zones and related definitions. Section 1400Z-2
provides two main tax incentives to encourage investment in qualified
opportunity zones. See section 1400Z-2(b) and (c). First, a taxpayer,
upon making a valid election, may generally defer, until the earlier of
an inclusion event or December 31, 2026, certain gains in gross income
that would otherwise be recognized in the tax year if the taxpayer
invests a corresponding amount in a qualifying investment in a QOF
within 180 days of the date of the sale or exchange. See section 1400Z-
2(b)(1)(A) and (B). The taxpayer may potentially exclude ten percent of
such deferred gain from gross income if the taxpayer holds the
qualifying investment in the QOF for at least five years. See section
1400Z-2(b)(2)(B)(iii). An additional five percent of such gain may
potentially be excluded from gross income if the taxpayer holds the
qualifying investment for at least seven years. See section 1400Z-
2(b)(2)(B)(iv). Second, a taxpayer, upon making a second valid election
under section 1400Z-2(c), may also exclude from gross income any
appreciation on the taxpayer's qualifying investment in the QOF if the
qualifying investment is held for at least ten years. Section 1400Z-
2(e)(4) provides that the Secretary of the Treasury or his delegate
shall prescribe regulations as may be necessary or appropriate to carry
out the purposes of section 1400Z-2, including rules to prevent abuse.
On October 29, 2018, the Treasury Department and the IRS published
in the Federal Register (83 FR 54279) a notice of proposed rulemaking
(REG-115420-18) providing guidance under section 1400Z-2 for investing
in qualified opportunity funds (83 FR 54279 (October 29, 2018))
(October 2018 proposed regulations). A second notice of proposed
rulemaking (REG-120186-18) was published in the Federal Register (84 FR
18652) on May 1, 2019, containing additional proposed regulations under
section 1400Z-2 (May 2019 proposed regulations). The May 2019 proposed
regulations also updated portions of the October 2018 proposed
regulations. On January 13, 2020, final regulations (TD 9889) under
section 1400Z-2 were published in the Federal Register (85 FR 1866, as
corrected at 85 FR 19082), effective for taxable years beginning after
March 13, 2020 (section 1400Z-2 regulations).
Under the section 1400Z-2 regulations, a taxpayer qualifies for
deferral under section 1400Z-2(a) only if the taxpayer is an eligible
taxpayer. Section 1.1400Z2(a)-1(a)(1). An eligible taxpayer is defined
as a person that is required to report the recognition of gains during
the taxable year under Federal income tax accounting principles.
Section 1.1400Z2(a)-1(b)(13). If an eligible taxpayer that is a
partnership does not elect to defer gain, a partner of such partnership
may elect to defer its distributive share of the gain. Section
1.1400Z2(a)-1(c)(8).
The section 1400Z-2 regulations provide that only gains that are
eligible gains may be deferred. Section 1.1400Z2(a)-1(b)(11). In
general, an eligible gain is gain that (i) is treated as a capital gain
or is a qualified 1231 gain, (ii) would be recognized for Federal
income tax purposes and subject to tax under subtitle A of the Code
before January 1, 2027, if section 1400Z-2(a)(1) did not apply to defer
the gain, and (iii) does not arise from a sale or exchange of property
with certain related persons. Id. Thus, for example, a nonresident
alien individual or foreign corporation generally may make a deferral
election with respect to an item of capital gain that is effectively
connected with a U.S. trade or business, because this gain otherwise is
subject to Federal income tax. When a partnership chooses to make a
deferral election, the section 1400Z-2 regulations provide an exception
to the general requirement that gain be subject to Federal income tax
in order to constitute eligible gain, subject to an anti-abuse rule.
Section 1.1400Z2(a)-1(b)(11)(ix)(B).
Foreign persons are generally subject to U.S. income tax on amounts
that are effectively connected with the conduct of a trade or business
within the United States (ECI). A foreign person that directly or
indirectly is engaged in a trade or business in the United States must
file a U.S. income tax return and pay any tax due.
To ensure the collection of tax, in certain circumstances, the Code
imposes withholding requirements on payments or allocations of ECI to
foreign persons. See sections 1445, 1446(a), and 1446(f). The amount of
withholding under these provisions is intended to serve as a
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proxy for the amount of the foreign person's substantive tax liability
and may not match the actual amount of tax due. The amount withheld may
be claimed as a credit against the amount of tax due and shown on the
foreign person's tax return.
Specifically, section 1445(a) requires a transferee to withhold tax
on a disposition of a United States real property interest (as defined
in section 897(c)) (U.S. real property interest) by a foreign person.
Generally, the transferee must withhold 15 percent of the amount
realized and deposit the tax with the IRS within 20 days of the
transfer. Certain exceptions and reductions to the rate of withholding
can apply, including by the foreign person obtaining a withholding
certificate from the IRS to reduce or eliminate the amount required to
be withheld on the transfer.
Section 1445(e)(1) requires a domestic partnership, trust, or
estate that disposes of a United States real property interest to
withhold on any portion of the gain that is allocable to a foreign
partner or beneficiary. The rate of withholding is the highest rate of
tax in effect under section 11(b) (currently 21 percent).
Section 1445(e)(2) requires a foreign corporation that recognizes
gain on the distribution of a United States real property interest to
withhold on the gain at the highest rate of tax in effect under section
11(b).
Section 1445(e)(3) requires a domestic corporation that is or has
been a United States real property holding corporation to withhold 15
percent of a distribution to a nonresident alien or foreign
corporation.
Section 1445(e)(6) requires a qualified investment entity to
withhold at the highest rate of tax specified in section 11(b) on the
amount of the distribution that is treated as gain from the sale or
exchange of a United States real property interest.
Section 1446(a) generally requires a partnership to withhold tax on
effectively connected taxable income as determined under Sec. 1.1446-2
(ECTI) allocable to a foreign partner, with limited adjustments,
regardless of whether the income is distributed to the partner (section
1446(a) tax). A partnership must generally withhold section 1446(a) tax
on a foreign partner's allocable share of ECTI at the highest rate of
tax specified in section 1 (for a foreign partner other than a
corporation) or section 11(b) (for a foreign partner that is a
corporation). A partnership is generally required to pay the section
1446(a) tax in four installment payments. The partnership may consider
certain partner-level deductions and losses as a reduction to the ECTI
on which it must withhold section 1446(a) tax. See Sec. 1.1446-6.
Section 1446(f) requires withholding under certain circumstances in
connection with a disposition of a partnership interest. Specifically,
if, on a disposition (which includes a distribution from a partnership
to a partner) of a partnership interest, section 864(c)(8) treats any
portion of a foreign partner's gain as effectively connected gain,
section 1446(f) requires the transferee to withhold tax equal to 10
percent of the amount realized, unless an exemption or reduced rate of
withholding applies. The transferee must deposit the tax with the IRS
within 20 days of the transfer. See Sec. 1.1446(f)-2. For purposes of
section 1446(f), a transferor may in certain cases certify to the
transferee that the transfer is not subject to withholding or otherwise
qualifies for an exception to withholding or an adjustment to the
amount required to be withheld. Id.
Under sections 33 and 1462, a foreign person subject to withholding
under section 1445, 1446(a), or 1446(f) may credit the amount withheld
against the amount of income tax liability shown on the person's tax
return.
Explanation of Provisions
I. Overview of Proposed Regulations
These proposed regulations provide requirements for certain foreign
persons and certain foreign-owned partnerships investing in QOFs and
flexibility for working capital safe harbor plans.
II. Requirements for Certain Foreign Persons and Certain Foreign-Owned
Partnerships Investing in QOFs
A. Coordination of the Deferral Election Under Section 1400Z-2(a) With
the Withholding Rules Under Sections 1445, 1446(a) and 1446(f)
The existing section 1400Z-2 regulations do not coordinate the
deferral election under section 1400Z-2(a) with the withholding rules
in sections 1445, 1446(a), and 1446(f). Generally, these withholding
provisions subject a foreign person to withholding to ensure the
collection of tax due to the increased risk of noncompliance by a
person that is not a United States person. In general, the withholding
may be claimed as a credit or refund when the foreign person files its
return and pays any substantive tax due. Thus, a foreign person subject
to withholding that elects to defer gain under section 1400Z-2(a) may
be entitled to apply the credit for withholding against tax on other
income or claim a refund for the year in which withholding was applied,
as the foreign person will not be required to pay substantive tax on
all or a portion of the deferred gain until the gain is recognized upon
the earlier of an inclusion event or December 31, 2026. In these
circumstances, the withholding will not serve its intended purpose to
ensure that the substantive tax is collected. To address the risk of
noncompliance by certain foreign persons with respect to their U.S. tax
obligations related to deferred gain under section 1400Z-2(a), the
Treasury Department and the IRS have determined that coordination is
needed between section 1400Z-2 and sections 1445, 1446(a), and 1446(f).
To ensure that the compliance purposes of sections 1445, 1446(a),
and 1446(f) are not undermined when a foreign person elects to defer
gain under section 1400Z-2(a), these proposed regulations provide that
security-required persons (certain foreign persons and foreign-owned
partnerships) investing gain that is a security-required gain
(generally, gain from a transfer subject to withholding under section
1445, 1446(a), or 1446(f)) may not make a deferral election under
section 1400Z-2(a) unless an eligibility certificate is obtained with
respect to that gain. See section II.B of this Explanation of
Provisions. At the same time, the proposed regulations eliminate or
reduce withholding under section 1445, 1446(a), or 1446(f) on security-
required persons that obtain an eligibility certificate and provide
security to the IRS before the transaction giving rise to the gain. As
discussed in Part II.C of this Explanation of Provisions, this
exemption responds to comments received on the proposed regulations
under section 1400Z-2 requesting withholding relief so that foreign
persons have funds available to invest the entire amount of eligible
gain into a QOF. A security-required person that does not obtain an
eligibility certificate before the transfer, and thus is withheld upon,
must still obtain an eligibility certificate to make a deferral
election under section 1400Z-2(a). The security-required person (or, if
applicable, its partner, owner, or beneficiary) may also claim a credit
or refund for the amount withheld on the deferred gain when filing its
return. The IRS intends to require any claim for credit or refund for
amounts withheld under section 1445, 1446(a), or 1446(f) on deferred
gain under section 1400Z-2(a) to include a copy of the eligibility
certificate for the covered transfer (or a statement providing that the
transfer was not a covered transfer).
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B. Requirement for Certain Persons To Obtain Eligibility Certificate
1. In General
The proposed regulations provide that a taxpayer that is a
security-required person may not make a deferral election under section
1400Z-2(a) with respect to part or all of a security-required gain from
a covered transfer unless the taxpayer obtains an eligibility
certificate from the IRS with respect to such security-required gain by
the date on which the deferral election is filed with the IRS. Proposed
Sec. 1.1400Z2(a)-1(a)(3). The eligibility certificate must specify the
permitted deferral amount, and the taxpayer may not make a deferral
election with respect to the security-required gain in an amount that
exceeds the permitted deferral amount. Id.
2. Security-Required Persons
A security-required person means a person that is either (i) a
foreign person other than a partnership or (ii) a specified
partnership. Proposed Sec. 1.1400Z2(a)-2(b)(1). To minimize burden,
the Treasury Department and the IRS have decided not to require that
all partnerships electing to defer gain under section 1400Z-2(a) obtain
an eligibility certificate. Rather, the rules regarding specified
partnerships are intended to impose this requirement only on
partnerships that pose a compliance risk with respect to the collection
of tax on any deferred gain and that either hold a significant amount
of U.S. real property interests or assets used in a U.S. trade or
business or that generate a significant amount of gain that the
partnership elects to defer. An abusive avoidance of the rules
regarding specified partnerships is subject to the existing anti-abuse
rule in Sec. 1.1400Z2(f)-1(c)(1) (providing that if a significant
purpose of a transaction is to achieve a Federal income tax result that
is inconsistent with the purposes of section 1400Z-2 and the section
1400Z-2 regulations, a transaction (or series of transactions) will be
recast or recharacterized for Federal income tax purposes as
appropriate to achieve tax results that are consistent with the
purposes of section 1400Z-2 and the section 1400Z-2 regulations).
A specified partnership is a partnership, foreign or domestic, that
meets three tests with respect to a transfer that produces a security-
required gain: An ownership test, a closely-held test, and a gain or
asset test. Proposed Sec. 1.1400Z2(a)-2(b)(3). The ownership test is
met if, at the time of transfer, 20 percent or more of the capital or
profits interests in the partnership are owned (directly or indirectly
through one or more partnerships, trusts, or estates) by one or more
nonresident aliens or foreign corporations. Proposed Sec. 1.1400Z2(a)-
2(b)(3)(i). The closely-held test is met if, at any time during a look-
back period, a partnership has 10 or fewer direct partners that own 90
percent or more of the capital or profits interests in the partnership,
with any related partners (within the meaning of section 267(b) or
707(b)(1)) being treated as a single partner. Proposed Sec.
1.1400Z2(a)-2(b)(3)(ii). For purposes of the closely-held test, the
look-back period is the period that begins on the later of the date
that is one year before the date of the transfer or the date on which
the partnership was formed, and that ends on the date of the transfer.
Id. Further, a partner that is a partnership or trust is considered a
direct partner. Id. The gain or asset test is met if either: (i) The
amount of security-required gain from the transfer exceeds $1 million
(the gain test) or (ii) at any time during a look-back period, the
value of the partnership's assets that are U.S. real property interests
or assets used in a U.S. trade or business exceeds 25 percent of the
total value of the partnership's assets (the asset test). Proposed
Sec. 1.1400Z2(a)-2(b)(3)(iii). For purposes of the asset test, the
look-back period is the same as the look-back period for purposes of
the closely held test. Id. The proposed regulations allow the
partnership to determine the value of an asset on the last day of the
taxable year preceding the year in which the look-back period begins
or, for any asset acquired after this date (including upon formation of
the partnership), on the date of acquisition. Id. The proposed
regulations also provide rules for looking through interests in other
partnerships to value assets that are held indirectly. Id. Finally, the
proposed regulations state that the value of each asset will be
measured according to its gross fair market value. Id. The Treasury
Department and the IRS request comments on whether a method of valuing
assets other than fair market value should be used for purposes of the
asset test. The Treasury Department and the IRS also request comments
on whether net value, instead of gross value, should be used for
purposes of the asset test.
3. Covered Transfer and Security-Required Gain
A covered transfer is defined as: (i) A disposition by, or a
distribution to, a security-required person that is subject to
withholding under section 1445; (ii) a disposition by, or a
distribution to, a security-required person that is subject to
withholding under section 1446(f); (iii) a disposition by a specified
partnership of property, other than an interest in another partnership
or a U.S. real property interest, or a distribution to a specified
partnership, if any gain that arises is included in computing ECTI; or
(iv) a disposition by a partnership that is not a specified partnership
of property, or a distribution to such a partnership, if any gain that
arises is included in determining the allocable share of a security-
required person's ECTI.\1\ Proposed Sec. 1.1400Z2(a)-2(c)(2)(i). The
proposed regulations generally provide that a transfer subject to
section 1445 or 1446(f) is not a covered transfer if an exception to
withholding applies under those provisions. Proposed Sec. 1.1400Z2(a)-
2(c)(2)(ii). However, in order to impose the eligibility certificate
requirements on security-required persons that are domestic specified
partnerships, if the exception to withholding is based on the non-
foreign status of the transferor, the transfer will continue to be
treated as a covered transfer. Id. For the same reason, a domestic
specified partnership is treated as a foreign person in determining
whether a transfer is a covered transfer as defined in (A), (B), and
(D) of proposed Sec. 1.1400Z2(a)-2(c)(2)(i).
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\1\ While both categories (iii) and (iv) describe dispositions
or distributions, the gain from which is used in the calculation of
ECTI under Sec. 1.1446-2, category (iii) describes transactions
directly involving a specified partnership, while category (iv)
describes transactions involving a partnership that is not a
specified partnership that produce gain allocable to a partner that
is a security-required person. The transactions described in
category (iii) are limited to those involving property other than
partnership interests and U.S. real property interests because the
direct transfer by a specified partnership of a partnership interest
is subject to withholding under section 1446(f) (and thus is already
described in category (ii)), and the direct transfer of a U.S. real
property interest is subject to withholding under section 1445 (and
thus is already described in category (i)).
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Security-required gain is certain gain that arises from a covered
transfer. Proposed Sec. 1.1400Z2(a)-2(c)(1). For a covered transfer
defined in proposed Sec. 1.1400Z2(a)-2(c)(2)(i)(C) (described in (iii)
in the first sentence of the preceding paragraph), the amount of
security-required gain is the gain that is included in computing ECTI
under Sec. 1.1446-2, disregarding Sec. 1.1446-2(b)(4)(i). Id. For a
covered transfer defined in proposed Sec. 1.1400Z2(a)-2(c)(2)(i)(D)
(described in (iv) in the first sentence of the preceding paragraph),
the amount of security-required gain is the gain that is included in
computing ECTI under Sec. 1.1446-2 that is allocable to the security-
required person. Id.
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4. Application for an Eligibility Certificate and Acceptable Security
To obtain an eligibility certificate with respect to any security-
required gain, a security-required person must submit an application to
the IRS. Proposed Sec. 1.1400Z2(a)-2(d)(2). The IRS is considering
requiring electronic submission of the application; this process would
be described in forms, instructions, publications, or guidance
published in the Internal Revenue Bulletin. The application must
generally include the following: (i) Certain information about the
security-required person and the covered transfer; (ii) an agreement
for the deferral of tax and provision of security (deferral agreement);
(iii) an agreement with a U.S. agent (as defined in proposed Sec.
1.1400Z2(a)-2(d)(4)(ii)(D)); and (iv) acceptable security that secures
the amount of security-required gain for which the eligibility
certificate is being obtained. Proposed Sec. 1.1400Z2(a)-2(d)(3). The
application includes the requirement to provide a U.S. taxpayer
identification number. If applicants do not yet have a U.S. taxpayer
identification number, additional time should be allocated to ensure
that a U.S. taxpayer identification number can be obtained; see the
instructions to Forms W-7 and SS-4. The IRS may prescribe in forms or
instructions or in publications or guidance published in the Internal
Revenue Bulletin (see Sec. Sec. 601.601(d)(2) and 601.602 of this
chapter) procedures for obtaining a U.S. taxpayer identification number
under these circumstances.
Acceptable security is defined as an irrevocable standby letter of
credit issued by a U.S. bank that meets certain capital and other
requirements specified in these proposed regulations. Proposed Sec.
1.1400Z2(a)-2(d)(6)(ii). The proposed regulations provide that the IRS
may identify in published guidance additional financial institutions
that may qualify as issuers of letters of credit. Id. The Treasury
Department and the IRS request comments on financial institutions other
than banks that should qualify as issuers of letters of credit. The
Treasury Department and the IRS also request comments on whether
additional types of security are needed. Any additional proposed types
of security should preserve administrative flexibility to require
electronic submission of applications and protect the IRS's collection
ability.
5. Deferral Agreement and Events of Default
In general, under the deferral agreement, the security-required
person agrees to do the following: Timely file a Federal income tax
return and pay any tax liability due on the security-required gain for
which the security-required person seeks to defer gain under section
1400Z-2(a) when required; report any security-required gain in
accordance with the regulations under section 1400Z-2; provide security
to the IRS with respect to any tax liability due on security-required
gain for which the security-required person seeks to defer gain under
section 1400Z-2(a); and appoint a U.S. person to act as the security-
required person's limited agent for certain purposes specified in the
deferral agreement. Proposed Sec. 1.1400Z2(a)-2(d)(4)(ii). The
deferral agreement must conform to the template provided in guidance
published in the Internal Revenue Bulletin. Proposed Sec. 1.1400Z2(a)-
2(d)(4)(i).
An event of default under the deferral agreement is an inclusion
event that triggers recognition of the security-required gain for which
the security-required person seeks to defer gain under section 1400Z-
2(a). Proposed Sec. 1.1400Z2(a)-2(d)(4)(ii)(E). Defaults, upon which
an event of default may be based, will be specified in the deferral
agreement, and may include the following: A determination that the
security is no longer adequate to protect the IRS's interests; a change
in the creditworthiness of the issuer of a letter of credit; and a
failure by the security-required person to file returns or attach an
eligibility certificate (when required) during the period covered by
the deferral agreement. Proposed Sec. 1.1400Z2(a)-2(d)(4)(ii)(E). In
addition, the deferral agreement will specify whether notice of default
and an opportunity to cure will be provided to the security-required
person before an event of default arises. Id.
6. Amount of Eligibility Certificate
The proposed regulations provide that an eligibility certificate
will be issued for a permitted deferral amount. Proposed Sec.
1.1400Z2(a)-2(d)(1). If a security-required person provides security in
an amount equal to the maximum security amount, the permitted deferral
amount is the total amount of security-required gain. Proposed Sec.
1.1400Z2(a)-2(d)(7)(i). If a security-required person provides security
in an amount less than the maximum security amount, the permitted
deferral amount is the total amount of security-required gain
multiplied by the ratio of the amount of security provided over the
maximum security amount. Id.
The proposed regulations provide specific rules for determining the
maximum security amount, which is generally computed by reference to
either a percentage of the amount realized on the covered transfer or
the amount of tax due on the security-required gain. See proposed Sec.
1.1400Z2(a)-2(d)(7)(ii). The maximum security amount on a direct
disposition by, or a distribution to, a security-required person that
is subject to withholding under section 1445 is the lesser of: (i) The
amount realized multiplied by the rate specified under section 1445(a)
(or, for transfers subject to section 1445(e)(1), (e)(2), or (e)(6),
the rate specified in the applicable provision) or (ii) the security-
required gain multiplied by the highest rate of tax applicable to the
gain, based on the type of property, holding period, and the
classification of the security-required person. Proposed Sec.
1.1400Z2(a)-2(d)(7)(ii)(A). The maximum security amount on a direct
disposition by, or a distribution to, a security-required person that
is subject to withholding under section 1446(f) is the lesser of: (i)
The amount realized multiplied by the rate specified under section
1446(f)(1) or (ii) the security-required gain multiplied by the highest
rate of tax applicable to the gain based on the type of property,
holding period, and the classification of the security-required person.
Proposed Sec. 1.1400Z2(a)-2(d)(7)(ii)(B). If a direct disposition of a
partnership interest is subject to withholding under both sections 1445
and 1446(f), the proposed regulations provide that the rate specified
in section 1445 is used for purposes of determining the maximum
security amount. Proposed Sec. 1.1400Z2(a)-2(d)(7)(ii)(A) and (B).
For a direct disposition of property, other than an interest in
another partnership or a U.S. real property interest, by a specified
partnership, or a distribution to a specified partnership, the maximum
security amount is the security-required gain multiplied by the highest
rate of tax applicable to the gain, treating the specified partnership
as an individual for this purpose, and taking into account the type of
property and holding period. Proposed Sec. 1.1400Z2(a)-2(d)(7)(ii)(C).
Therefore, a specified partnership that has gain arising from the
direct sale or exchange of an asset used in a U.S. trade or business
(other than a U.S. real property interest) will generally be required
to obtain an eligibility certificate for such gain if it wants to elect
to defer all or part of the gain by investing in a QOF.
For a disposition of property (including an interest in another
partnership or a U.S. real property interest) by a partnership that is
not a specified partnership, or a distribution
[[Page 19590]]
to such a partnership, that gives rise to gain that is included in
determining the allocable share of a security-required person's ECTI,
the maximum security amount is the security-required gain multiplied by
the highest rate of tax applicable to the gain, taking into account the
type of property, holding period, and the classification of the
security-required person. Proposed Sec. 1.1400Z2(a)-2(d)(7)(ii)(D).
C. Elimination or Reduction of Withholding Based on an Eligibility
Certificate
Comments on the May 2019 proposed regulations requested relief from
withholding under section 1445, 1446(a), or 1446(f) on transactions if
gain from those transactions was deferred under section 1400Z-2. One
comment requested that a foreign taxpayer engaging in a sale subject to
withholding under section 1445 be able to provide a certificate or
other form of documentation to avoid withholding based on the
taxpayer's intention to invest the resulting gain in a QOF pursuant to
a deferral election under section 1400Z-2(a)(1). In addition, the
comment suggested that a foreign taxpayer would be required to certify
that it will file a tax return in the year the QOF interest is sold.
Another comment requested an exemption from withholding when a foreign
person enters into an agreement with the IRS to pay the tax when the
deferred gain is included under section 1400Z-2(a)(1)(B) and (b),
similar to when a gain recognition agreement is ``triggered'' under
section 367 and the regulations thereunder. Another comment suggested
that the IRS provide a reduced FIRPTA withholding certificate for
foreign persons who intend to invest in QOFs.
The comments noted that withholding may reduce the amount of funds
available to the foreign person to invest in the QOF fund within the
180-day investment period. Even though the foreign person may later
obtain a refund of the amount withheld, there may be a temporary lack
of liquidity that could prevent an investor from investing all of its
eligible gain into a QOF.
The proposed regulations address these comments by allowing a
security-required person to use an eligibility certificate as a basis
for reducing or eliminating withholding under section 1445, 1446(a), or
1446(f) on a covered transfer. For purposes of section 1445, a
security-required person may apply for a withholding certificate from
the IRS based on an eligibility certificate. For purposes of section
1446(f), the proposed regulations add a rule to allow a transferee to
rely on an eligibility certificate to qualify for an exception or
adjustment to withholding.
Section 1.1446-3 currently allows a partnership to consider certain
partner level deductions and losses certified in accordance with Sec.
1.1446-6 in determining its section 1446 tax. The proposed regulations
modify the rules in Sec. Sec. 1.1446-3 and 1.1446-6 to allow a
partnership to also consider in determining its section 1446 tax the
permitted deferral amount of an eligibility certificate submitted by a
partner. When determining installments of 1446 tax, to ensure that the
reduction in effectively connected items by the permitted deferral
amount is fully taken into account, the eligibility certificate must be
considered before the effectively connected items are annualized.
Proposed Sec. Sec. 1.1446-3(b)(2)(i)(B)(1) and 1.1446-6(c)(1)(iv).
Because the withholding requirement on a transfer or distribution
with respect to an interest in a publicly traded partnership (PTP) is
generally imposed on a broker (or nominee), and it would be
administratively difficult for a broker to timely obtain an eligibility
certificate, the procedures for using an eligibility certificate to
reduce or eliminate withholding do not apply for these purposes. A
security-required person that has gain arising from a disposition or
distribution with respect to a PTP interest is, however, still required
to obtain an eligibility certificate to defer security-required gain.
III. Flexibility With Respect to Working Capital Safe Harbor Plans in
the Event of a Federally Declared Disaster
After the major disaster declarations issued in response to the
ongoing novel coronavirus 2019 (COVID-19) pandemic, \2\ commenters
expressed a need for additional regulatory guidance regarding the
operation of the 24-month extension for the working capital safe harbor
included in the section 1400Z-2 regulations for Federally declared
disasters. Although the final regulations provide a qualified
opportunity zone business an additional 24 months to expend its working
capital assets, the qualified opportunity zone business must do so in a
manner substantially consistent with the original, pre-disaster written
designation in which the amount of working capital assets subject to
the safe harbor are designated and according to the original, pre-
disaster written schedule for expending such amounts. In some cases,
the commenters pointed out, the post-disaster environment facing the
qualified opportunity zone business may render the original plan
suboptimal or even infeasible.
---------------------------------------------------------------------------
\2\ See https://www.fema.gov/coronavirus/disaster-declarations.
---------------------------------------------------------------------------
In response, this notice of proposed rulemaking proposes to add
three new sentences at the end of Sec. 1.1400Z2(d)-1(d)(3)(v)(D) that
provide flexibility for qualified opportunity zone businesses to revise
or replace the original written designation and written plan, provided
that the remaining working capital assets are expended within the
original regulatorily required 31-month period, increased by the 24
additional months provided in response to the Federally declared
disaster.
IV. Applicability Dates
A. Proposed Regulations Related to Covered Transfers
The proposed regulations relating to covered transfers, including
the requirement for eligibility certificates, will apply to any covered
transfer that occurs after the date that these regulations are
published as final regulations in the Federal Register. Taxpayers
should not submit applications for eligibility certificates before the
date that these regulations are published as final regulations in the
Federal Register. Any applications submitted before such date will not
be processed by the IRS.
B. Proposed Regulations Related to Federally Declared Disasters
The three new sentences proposed to be added at the end of Sec.
1.1400Z2(d)-1(d)(3)(v)(D) are proposed to apply to taxable years
beginning after the date these regulations are published as final
regulations in the Federal Register. Additionally, a taxpayer may rely
on the three new sentences proposed to be added at the end of Sec.
1.1400Z2(d)-1(d)(3)(v)(D) for taxable years beginning after December
31, 2019.
Special Analyses
I. Regulatory Planning and Review
This proposed regulation is not subject to review under section
6(b) of 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.
II. Paperwork Reduction Act
A. Collection of Information for Proposed Sec. 1.1400Z2(a)-2
Proposed Sec. 1.1400Z2(a)-2 contains collections of information
that are not on existing or new IRS forms. The proposed regulations
require that security-required persons submit to the
[[Page 19591]]
IRS an application that includes the following information and
documents to obtain an eligibility certificate with respect to
security-required gain.
1. Identification of security-required person (proposed Sec.
1.1400Z2(a)-2(d)(3)(ii));
2. Information about the covered transfer (proposed Sec.
1.1400Z2(a)-2(d)(3)(iii));
3. Agreement for deferral of tax and provision of security
(proposed Sec. 1.1400Z2(a)-2(d)(4));
4. U.S. agent agreement (proposed Sec. 1.1400Z2(a)-2(d)(5)); and
5. Security and any related required documents (proposed Sec.
1.1400Z2(a)-2(d)(6)).
The collections of information contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
(OMB) for review in accordance with the Paperwork Reduction Act.
Commenters are strongly encouraged to submit public comments
electronically. Comments and recommendations for the proposed
information collection may be submitted via www.reginfo.gov/public/do/PRAMain. Find this particular information collection by selecting
``Currently under Review--Open for Public Comments'' then by using the
search function. Comments can also be emailed to the IRS at
[email protected] (indicate REG-121095-19 on the subject line). Comments
also may be mailed to OMB, Attn: Desk Officer for the Department of the
Treasury, Office of Information and Regulatory Affairs, Washington, DC
20503, with copies mailed to the IRS, Attn: IRS Reports Clearance
Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the
collections of information should be received by June 14, 2021.
Comments are specifically requested concerning:
Whether the proposed collection of information is necessary for the
proper performance of the IRS, including whether the information will
have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information (including underlying assumptions and
methodology);
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collections of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
The likely respondents required to comply with these proposed
regulations are business, other for-profit taxpayers, or individuals.
The proposed frequency of recordkeeping and reporting requirement will
be as needed.
Estimated total annual reporting burden: 35,000 hours.
Estimated average annual burden hours per respondent: Approximately
10 hours.
Estimated number of respondents: 3,500.
Estimated annual frequency of responses: On occasion (as the
collections of information do not occur on an annual basis).
B. Collection of Information for Proposed Sec. 1.1400Z2(d)-
1(d)(3)(v)(D)
Proposed Sec. 1.400Z2(d)-1(d)(3)(v)(D) imposes an additional
information collection requirement in the form of recordkeeping. The
creation of, or modification of, existing written schedules as required
under proposed Sec. 1.1400Z2(d)-1(d)(3)(v)(D) will be performed by
qualified opportunity zone businesses that want to receive an
additional 24 months to expend their working capital assets, under the
extension of time permitted by proposed Sec. 1.1400Z2(d)-
1(d)(3)(v)(D). This recordkeeping requirement will not be conducted
using a new or existing IRS form. Such businesses must maintain, as
part of their records, a copy of the written working plan including any
modifications to the plan and provide these records to the IRS upon its
request. This modification encourages investment in QOFs by providing
greater specificity to how an entity may consistently satisfy the
statutory requirements to be a qualified opportunity zone business in
light of the current economic climate. However, the increase in burden
on these entities is minimal as these entities were required to
maintain such records prior to the proposed modification if they wanted
to utilize a working capital safe harbor under Sec. 1.1400Z2(d)-
1(d)(3)(v).
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.
Books or records relating to a 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.
III. Regulatory Flexibility Act
It is hereby certified that the proposed regulations under
Sec. Sec. 1.1400Z2(a)-1, 1.1400Z2(a)-2, 1.1400Z2(b)-1, 1.1445-3,
1.1446-3, 1.1446-6, 1.1446-7 and 1.1446(f)-2, if adopted, will not have
a significant economic impact on a substantial number of domestic small
entities within the meaning of section 601(6) of the Regulatory
Flexibility Act (5 U.S.C. chapter 6). Although these proposed
regulations would primarily affect foreign persons, they may have an
impact on a small number of domestic partnerships. The domestic
partnerships affected by these regulations are closely-held
partnerships with significant foreign ownership and that either have
substantial assets that are either U.S. real property interests or
assets used in a U.S. trade or business or a large amount of gain from
the sale of such assets. This is a narrow set of taxpayers and is
likely a small subset of persons that invest in a QOF.
It is hereby certified that the proposed regulation under Sec.
1.1400Z2(d)-1(d)(3)(v)(D), if adopted, will not have a significant
economic impact on a substantial number of small entities within the
meaning of section 601(6) of the Regulatory Flexibility Act. The
Treasury Department and the IRS anticipate that this proposed
regulation will provide added clarity for qualified opportunity zone
businesses to create or modify existing written plans to expend working
capital in the event of a Federally declared disaster.
Taxpayers affected by these proposed regulations include QOFs,
investors in QOFs and qualified opportunity zone businesses in which a
QOF holds an ownership interest. The proposed regulations will not
directly affect the taxable incomes and tax liabilities of qualified
opportunity zone businesses; they will affect only the taxable income
and tax liabilities of QOFs (and owners of QOFs) that invest in such
businesses. Although there is a lack of available data regarding the
extent to which small entities invest in QOFs, will certify as QOFs, or
receive equity investments from QOFs, the Treasury Department and the
IRS project that most of the investment flowing into QOFs will come
from large corporations and wealthy individuals though some of these
funds would likely flow through an intermediary investment partnership.
It is expected that some QOFs and qualified opportunity zone businesses
would be classified as small entities; however, the number of small
entities significantly affected is not likely to be substantial.
Accordingly, the Secretary certifies that these rules will not have a
[[Page 19592]]
significant economic impact on a substantial number of small entities.
Notwithstanding this certification, the Treasury Department and the
IRS invite comments on any impact these regulations would have on small
entities.
Pursuant to section 7805(f), these regulations have been submitted
to the Chief Counsel for the Office of Advocacy of the Small Business
Administration for comment on their impact on small business.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a state,
local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. This rule does not include any Federal mandate that may
result in expenditures by state, local, or tribal governments, or by
the private sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive Order. This proposed rule does not have
federalism implications, does not impose substantial direct compliance
costs on state and local governments, and does not preempt state law
within the meaning of the Executive Order.
Comments and Requests for Public Hearing
Before these proposed amendments to the regulations are adopted as
final regulations, consideration will be given to comments that are
submitted timely to the IRS as prescribed in the preamble under the
ADDRESSES section. The Treasury Department and the IRS request comments
on all aspects of the proposed regulations. Any electronic comments
submitted, and to the extent practicable any paper comments submitted,
will be made available at www.regulations.gov or upon request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are also encouraged to be made electronically. If a
public hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register. Announcement 2020-4,
2020-17 IRB 1, provides that until further notice, public hearings
conducted by the IRS will be held telephonically. Any telephonic
hearing will be made accessible to people with disabilities.
Drafting Information
The principal authors of these proposed regulations are Milton
Cahn, L. Ulysses Chatman, Ronald M. Gootzeit, and Subin Seth of the
Office of the Associate Chief Counsel (International) and Erika Reigle
of the Office of the Associate Chief Counsel (Income Tax & Accounting).
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 Publishing 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
an entry for Sec. 1.1400Z2(a)-2 and revising the entries for
Sec. Sec. 1.1445-3, 1.1446-3, 1.1446-6, 1.1446-7 and 1.1446(f)-2 to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.1400Z2(a)-2 also issued under 26 U.S.C. 1400Z-2(e)(4).
* * * * *
Section 1.1445-3 also issued under 26 U.S.C. 1400Z-2(e)(4) and
26 U.S.C. 1445(e)(7).
* * * * *
Section 1.1446-3 also issued under 26 U.S.C. 1400Z-2(e)(4) and
26 U.S.C. 1446(g).
* * * * *
Section 1.1446-6 also issued under 26 U.S.C. 1400Z-2(e)(4) and
26 U.S.C. 1446(g).
Section 1.1446-7 also issued under 26 U.S.C. 1400Z-2(e)(4) and
26 U.S.C. 1446(g).
* * * * *
Section 1.1446(f)-2 also issued under 26 U.S.C. 1400Z-2(e)(4),
26 U.S.C. 1446(f)(6), and 26 U.S.C. 1446(g).
* * * * *
0
Par. 2. Section 1.1400Z2-0 is amended by:
0
1. Revising the introductory text.
0
2. Adding an entry for Sec. 1.1400Z2(a)-1(a)(3).
0
3. Revising the entry for Sec. 1.1400Z2(a)-1(g)(2).
0
4. Adding an entry for Sec. 1.1400Z2(a)-2.
0
5. Adding an entry for Sec. 1.1400Z2(b)-1(j)(3).
0
6. Revising the entry for Sec. 1.1400Z2(d)-1(e)(2).
The revisions and additions read as follows:
Sec. 1.1400Z2-0 Table of Contents.
This section lists the table of contents for Sec. Sec.
1.1400Z2(a)-1 through 1.1400Z2(f)-2.
Sec. 1.1400Z2(a)-1 Deferring tax on capital gains by investing in
opportunity zones.
(a) * * *
(3) Eligibility certificate needed to establish the permitted
deferral amount for certain foreign persons and foreign-owned
partnerships.
* * * * *
(g) * * *
(2) Exceptions.
Sec. 1.1400Z2(a)-2 Certain foreign persons and foreign-owned
partnerships required to provide security.
(a) In general.
(b) Security-required person.
(1) In general.
(2) Foreign person.
(3) Specified partnership.
(c) Security-required gain.
(1) Definition.
(2) Covered transfer.
(d) Eligibility certificate.
(1) In general.
(2) Application materials.
(3) Application.
(4) Deferral agreement.
(5) U.S. agent agreement.
(6) Security.
(7) Permitted deferral amount.
(e) Example.
(f) Applicability date.
Sec. 1.1400Z2(b)-1 Inclusion of gains that have been deferred under
section 1400Z-2(a).
* * * * *
(j) * * *
(3) Specific rules.
Sec. 1.1400Z2(d)-1 Qualified opportunity funds and qualified
opportunity zone businesses.
* * * * *
[[Page 19593]]
(e) * * *
(2) Exceptions.
* * * * *
0
Par. 3. Section 1.1400Z2(a)-1 is amended by:
0
1. Adding paragraph (a)(3).
0
2. Revising paragraph (g)(1).
0
3. Redesignating paragraphs (g)(2) introductory text and (g)(2)(i) and
(ii) as paragraphs (g)(2)(i) and (g)(2)(i)(A) and (B), respectively.
0
4. Adding a subject heading for newly redesignated paragraph (g)(2).
0
5. Adding new paragraph (g)(2)(ii).
The revisions and additions read as follows:
Sec. 1.1400Z2(a)-1 Deferring tax on capital gains by investing in
opportunity zones.
(a) * * *
(3) Eligibility certificate needed to establish the permitted
deferral amount for certain foreign persons and foreign-owned
partnerships. Notwithstanding any other provision of this section, if a
taxpayer is a security-required person (as defined in Sec.
1.1400Z2(a)-2(b)(1)) with respect to a gain and that gain is a
security-required gain (as defined in Sec. 1.1400Z2(a)-2(c)(1)), then
the taxpayer may not make a deferral election under section 1400Z-2(a)
with respect to part or all of that gain unless the requirements in
paragraph (a)(3)(i), (ii), and (iii) of this section are satisfied.
(i) Not later than the date on which the deferral election is filed
with the IRS under paragraph (a)(2) of this section, the person obtains
an eligibility certificate with respect to that gain (as defined in
Sec. 1.1400Z2(a)-2(d)(1));
(ii) The eligibility certificate provides a permitted deferral
amount (as defined in Sec. 1.1400Z2(a)-2(d)(7)); and
(iii) The amount of gain sought to be deferred does not exceed the
permitted deferral amount.
(iv) See Sec. 1.1400Z2(a)-2 for additional requirements for
certain foreign persons and foreign-owned partnerships to make a valid
deferral election.
(v) Examples. The examples in this paragraph (a)(3)(v) illustrate
the rule in paragraph (a)(3) of this section.
(A) Example 1. Eligibility certificate for a permitted deferral
amount that is less than the total amount of security-required gain.
Taxpayer realizes a $100x gain, which is an eligible gain. In
addition, Taxpayer is a security-required person with respect to
that gain, and the gain is a security-required gain. Taxpayer
invests $100x in a QOF, and, without taking into account the
limitation in paragraph (a)(3)(i) of this section, Taxpayer would be
able to make a valid deferral election with respect to the entire
$100x gain. Taxpayer applies for an eligibility certificate with
respect to that gain and receives the eligibility certificate before
timely filing Taxpayer's Federal income tax return for the taxable
year in which the gain would be recognized. The eligibility
certificate, however, provides a permitted deferral amount of $75x.
Under paragraph (a)(3) of this section, therefore, a valid deferral
election is limited to that deferral amount. Consequently, $75x of
Taxpayer's investment in the QOF is a qualifying investment, which
is described in section 1400Z-2(e)(1)(A)(i), and no election under
section 1400Z-2(a) can apply to the remaining $25x ($100x-$75x)
investment. As a result, that remaining investment in the QOF is a
non-qualifying investment, which is described in section 1400Z-
2(e)(1)(A)(ii).
(B) Example 2. Deferring gain from inclusion. In 2022, Taxpayer
realizes a gain of $x, Taxpayer was a security-required person with
respect to that gain, and the gain was a security-required gain.
Complying with all the requirements in this section (including
paragraph (a)(3) of this section), Taxpayer made a valid election to
defer a gain of $x, after having invested $x in a QOF. In 2025,
after Taxpayer's interest in the QOF had appreciated by $y, Taxpayer
sold that interest for $x + $y. The sale was an inclusion event,
requiring Taxpayer to include in income the deferred gain of $x.
Under paragraph (c)(1) of this section, the $x inclusion is a
security-required gain because the deferred gain was a security-
required gain. If Taxpayer wants to elect to defer the $x of
included gain and Taxpayer is a security-required person with
respect to the included gain, the limitation in paragraph (a)(3) of
this section applies. Whether the $y gain from the sale is a
security-required gain is determined by whether, independent of the
treatment of the inclusion, the $y gain on the sale is within the
definition of security-required gain in Sec. 1.1400Z2(a)-2(c).
* * * * *
(g) * * *
(1) In general. Except as provided in paragraph (g)(2) of this
section, the provisions of this section are applicable for taxable
years beginning after March 13, 2020.
(2) Exceptions. * * *
(ii) Eligibility certificate requirement. Paragraph (a)(3) of this
section applies to any security-required gain (as defined in Sec.
1.1400Z2(a)-2(c)(1)) from a covered transfer (as defined in Sec.
1.1400Z2(a)-2(c)(2)) that occurs after [DATE OF PUBLICATION OF FINAL
RULE].
0
Par. 4. Section 1.1400Z2(a)-2 is added to read as follows:
Sec. 1.1400Z2(a)-2 Certain foreign persons and foreign-owned
partnerships required to provide security.
(a) In general. This section provides definitions and procedures
for certain foreign persons and foreign-owned partnerships to obtain an
eligibility certificates in order to meet the requirement in Sec.
1.1400Z2(a)-1(a)(3) to make a deferral election with respect to certain
gains. Paragraph (b) of this section describes the persons required to
obtain an eligibility certificate. Paragraph (c) of this section
describes the gains for which an eligibility certificate must be
obtained. Paragraph (d) of this section provides the procedures for
obtaining an eligibility certificate and defines the type and amount of
security required.
(b) Security-required person--(1) In general. A security-required
person is, with respect to a gain, a person that would be required to
report the recognition of the gain under Federal income tax principles
and that is either--
(i) A foreign person that is not a partnership, or
(ii) A specified partnership (as defined in paragraph (b)(3) of
this section).
(2) Foreign person. The term foreign person means a person that is
not a United States person under section 7701(a)(30).
(3) Specified partnership. The term specified partnership means,
with respect to a transfer that gives rise to a security-required gain,
a partnership that satisfies the requirements of paragraphs (b)(3)(i)
through (iii) of this section. For purposes of paragraphs (b)(3)(ii)
and (iii) of this section, the look-back period is the period that
begins on the later of the date that is one year before the date of the
transfer or the date on which the partnership was formed, and that ends
on the date of such transfer. A domestic specified partnership means a
specified partnership that is a domestic partnership.
(i) Ownership test. A partnership satisfies the requirements of
this paragraph (b)(3)(i) if, at the time of transfer, 20 percent or
more of the capital or profits interests in the partnership are owned
(directly or indirectly through one or more partnerships, trusts, or
estates) by one or more nonresident aliens or foreign corporations.
(ii) Closely-held test. A partnership satisfies the requirements of
this paragraph (b)(3)(ii) if, at any time during the look-back period,
it has ten or fewer direct partners that own 90 percent or more of the
capital or profits interests in the partnership. For this purpose, any
partners that are related (within the meaning of section 267(b) or
707(b)(1)) are treated as one partner.
(iii) Gain or asset test. A partnership satisfies the requirements
of this paragraph (b)(3)(iii) if either the security-required gain is
$1 million or more (the gain test), or the aggregate value of the
partnership's assets that are United States real property interests (as
defined in section 897(c)) or assets used in the conduct of a trade or
business
[[Page 19594]]
within the United States is, at any time during the look-back period,
equal to or greater than 25 percent of the value of all of the assets
of the partnership (the asset test). In making the calculation under
the asset test described in this paragraph (b)(3)(iii)--
(A) The value of each asset is determined on the last day of the
taxable year before the year in which the look-back period begins or,
for any asset acquired after this date, on the date of acquisition
(including upon formation of the partnership);
(B) The value of each asset is measured according to its gross fair
market value; and
(C) The partnership must include the value of the proportionate
share of any assets held by a partnership in which the first-mentioned
partnership is a direct or indirect partner, but the first-mentioned
partnership must not include the value of a direct or indirect interest
in another partnership.
(c) Security-required gain--(1) Definition. The term security-
required gain means--
(i) The gain from a covered transfer described in paragraphs
(c)(2)(i)(A) or (B) of this section;
(ii) The gain from a covered transfer described in paragraph
(c)(2)(i)(C) of this section that is included in computing effectively
connected taxable income, as determined under Sec. 1.1446-2 (ECTI),
disregarding Sec. 1.1446-2(b)(4)(i); or
(iii) The gain from a covered transfer described in paragraph
(c)(2)(i)(D) of this section that is included in computing ECTI
allocated to a security-required person.
(2) Covered transfer--(i) In general. The term covered transfer
means--
(A) A disposition by, or a distribution to, a security-required
person that is subject to withholding under section 1445 (treating a
security-required person that is a domestic specified partnership as a
foreign person for this purpose);
(B) A disposition by, or a distribution to, a security-required
person that is subject to withholding under section 1446(f) (treating a
security-required person that is a domestic specified partnership as a
foreign person for this purpose);
(C) A disposition by a specified partnership of property, other
than an interest in another partnership or a U.S. real property
interest, or a distribution to a specified partnership, if any gain
that arises is includible in computing ECTI; or
(D) A disposition by a partnership of property, or a distribution
to such a partnership, if any gain that arises is includible (by any
partnership) in determining the allocable share of a security-required
person's ECTI (treating a security-required person that is a domestic
specified partnership as a foreign person for this purpose).
(ii) Exceptions to withholding. A disposition or distribution
described in paragraph (c)(2)(i)(A) or (B) of this section is not a
covered transfer if an exception under Sec. 1.1445-2, 1.1446(f)-2(b),
or 1.1446(f)-4(b) applies (other than an exception pertaining to non-
foreign status in Sec. 1.1445-2(b), Sec. 1.1446(f)-2(b)(2), or Sec.
1.1446(f)-4(b)(2)). In determining whether an exception applies for
purposes of this paragraph (c)(2)(ii), any requirement to provide a
certification to the transferee in order to claim the applicable
exception is disregarded.
(d) Eligibility certificate--(1) In general. This paragraph (d)
defines an eligibility certificate with respect to a gain and describes
the procedures for obtaining such a certificate. The term eligibility
certificate means, with respect to a security-required gain, a document
issued by the IRS pursuant to this paragraph (d) that provides the
permitted deferral amount. The eligibility certificate will also
include the maximum security amount, the amount of security provided,
and any other information as may be prescribed in forms or instructions
or in publications or guidance published in the Internal Revenue
Bulletin (see Sec. Sec. 601.601(d)(2) and 601.602 of this chapter).
Generally, the IRS will make a determination with respect to a complete
application for an eligibility certificate not later than the 90th day
after the date that all information necessary for the IRS to make a
determination is received. At its discretion, the IRS may extend this
period in unusual circumstances after notifying the security-required
person no later than the 45th day after the date that all information
necessary for the IRS to make a determination is received. The IRS will
send a notification to the security-required person of its
determination and, if the application is approved, provide an
eligibility certificate to the security-required person. For the use of
an eligibility certificate to reduce or eliminate certain withholding
taxes, see Sec. Sec. 1.1445-3(e)(5), 1.1446-6(c)(1)(iv), and
1.1446(f)-2(b)(8) and (c)(5).
(2) Application materials. To obtain an eligibility certificate
with respect to security-required gain, a security-required person must
submit to the IRS the application described in paragraph (d)(3) of this
section, the deferral agreement described in paragraph (d)(4) of this
section, the U.S. agent agreement described in paragraph (d)(5) of this
section, and the security (or evidence of security) of the type and in
the amount described in paragraphs (d)(6) and (7) of this section.
(3) Application--(i) In general. An application for an eligibility
certificate must be submitted in the form and in the manner prescribed
in forms or instructions or in publications or guidance published in
the Internal Revenue Bulletin (see Sec. Sec. 601.601(d)(2) and 601.602
of this chapter). An application for an eligibility certificate must
include the information described in paragraphs (d)(3)(ii) and (iii) of
this section and any other information prescribed in forms or
instructions or in publications or guidance published in the Internal
Revenue Bulletin (see Sec. Sec. 601.601(d)(2) and 601.602 of this
chapter). The security-required person must sign the application and
represent under penalties of perjury that all information provided on
or with the application is true, correct, and complete to the best of
that person's knowledge and belief.
(ii) Identification of security-required person and U.S. agent. The
application for an eligibility certificate must include the name,
address, and U.S. taxpayer identification number of the security-
required person, and the name, address, and U.S. taxpayer
identification number of the security-required person's U.S. agent (as
defined in paragraph (d)(4)(ii)(D) of this section).
(iii) Information about the covered transfer--(A) Required
information. The application must identify the type of covered
transfer. For a covered transfer described in paragraph (c)(2)(i)(A),
(B), or (C) of this section that is not a distribution, the application
must include a description of the property transferred in the covered
transfer, the amount of security-required gain, the amount realized,
the adjusted basis in the property, and the maximum security amount.
For a covered transfer described in paragraph (c)(2)(i)(A), (B), or (C)
of this section that is a distribution, the application must include
the amount of the distribution, a description of the property
distributed (including cash), the amount of security-required gain, and
the maximum security amount. For a covered transfer described in
paragraph (c)(2)(i)(D) of this section, the application must include
the amount of security-required gain and the maximum security amount.
In each case, the application for the eligibility certificate must also
identify the amount of security that has been provided and the amount
of security-required gain for which the eligibility certificate is
being obtained. If an
[[Page 19595]]
amount described in this paragraph is not known when the application is
submitted, a security-required person may include a reasonable estimate
of the amount if the estimate is determined no earlier than 120 days
before the covered transfer and the security-required person also
includes in the application documentation of the basis for the estimate
(for example, a purchase contract).
(B) Definition of amount realized. The term amount realized means
for a covered transfer described in paragraph (c)(2)(i)(A) of this
section, the amount determined under Sec. 1.1445-1(g)(5); for a
covered transfer described in paragraph (c)(2)(i)(B) of this section,
the amount determined under Sec. 1.1446(f)-2(c)(2)(i) (or the amount
determined using the alternative procedures under Sec. 1.1446(f)-
2(c)(2)(ii), disregarding any requirement to provide a certification)
or Sec. 1.1446(f)-4(c)(2)(i); and for a covered transfer described in
paragraph (c)(2)(i)(C) of this section, the amount determined under
section 1001(b).
(4) Deferral agreement--(i) In general. A deferral agreement is an
agreement entered into between a security-required person and the IRS
for the deferral of tax and provision of security. The term of the
deferral agreement must not end sooner than 36 months after the due
date (with extensions) for the filing of the security-required person's
Federal income tax return for the taxable year that includes the date
specified in section 1400Z-2(b)(1). The deferral agreement must conform
to any template provided in forms or instructions or in publications or
guidance published in the Internal Revenue Bulletin (see Sec. Sec.
601.601(d)(2) and 601.602 of this chapter).
(ii) Minimum terms and conditions. The minimum terms and conditions
of a deferral agreement are provided in paragraphs (d)(4)(ii)(A)
through (D) of this section. The deferral agreement must also include
any additional terms and conditions provided in a template provided in
forms or instructions or in publications or guidance published in the
Internal Revenue Bulletin (see Sec. Sec. 601.601(d)(2) and 601.602 of
this chapter).
(A) The security-required person will timely file a Federal income
tax return and pay any tax liability due on security-required gain
deferred under section 1400Z-2(a) and the regulations thereunder for
each taxable year in which the security-required person is required to
include the gain or a portion thereof in income under Sec.
1.1400Z2(b)-1.
(B) The security-required person will report any security-required
gain invested in a QOF held at any point during the taxable year in
accordance with Sec. 1.1400Z2(a)-1(d)(2).
(C) The security-required person provides security to the IRS in
the amount required for the security-required gain for which the
security-required person seeks to defer gain under section 1400Z-2(a).
The security may be replaced during the term of the deferral agreement,
to the extent provided in forms or instructions or in publications or
guidance published in the Internal Revenue Bulletin (see Sec. Sec.
601.601(d)(2) and 601.602 of this chapter). Upon a failure to pay any
tax due on security-required gain for which the security-required
person seeks to defer gain under section 1400Z-2(a) when the tax is due
or upon an event of default (as described in paragraph (d)(4)(iii) of
this section) under the deferral agreement, the IRS may collect the
entire amount of the liability by recourse to the security and may
exercise any other rights and remedies of a secured party under
applicable law.
(D) The security-required person appoints a U.S. person to act as
the security-required person's limited agent for purposes of accepting
communication related to the deferral agreement from the IRS, accepting
service of process for the timely enforcement of the terms of the
deferral agreement, and any other purposes specified in the deferral
agreement (U.S. agent). See paragraph (d)(5) of this section for the
agreement that the security-required person must enter into with the
U.S. agent.
(iii) Events of default. The deferral agreement will specify what
is considered a default, the circumstances that give rise to an event
of default, and whether a notice of default and an opportunity to cure
will be provided to the security-required person before an event of
default arises. Defaults include, but are not limited to, a failure by
an issuer of a letter of credit to continue to meet the requirements of
paragraph (d)(6)(ii) of this section throughout the term of the
deferral agreement; a determination by the IRS that the security does
not otherwise adequately secure the interests of the IRS; a
determination by the IRS that the U.S. agent agreement is no longer in
effect; a resignation of the U.S. agent; a failure by the security-
required person to file any required Federal income tax returns and
information returns or pay any tax due during the term of the deferral
agreement; and a failure by the security-required person to attach a
copy of the eligibility certificate to any tax returns, information
returns, forms, or other filings with the IRS as required in the
deferral agreement. The deferral agreement will specify which defaults
will require notification from the IRS and an opportunity to cure
before a default becomes an event of default. For example, the deferral
agreement will provide that a security-required person that fails to
report any security-required gain invested in a QOF held at any point
during the taxable year in accordance with Sec. 1.1400Z2(a)-1(d)(2)
for any given taxable year will be permitted to cure the default by
making the report described in the first sentence of Sec. 1.1400Z2(a)-
1(d)(2) or establishing to the satisfaction of the Commissioner that an
inclusion event described in Sec. 1.1400Z2(b)-1(c) did not occur
during that taxable year. The deferral agreement will specify the date
of an event of default. See Sec. 1.1400Z2(b)-1(c)(1)(v) for the
consequences of an event of default under a deferral agreement.
(5) U.S. agent agreement. The security-required person must enter
into a binding agreement with a U.S. agent (as defined in paragraph
(d)(4)(ii)(D) of this section) authorizing the U.S. agent to act as an
agent (U.S. agent agreement). The U.S. agent agreement must include the
terms and conditions provided in forms or instructions or in
publications or guidance published in the Internal Revenue Bulletin
(see Sec. Sec. 601.601(d)(2) and 601.602 of this chapter). The U.S.
agent agreement must be executed by the security-required person and
the U.S. agent and must remain in effect for as long as the deferral
agreement remains in effect.
(6) Security--(i) In general. The security-required person must
provide to the IRS security described in paragraph (d)(6)(ii) of this
section. The proposed security (and any required documents described in
forms or instructions or in publications or guidance published in the
Internal Revenue Bulletin (see Sec. Sec. 601.601(d)(2) and 601.602 of
this chapter)) must generally be submitted to the IRS with the
security-required person's application for an eligibility certificate.
The maturity date or expiration of the security must not be earlier
than 36 months after the due date (with extensions) for the filing of
the security-required person's Federal income tax return for the
taxable year that includes the date specified in section 1400Z-2(b)(1).
The security cannot be accelerated, cancelled, or otherwise terminated
before maturity, other than at the direction of, or with the consent
of, the IRS. Additional terms and conditions for the security may be
specified in forms or instructions or in publications or guidance
published in
[[Page 19596]]
the Internal Revenue Bulletin (see Sec. Sec. 601.601(d)(2) and 601.602
of this chapter). See paragraph (d)(7) of this section for determining
the required amount of the security.
(ii) Letter of credit. The IRS may accept as security an
irrevocable standby letter of credit that is issued by a U.S. bank that
is categorized as well capitalized in accordance with applicable
Federal banking regulations and regularly issues letters of credit in
the ordinary course of business to customers other than security-
required persons under this paragraph (d)(6), or any other financial
institution acceptable to the IRS, as provided in forms or instructions
or in publications or guidance published in the Internal Revenue
Bulletin (see Sec. Sec. 601.601(d)(2) and 601.602 of this chapter).
(7) Permitted deferral amount--(i) In general. The permitted
deferral amount is the amount for which an eligibility certificate is
issued to a security-required person with respect to a security-
required gain. If a security-required person provides security in an
amount equal to the maximum security amount, the permitted deferral
amount is the total amount of security-required gain. If a security-
required person provides security in an amount less than the maximum
security amount, the permitted deferral amount is the total amount of
security-required gain multiplied by the ratio of the amount of
security provided over the maximum security amount.
(ii) Maximum security amount. The term maximum security amount
means--
(A) For a covered transfer described in paragraph (c)(2)(i)(A) of
this section, the lesser of the amount realized (as defined in
paragraph (d)(3)(iii)(B) of this section) multiplied by the rate
specified in section 1445(a) (or, for a covered transfer subject to
section 1445(e)(1), (e)(2), or (e)(6), the security-required gain
multiplied by the rate specified under the applicable provision) or the
security-required gain multiplied by the highest rate of tax applicable
to the gain, taking into account the type of property, holding period,
and classification of the security-required person (treating a
security-required person that is a partnership or trust as an
individual for this purpose);
(B) For a covered transfer described solely in paragraph
(c)(2)(i)(B) of this section, the lesser of the amount realized (as
defined in paragraph (d)(3)(iii)(B) of this section) multiplied by the
rate specified in section 1446(f)(1), or the security-required gain
multiplied by the highest rate of tax applicable to the gain, taking
into account the type of property, holding period, and classification
of the security-required person (treating a security-required person
that is a partnership or trust as an individual for this purpose);
(C) For a covered transfer described in paragraph (c)(2)(i)(C) of
this section, the security-required gain multiplied by the highest rate
of tax applicable to the gain, taking into account the type of property
and the specified partnership's holding period, and treating the
specified partnership as an individual for this purpose; or
(D) For a covered transfer described in paragraph (c)(2)(i)(D) of
this section, the security-required gain multiplied by the highest rate
of tax applicable to the gain, taking into account the type of
property, the holding period and classification of the security-
required person (treating a security-required person that is a
partnership or trust as an individual for this purpose).
(iii) Example. SRP, an individual who is a security-required
person, disposes of U.S. real property that SRP has held for more
than one year and that has a basis of $80x in a covered transfer
subject to withholding under section 1445(a). The amount realized is
$200x, and the amount of the security-required gain is $120x of
long-term capital gain ($200x amount realized less $80x basis).
Because the covered transfer is described in paragraph (c)(2)(i)(A)
of this section, the maximum security amount is $24x (the lesser of
$30x (the amount realized of $200x multiplied by the rate specified
in section 1445(a), (in 2021, 15%)) and $24x (the security-required
gain of $120x multiplied by the highest rate of tax applicable to
the gain taking into account the type of property, holding period
and the classification of the security-required person (in 2021,
20%))). SRP applies for and receives an eligibility certificate in
accordance with paragraph (d)(1). SRP provides security in the
amount of $15x. Because SRP has provided security in an amount less
than the maximum security amount, the eligibility certificate will
be issued for less than the total amount of security-required gain.
The permitted deferral amount shown on the eligibility certificate
is the total amount of security-required gain ($120x) multiplied by
the ratio of the amount of security provided by SRP ($15x) over the
maximum security amount ($24x). Therefore, SRP will obtain an
eligibility certificate for a permitted deferral amount of $75x
($120x multiplied by 62.5%).
(e) Example. The example in this paragraph (e) illustrates the
rules in this section and Sec. 1.1400Z2(a)-1(a)(3).
(1) Facts. Partnership P is an eligible taxpayer within the
meaning of Sec. 1.1400Z2(a)-1(b)(13) of this section. The relevant
events take place during Years 1 through 3, all of which end earlier
than 2027. At all times during those years, P was owned by 10 equal
partners.
(i) Three eligible gains. During Year 2, P recognized three
gains--G1, G2, and G3--for,
respectively, $750,000 on September 1, $2 million on October 1, and
$2 million on December 20. All three gains were eligible gains
within the meaning of Sec. 1.1400Z2(a)-1(b)(11) and the
transactions that gave rise to the gains were subject to withholding
under section 1445 or 1446.
(ii) Ownership test. On September 1, Year 2, P satisfied the
ownership test in paragraph (b)(3)(i) of this section because on
that date partners O1 through O7 were United
States persons, and partners O8 through O10
were foreign individuals. On October 1, Year 2, P did not satisfy
the ownership test in paragraph (b)(3)(i) of this section because as
of that date partners O9 and O10 had been
replaced by O11 and O12, who were both United
States persons. On December 20, Year 2, P satisfied the ownership
test in paragraph (b)(3)(i) of this section because as of that date
partners O11 and O12 had been replaced by
O13 and O14, which were both foreign
corporations.
(iii) Closely-held test. At all times during Years 1 through 2,
P satisfied the closely-held test in paragraph (b)(3)(ii) of this
section because P was owned by 10 partners.
(iv) Asset test. At all times during Years 1 through 3, P did
not satisfy the asset test in paragraph (b)(3)(iii) of this section
because P had total assets in excess of $100 million, of which less
than $25 million was United States real property interests or assets
used in the conduct of a trade or business within the United States.
(v) Investment in a QOF and election to defer. On January 15 of
Year 3, P invested $4.75 million in a QOF, and on P's timely filed
Federal income tax return for Year 2, P indicated that it was
electing to defer all three gains under Sec. 1.1400Z2(a)-1(a).
These three elections are proper unless they are barred by Sec.
1.1400Z2(a)-1(a)(3).
(2) Analysis--(i) G1. P satisfies the ownership test as of the
date of the transfer. P also satisfies the closely-held test during
the look-back period for G1, but does not satisfy the
asset test during the look-back period for G1. P does not
satisfy the gain test in paragraph (b)(3)(iii) of this section
because the amount of the G1 gain is less than $1
million. As a result, P is not a specified partnership with respect
to G1. Accordingly, P is not a security-required person
with respect to G1, and, thus, P does not need an
eligibility certificate with respect to G1 in order to
make a proper deferral election with respect to G1.
(ii) G2. Unlike G1, G2 ($2 million) is
large enough to satisfy the gain test in paragraph (b)(3)(iii) of
this section ($1 million or more). P also satisfies the closely-held
test during the look-back period for G2. However, P does
not satisfy the ownership test as of the date of transfer.
Accordingly, P is not a specified partnership with respect to
G2 and, thus, P is not a security-required person with
respect to G2. P does not need an eligibility certificate
with respect to G2 in order to make a proper deferral
election with respect to G2.
(iii) G3. P satisfies the ownership test as of the
date of the transfer. P also satisfies the closely-held test during
the look-back period for G3. Also, G3 is large
enough to satisfy the gain test. Accordingly, P is a security-
required person with respect to G3, and G3 is
[[Page 19597]]
a security-required gain. Consequently, P may not elect to defer
G3 unless, not later than the date on which P files its
Federal income tax return for Year 2, P has received an eligibility
certificate with respect to G3. Even if P has received
such an eligibility certificate, P may not elect to defer a larger
amount of G3 than the permitted deferral amount shown on
the eligibility certificate.
(f) Applicability date. This section applies to any covered
transfer that occurs after [DATE OF PUBLICATION OF FINAL RULE].
0
Par. 5. Section 1.1400Z2(b)-1 is amended by:
0
1. Revising paragraph (c)(1)(iv).
0
2. Adding paragraph (c)(1)(v).
0
3. Revising paragraph (j)(1).
0
4. Adding paragraph (j)(3).
The revisions and additions read as follows:
Sec. 1.1400Z2(b)-1 Inclusion of gains that have been deferred under
section 1400Z-2(a).
* * * * *
(c) * * *
(1) * * *
(iv) A QOF in which an eligible taxpayer holds a qualifying
investment loses its status as a QOF; or
(v) An event of default occurs under a deferral agreement
(described in Sec. 1.1400Z2(a)-2(d)(4)) entered into between a
security-required person and the IRS (in which case the deferred gain
to be included is the gain whose deferral was made possible by the
eligibility certificate that was based on the agreement).
* * * * *
(j) * * *
(1) In general. Except as provided in paragraph (j)(3) of this
section, the provisions of this section are applicable for taxable
years beginning after March 13, 2020.
* * * * *
(3) Specific rules. Paragraph (c)(1)(v) of this section applies to
any deferral agreement (as defined in Sec. 1.1400Z2(a)-2(d)(4))
entered into after [DATE OF PUBLICATION OF FINAL RULE].
0
Par. 6. Section 1.1400Z2(d)-1 is amended by:
0
1. Revising paragraphs (d)(3)(v)(D) and (e)(1).
0
2. Redesignating paragraphs (e)(2) introductory text and (e)(2)(i) and
(ii) as paragraphs (e)(2)(i) and (e)(2)(i)(A) and (B).
0
3. Adding a subject heading for newly redesignated paragraph (e)(2).
0
4. Adding new paragraph (e)(2)(ii).
The revisions and additions read as follows:
Sec. 1.1400Z2(d)-1 Qualified opportunity funds and qualified
opportunity zone businesses.
* * * * *
(d) * * *
(3) * * *
(v) * * *
(D) Federally declared disasters. If the qualified opportunity zone
business is located in a qualified opportunity zone impacted by a
federally declared disaster (as defined in section 165(i)(5)(A)), the
qualified opportunity zone business may receive not more than an
additional 24 months to expend its working capital assets, as long as
it otherwise meets the requirements of paragraph (d)(3)(v) of this
section. For purposes of the preceding sentence, meeting the
requirements of paragraph (d)(3)(v) of this section may be determined
by reference either to the original amount of working capital assets
designated in writing under paragraph (d)(3)(v)(A) of this section and
reasonable written schedule under paragraph (d)(3)(v)(B) of this
section or to a new or revised written designation and written schedule
that satisfy the requirements of paragraph (d)(3)(v)(A) and (B) of this
section, respectively. A new or revised written designation of the
amount of working capital assets and reasonable written schedule for
expending that amount may be used only if adopted not later than 120
days after the close of the incident period, as defined in 44 CFR
206.32(f), with respect to that disaster. In determining whether a new
or revised schedule satisfies the requirements of paragraph
(d)(3)(v)(B) of this section, the planned completion of spending must
take into account the up-to-31 month period originally allowed under
paragraph (d)(3)(v)(B) of this section, plus the up-to-24 additional
months provided in this paragraph (d)(3)(v)(D).
* * * * *
(e) * * *
(1) In general. Except as provided in paragraph (e)(2) of this
section, the provisions of this section are applicable for taxable
years beginning after March 13, 2020.
(2) Exceptions. * * *
(ii) Flexibility with respect to working capital safe harbor plans
in the event of a federally declared disaster. The final three
sentences in paragraph (d)(3)(v)(D) are applicable for taxable years
beginning after [DATE OF PUBLICATION OF FINAL RULE].
0
Par. 7. Section 1.1445-3 is amended by adding paragraph (e)(5) to read
as follows:
Sec. 1.1445-3 Adjustments to amount required to be withheld pursuant
to withholding certificate.
* * * * *
(e) * * *
(5) Special rule for gain deferred under section 1400Z-2(a). The
Internal Revenue Service will issue a withholding certificate under
this paragraph (e) that excuses withholding or that permits a
transferee to withhold a reduced amount if the transferor has obtained
an eligibility certificate under Sec. 1.1400Z2(a)-2 from the IRS with
respect to the transfer. The amount by which the transferee may reduce
the withholding (including a reduction to zero) is the amount of
security provided on the eligibility certificate. If this paragraph
(e)(5) applies, the requirements in paragraphs (e)(1) through (e)(4) of
this section are deemed to have been satisfied. This paragraph (e)(5)
applies to any covered transfer defined in Sec. 1.1400Z2(a)-2(c)(2)
that occurs after [DATE OF PUBLICATION OF FINAL RULE].
* * * * *
0
Par. 8. Section 1.1446-3 is amended by revising paragraph
(b)(2)(i)(B)(1) introductory text to read as follows:
Sec. 1.1446-3 Time and manner of calculating and paying over the 1446
tax.
* * * * *
(b) * * *
(2) * * *
(i) * * *
(B) * * *
(1) To the extent applicable, in computing the 1446 tax due with
respect to a foreign partner, a partnership may consider a certificate
received from such partner under Sec. 1.1446-6(c)(1)(i), (ii) or (iv)
and the amount of state and local taxes permitted to be considered
under Sec. 1.1446-6(c)(1)(iii). For this purpose, a partnership shall
first consider under Sec. 1.1446-6(c)(1)(iv) the partner's permitted
deferral amounts and then annualize the partner's allocable share of
the partnership's items of effectively connected income, gain,
deduction, and loss before--
* * * * *
0
Par. 9. Section 1.1446-6 is amended by:
0
1. Revising paragraph (a)(1).
0
2. Revising the first sentence of paragraph (a)(2).
0
3. Adding a sentence at the end of paragraph (c)(1).
0
4. Adding paragraph (c)(1)(iv).
0
5. Adding a sentence at the end of paragraph (c)(2)(i).
0
6. Revising the seventh sentence of paragraph (d)(3)(i).
0
7. Adding a sentence at the end of paragraph (f).
The revisions and additions read as follows:
[[Page 19598]]
Sec. 1.1446-6 Special rules to reduce a partnership's 1446 tax with
respect to a foreign partner's allocable share of effectively connected
taxable income.
(a) In general--(1) Purpose and scope. This section provides rules
regarding when a partnership required to pay withholding tax under
section 1446 (1446 tax), or an installment of 1446 tax, may consider
certain partner-level deductions and losses and eligibility
certificates under Sec. 1.1400Z2(a)-2(d) in computing its 1446 tax
obligation under Sec. 1.1446-3. This section also provides rules
regarding when a partnership is not required to pay a de minimis amount
of 1446 tax due with respect to a nonresident alien individual partner.
A partnership determines the applicability of the rules of this section
on a partner-by-partner basis for each installment period and when
completing its Form 8804, ``Annual Return for Partnership Withholding
Tax (Section 1446),'' and paying 1446 tax for the partnership taxable
year. Except with respect to certain state and local taxes paid by the
partnership on behalf of the partner, to apply the rules of this
section with respect to a foreign partner, the partnership must receive
a certificate described in Sec. 1.1446-6(c)(1)(i) and (ii) from such
partner for each partnership taxable year or an eligibility certificate
described in Sec. 1.1400Z2(a)-2(d) for each security-required gain (as
defined in Sec. 1.1400Z2(a)-2(c)(1)). Paragraph (b) of this section
identifies the foreign partners to which this section applies.
Paragraph (c) of this section identifies the deductions and losses and
security-required gains that a foreign partner may certify to the
partnership as well as the state and local taxes paid by the
partnership on behalf of the foreign partner that can be taken into
account without a certification, and establishes an exception that
permits a partnership to not pay a de minimis amount of 1446 tax with
respect to a nonresident alien partner. Paragraph (c) of this section
also sets forth the requirements for a valid certificate. Paragraphs
(a)(2) and (d) of this section establish when a partnership may rely on
and consider a foreign partner's certificate in computing its 1446 tax,
and the effects of relying on such a certificate. Paragraph (d) of this
section also describes the effects of a partnership relying on a
certificate (including an updated certificate) and the reporting
requirements of a partnership with respect to a certificate. Paragraph
(e) of this section sets forth examples that illustrate the rules of
this section. Paragraph (f) of this section provides the Effective/
Applicability date. Paragraph (g) of this section provides a transition
rule.
(2) Reasonable reliance on a certificate. Subject to Sec. 1.1446-2
and the rules of this section, a partnership receiving a certificate
(including an updated certificate or status update under paragraph
(c)(2)(ii)(B) of this section) of deductions and losses or an
eligibility certificate from a partner provided in accordance with the
provisions of this section may reasonably rely on the certificate of
deductions and losses (to the extent of the certified deductions and
losses or other representations set forth in the certificate) or
eligibility certificate (to the extent of the permitted deferral amount
determined in Sec. 1.1400Z2(a)-2(d)(7)) until such time that it has
actual knowledge or reason to know that the certificate is defective or
that the time for receiving an updated certificate or status update
from the partner under paragraph (c)(2)(ii)(B) of this section has
expired. * * *
* * * * *
(c) * * *
(1) * * * Under paragraph (c)(1)(iv) of this section, a partnership
may take into account eligibility certificates submitted by a foreign
partner with respect to security-required gains.
* * * * *
(iv) Consideration of eligibility certificates. A partner that is a
nonresident alien or foreign corporation that satisfies the
requirements of Sec. 1.1400Z2(a)-1(a)(3) may provide a copy of an
eligibility certificate, as defined in Sec. 1.1400Z2(a)-2(d)(1), for
each of the partner's security-required gains, as defined in Sec.
1.1400Z2(a)-2(c)(1).
* * * * *
(2) * * *
(i) * * * A partner's certification under paragraph (c)(1)(iv) of
this section shall be the eligibility certificate described in Sec.
1.1400Z2(a)-2(d)(1).
* * * * *
(d) * * *
(3) * * *
(i) * * * For an installment period other than the first
installment period for which the partnership considers a foreign
partner's certificate or updated certificate, the partnership may,
instead of attaching any partner's certificate, attach to Form 8813 a
list containing the name, TIN, the amount of certified deductions and
losses, the amount of gain excluded resulting from an eligibility
certificate, and the amount of state and local taxes the partnership
may consider under paragraph (c)(1)(iii) of this section for each
foreign partner whose certificate was relied upon.
* * * * *
(f) * * * Paragraph (c)(1)(iv) of this section and the references
in paragraphs (a)(1), (a)(2), (c)(1), and (d)(3)(i) of this section to
eligibility certificates, covered transfers and security-required
gains, apply to any covered transfers (as defined in Sec. 1.1400Z2(a)-
2(c)(2)) occurring after [DATE OF PUBLICATION OF FINAL RULE].
* * * * *
0
Par. 10. Section 1.1446-7 is amended by adding a sentence at the end of
the section to read as follows:
Sec. 1.1446-7 Effective/Applicability date.
* * * The references in Sec. 1.1446-3(b)(2)(i)(B)(1) to Sec.
1.1446-6(c)(1)(iv) apply to partnership taxable years ending after
[DATE OF PUBLICATION OF FINAL RULE].
0
Par. 11. Section 1.1446(f)-2 is amended by adding paragraphs (b)(8) and
(c)(5) and by adding a sentence to the end of paragraph (f) to read as
follows:
Sec. 1.1446(f)-2 Withholding on the transfer of a non-publicly traded
partnership interest.
* * * * *
(b) * * *
(8) Gain deferred under section 1400Z-2(a). A transferee may rely
on a certification from the transferor that includes a copy of an
eligibility certificate (as described in Sec. 1.1400Z2(a)-2(d)) with
respect to the transfer for an amount of security that is greater than
or equal to the maximum security amount. See paragraph (c)(5) of this
section for when an eligibility certificate provides an amount of
security that is less than the maximum security amount.
(c) * * *
(5) Gain deferred under section 1400Z-2(a). A transferee may rely
on a certification from a transferor that includes a copy of an
eligibility certificate (as described in Sec. 1.1400Z2(a)-2(d)) with
respect to the transfer to reduce the amount required to be withheld
under this section by the amount of security provided on the
eligibility certificate.
* * * * *
(f) Applicability date. * * * Paragraphs (b)(8) and (c)(5) of this
section apply to any covered transfer (as defined in Sec. 1.1400Z2(a)-
2(c)(2)) that
[[Page 19599]]
occurs after [DATE OF PUBLICATION OF FINAL RULE].
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2021-06143 Filed 4-12-21; 4:15 pm]
BILLING CODE 4830-01-P