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helicopters as having MOD 332P087140.00 (h) Subject DEPARTMENT OF THE TREASURY installed: Model AS332L2 serial numbers (S/ Joint Aircraft Service Component (JASC) Ns) 2388, 2390, 2565, 2573, 2577, 2578, and Code: 6320, Main Rotor Gearbox. Internal Revenue Service 2587; and Model EC225LP S/Ns 2600, 2623, 2645, 2650, 2651, 2653, 2659, 2684, 2693, (i) Material Incorporated by Reference 26 CFR Part 1 2711, 2712, 2719, 2753, 2756, 2767, 2796, (1) The Director of the Federal Register 2926, 2961, 2973, 2974, 2979, 3002, 3003, [TD 9919] and 3012. approved the incorporation by reference (IBR) of the service information listed in this (3) After the effective date of this AD, do RIN 1545–BO86 paragraph under 5 U.S.C. 552(a) and 1 CFR not install a jettisonable cabin window unless you comply with the requirements of part 51. Gain or Loss of Foreign Persons From paragraph (e)(1) or (e)(2) of this AD, as (2) You must use this service information Sale or Exchange of Certain applicable to your model helicopter and as applicable to do the actions required by Partnership Interests configuration. this AD, unless the AD specifies otherwise. (i) Airbus Helicopters Alert Service AGENCY: Internal Revenue Service (IRS), (f) Alternative Methods of Compliance Bulletin (ASB) No. AS332–05.01.05, Revision Treasury. (AMOCs) 1, dated February 8, 2018. ACTION: Final regulations and temporary (1) The Manager, Rotorcraft Standards (ii) Airbus Helicopters ASB No. AS332– regulations. Branch, FAA, may approve AMOCs for this 05.01.05, Revision 2, dated April 10, 2019. AD. Send your proposal to: Matt Fuller, AD (iii) Airbus Helicopters ASB No. AS332– SUMMARY: This document contains Program Manager, Operational Safety Branch, 05.01.05, Revision 3, dated February 10, regulations that provide guidance for Airworthiness Products Section, General certain foreign persons that recognize Aviation and Rotorcraft Unit, 10101 2020. Hillwood Pkwy., Fort Worth, TX 76177; (iv) Airbus Helicopters ASB No. AS332– gain or loss from the sale or exchange telephone 817–222–5110; email 9-ASW-FTW- 05.01.05, Revision 4, dated September 23, of an interest in a partnership that is [email protected]. 2020. engaged in a trade or business within (2) For operations conducted under a 14 (v) Airbus Helicopters ASB No. AS332– the United States. The regulations also CFR part 119 operating certificate or under 56.90.13, Revision 0, dated February 8, 2018. affect partnerships that, directly or 14 CFR part 91, subpart K, the FAA suggests (vi) Airbus Helicopters ASB No. EC225– indirectly, have foreign persons as that you notify your principal inspector, or 05A046, Revision 1, dated February 8, 2018. partners. lacking a principal inspector, the manager of (vii) Airbus Helicopters ASB No. EC225– the local flight standards district office or DATES: Effective date: These regulations 05A046, Revision 2, dated April 10, 2019. are effective on November 6, 2020. certificate holding district office, before (viii) Airbus Helicopters ASB No. EC225– Applicability dates: For dates of operating any aircraft complying with this 05A046, Revision 3, dated February 10, 2020. AD through an AMOC. applicability, see §§ 1.864(c)(8)–1(j) and (ix) Airbus Helicopters ASB No. EC225– 1.897–7(c). (g) Additional Information 56C012, Revision 0, dated February 8, 2018. FOR FURTHER INFORMATION CONTACT: (1) Airbus Helicopters Information Notice (3) For service information identified in No. 3012–I–05, Revision 0, dated March 8, this AD, contact Airbus Helicopters, 2701 N. Chadwick Rowland or Ronald M. 2016, Airbus Helicopters ASB No. AS332– Forum Drive, Grand Prairie, TX 75052; Gootzeit, (202) 317–6937 (not a toll-free 56.90.14, Revision 0, dated April 10, 2019, telephone 972–641–0000 or 800–232–0323; call). Airbus Helicopters ASB No. AS332–56.00.16, fax 972–641–3775; or at https:// SUPPLEMENTARY INFORMATION: Revision 0, dated February 10, 2020, Airbus www.airbus.com/helicopters/services/ Helicopters ASB No. AS332–56.00.18, technical-support.html. Background Revision 0, Airbus Helicopters ASB No. (4) You may view this service information On December 27, 2018, the AS332–56.00.20, Revision 0, and Airbus at the FAA, Office of the Regional Counsel, Department of the Treasury (the Helicopters ASB No. AS332–56.00.21, Southwest Region, 10101 Hillwood Pkwy., ‘‘Treasury Department’’) and the IRS Revision 0, all dated September 23, 2020, Room 6N–321, Fort Worth, TX 76177. For Airbus Helicopters ASB No. EC225–56A013, published proposed regulations (REG– Revision 1, Airbus Helicopters ASB No. information on the availability of this 113604–18) under section 864(c)(8) in EC225–56A015, Revision 0, Airbus material at the FAA, call 817–222–5110. the Federal Register (83 FR 66647) (the Helicopters ASB No. EC225–56A016, (5) You may view this service information ‘‘proposed regulations’’). Section Revision 0, and Airbus Helicopters ASB No. that is incorporated by reference at the 864(c)(8) was added to the Internal EC225–56A017, Revision 0, all dated National Archives and Records Revenue Code (the ‘‘Code’’) by the Tax February 10, 2020, which are not Administration (NARA). For information on Cuts and Jobs Act, Public Law 115–97 incorporated by reference, contains the availability of this material at NARA, (2017) (the ‘‘Act’’), which was enacted additional information about the subject of email [email protected], or go to: https:// on December 22, 2017. The proposed this AD. For service information identified in www.archives.gov/federal-register/cfr/ibr- regulations provide rules for this AD, contact Airbus Helicopters, 2701 N locations.html. Forum Drive, Grand Prairie, TX 75052; determining the amount of gain or loss telephone 972–641–0000 or 800–232–0323; Issued on November 2, 2020. treated as effectively connected with the fax 972–641–3775; or at https:// Gaetano A. Sciortino, conduct of a trade or business within the United States (‘‘effectively www.airbus.com/helicopters/services/ Deputy Director for Strategic Initiatives, technical-support.html. You may view the Compliance & Airworthiness Division, connected gain’’ or ‘‘effectively referenced service information at the FAA, Aircraft Certification Service. connected loss’’) under section Office of the Regional Counsel, Southwest 864(c)(8), including certain rules that [FR Doc. 2020–24626 Filed 11–5–20; 8:45 am] Region, 10101 Hillwood Pkwy., Room 6N– coordinate section 864(c)(8) with other 321, Fort Worth, TX 76177. BILLING CODE 4910–13–P relevant sections of the Code. (2) The subject of this AD is addressed in The Treasury Department and the IRS European Union Aviation Safety Agency (EASA) AD No. 2018–0039R1, dated received written comments with respect September 25, 2020. You may view the EASA to the proposed regulations. All written AD on the internet at https:// comments received in response to the www.regulations.gov in Docket No. FAA– proposed regulations are available at 2019–1019. www.regulations.gov or upon request.

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No public hearing on the proposed determine the amount of effectively and loss and, in turn, for determining regulations was requested or held. connected gain or effectively connected deemed sale EC gain and loss. The Treasury Department and the IRS loss under section 864(c)(8). In general, In general, proposed § 1.864(c)(8)– have also published proposed this amount is determined through a 1(c)(2)(i) treats all deemed sale gain and regulations (REG–105476–18) in the three-step process. Step one determines loss as attributable to an office or other Federal Register relating to the the amount of gain or loss from each fixed place of business maintained by withholding of tax and information partnership asset as if the partnership the partnership in the United States, reporting with respect to certain conducted a deemed sale of all of its and does not treat inventory property as dispositions by a foreign person of an assets on the date of transfer (these sold for use, disposition, or interest in a partnership that is engaged amounts, deemed sale gain or deemed consumption outside the United States in the conduct of a trade or business sale loss). Step two determines the in a sale in which an office or other within the United States (the ‘‘proposed amount of the deemed sale gain or loss fixed place of business maintained by withholding regulations’’). See 84 FR that would be treated as effectively the partnership in a foreign country 21198 (May 13, 2019). The Treasury connected gain or loss with respect to materially participates. Thus, the rule in Department and the IRS plan to publish each asset (these amounts are referred to proposed § 1.864(c)(8)–1(c)(2)(i) final withholding and information as deemed sale EC gain or deemed sale provides simplifying factual reporting regulations in a later issue of EC loss). Finally, step three determines assumptions that generally treat deemed the Federal Register. the foreign transferor’s distributive sale gain and loss as U.S. source. An exception to this rule is provided in the Summary of Comments and share of the deemed sale EC gain or proposed regulations if, during the ten- Explanation of Revisions deemed sale EC loss amounts determined in step two. year period ending on the date of I. Overview transfer, the asset in question produced As noted in the preceding paragraph, no income or gain that was taxable as The final regulations retain the basic step two requires the gain or loss from income that was effectively connected approach and structure of the proposed the deemed sale of each partnership with the conduct of a trade or business regulations with certain revisions. This asset to be analyzed to determine if the within the United States by the Summary of Comments and Explanation gain or loss is properly characterized as partnership (or a predecessor), and the of Revisions section discusses the effectively connected gain or effectively comments received in response to the asset has not been used, or held for use, connected loss. Sourcing determinations in the conduct of a trade or business solicitation of comments in the are often material in determining proposed regulations and explains the within the United States by the whether gain or loss is effectively partnership (or a predecessor) (the ‘‘ten- revisions made in response to those connected with the conduct of a trade comments. year exception’’). Proposed or business within the United States. § 1.864(c)(8)–1(c)(2)(ii). II. Comments and Revisions to See, for example, sections 864(c)(2) and A comment on the interaction Proposed § 1.864(c)(8)–1 (3). Because the sourcing rules in the between section 864(c)(8) and the Code and regulations are generally fact- sourcing rules suggested that the A. Determining Deemed Sale EC Gain or specific, the application of these rules in Deemed Sale EC Loss simplifying factual assumptions the context of the deemed sale required supplied by the rule in proposed Section 864(c)(8)(A) provides that by section 864(c)(8)(B) is unclear. For § 1.864(c)(8)–1(c)(2)(i) may overstate the gain or loss of a nonresident alien example, it is unclear how to apply the amount of effectively connected gain or individual or foreign corporation (a sourcing rules and principles contained loss on a deemed sale of the ‘‘foreign transferor’’) from the sale, in sections 865(e)(2)(A) and (e)(3) (and partnership’s assets, as compared to an exchange, or other disposition the regulations implementing those actual asset sale, by treating all gain or (‘‘transfer’’) of an interest in a sections) (the U.S. office rule) to the loss from the deemed sale as attributable partnership that is engaged in any trade deemed sale of partnership property to a U.S. office of the partnership, or business within the United States is required by section 864(c)(8)(B). subject only to the ten-year exception. treated as effectively connected gain or Specifically, the application of the U.S. As a result, the proposed regulations loss to the extent such gain or loss does office rule depends upon factual would similarly overstate the amount of not exceed the amount determined determinations made regarding the the deemed sale limitation. To address under section 864(c)(8)(B). In general, underlying sale; that is, whether it is this concern, the comment suggested section 864(c)(8)(B) limits the amount of attributable to an office or other fixed that in determining deemed sale EC gain effectively connected gain or loss to the place of business in the United States, and loss, the final regulations should portion of the foreign transferor’s and, with respect to inventory property, aim to provide a result that is no better distributive share of gain or loss that whether it is sold for use, disposition, or worse than the result that would would have been effectively connected or consumption outside the United occur upon an actual asset sale by the if the partnership had sold all of its States and whether an office or other partnership, but the comment assets at fair market value (the deemed fixed place of business maintained by acknowledged the difficulty in sale limitation). The proposed the taxpayer in the foreign country achieving this objective because the regulations illustrate how to determine materially participated in the sale. In a underlying source rules largely rely on the deemed sale limitation described in deemed sale, however, the required fact-specific determinations. section 864(c)(8)(B), which the proposed facts are generally not determinable The Treasury Department and the IRS regulations refer to as the aggregate because a sale has not actually occurred. generally agree with the broad deemed sale EC (‘‘ADSEC’’) amount. Therefore, to address this lack of principles described in the comment Once the ADSEC amount has been required facts and provide guidance on regarding proposed § 1.864(c)(8)–1(c)(2). determined for each applicable category how to apply the sourcing provisions to While these final regulations retain the of gain or loss, the foreign transferor’s deemed sales, the proposed regulations basic framework of the proposed outside gain or loss in each category is provide rules that serve as a proxy for regulations, including the factual compared to the relevant ADSEC gain or the factual determinations that apply for determinations regarding office ADSEC loss amount for that category to purposes of sourcing deemed sale gain attribution provided in proposed

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§ 1.864(c)(8)–1(c)(2)(i), these final by the partnership in the United States, asset-specific rules use existing sourcing regulations adjust their effects by adding and does not treat inventory property as rules and principles to provide fair, rules for sourcing gain or loss from sold for use, disposition, or administrable rules that can be applied specific assets that may be particularly consumption outside the United States consistently. Specifically, the foreign difficult to source in a deemed sale. in a sale in which an office or other source portion of deemed sale gain or § 1.864(c)(8)–1(c)(2)(ii)(B) through (E). fixed place of business maintained by loss attributable to inventory property (as defined in section 865(i)(1)) is 1. Ten-Year Exception the partnership in a foreign country materially participated. These final determined using a proxy method that The final regulations provide that regulations make several changes to the is based on historical data (as suggested deemed sale EC gain and loss is general rule provided in proposed by the comment); the foreign source determined by applying section 864 and § 1.864(c)(8)–1(c)(2)(i) in response to the portion of deemed sale gain and loss the regulations thereunder. comment described in section II.A of attributable to intangibles (as defined in § 1.864(c)(8)–1(c)(2)(i)(A). These final this Summary of Comments and section 865(d)(2)) is determined using a regulations retain the ten-year exception Explanation of Revisions; these final proxy method that is based on the as an exception to the determination of regulations also clarify the scope of this partnership’s historic income; and the deemed sale EC gain and loss under rule. First, these final regulations clarify foreign source portion for certain § 1.864(c)(8)–1(c)(2)(i)(A). The ten-year that the general rule applies only for deemed sale gain or loss attributable to exception is intended to remove assets purposes of applying section depreciable personal property (as that have no nexus to the United States 865(e)(2)(A) to personal property held defined in section 865(c)(4)(A)) is from the deemed sale EC gain and loss by the partnership on the date of the determined under a recapture principle determination; therefore, for these deemed sale. § 1.864(c)(8)–1(c)(2)(ii)(A). and, to the extent applicable, a proxy assets, a foreign transferor does not need Second, these final regulations provide method that is also based on historical to apply the rules described in additional sourcing rules for data. Additionally, these final § 1.864(c)(8)–1(c)(2)(ii) to determine determining the foreign source portion regulations add a material change in deemed sale EC gain and loss. One of deemed sale gain and loss attributable circumstances rule in § 1.864(c)(8)– comment requested that the final to specific assets included in the 1(c)(2)(ii)(E) that applies if, based on a regulations clarify that the ten-year deemed sale. § 1.864(c)(8)–1(c)(2)(ii)(B) material change in circumstances, the exception applies to assets that were not through (E). The specific assets are asset-specific rules for inventory held by the partnership for the full ten- inventory, intangibles, and depreciable property or intangibles do not reach an year period. As requested by the personal property. Additional sourcing appropriate sourcing result. comment, these final regulations modify rules are needed because gain or loss Thus, to the extent that deemed sale the relevant testing period for the ten- from actual sales of each of these assets gain or loss is attributable to inventory, year exception to account for a would be subject to specific sourcing intangibles, or depreciable personal partnership (including a predecessor of rules under the Code, but sourcing property, the sourcing result for these the partnership) that has not existed for deemed sale gain or loss under those assets is determined by first applying at least ten years, or that has not held rules would generally require facts that § 1.864(c)(8)–1(c)(2)(ii)(A) and then, to an asset for at least ten years, by are not determinable in a deemed sale. the extent applicable, the asset-specific shortening the relevant testing period to These final regulations also clarify that rules provided in § 1.864(c)(8)– the lesser of the ten-year period ending 1(c)(2)(ii)(B) through (D), or the material if the partnership does not maintain an on the date of the transfer or the period change in circumstances rule provided office or other fixed place of business in during which the partnership (and a in § 1.864(c)(8)–1(c)(2)(ii)(E). the United States (within the meaning of predecessor of the partnership) held the Accordingly, the U.S. office attribution section 864(c)(5)(A) and § 1.864–7), asset. § 1.864(c)(8)–1(c)(2)(i)(B). In rule described in § 1.864(c)(8)– neither the U.S. office attribution addition, to ensure that the ten-year 1(c)(2)(ii)(A) applies to these assets only described in § 1.864(c)(8)–1(c)(2)(ii)(A), exception is properly applied, these to the extent that the deemed sale gain nor the additional sourcing rules final regulations also modify the or loss exceeds the relevant foreign described in § 1.864(c)(8)–1(c)(2)(ii)(B) relevant testing period to include any source portion determined under the through (E), will apply. § 1.864(c)(8)– period during which the foreign relevant rule provided in § 1.864(c)(8)– 1(c)(2)(ii)(A). Finally, the final transferor (and a predecessor of the 1(c)(2)(ii)(B) through (E). foreign transferor) held the asset. Id. regulations reorganize the proposed Accordingly, an asset will not qualify regulations to account for the changes i. Look-Back Rule for Inventory Property for the ten-year exception if it generated described in this section II.A.2 of this The comment on the interaction effectively connected income or Summary of Comments and Explanation between section 864(c)(8) and the effectively connected gain for the of Revisions, and the phrase in sourcing rules recommended that the foreign transferor (or a predecessor of proposed § 1.864(c)(8)–1(c)(2)(i) Treasury Department and IRS consider the foreign transferor), or if the asset regarding use, disposition, or a separate rule for sourcing deemed was used in the conduct of a trade or consumption outside the United States sales of inventory based on historical business within the United States by the is removed to conform with changes data showing how inventory sales were foreign transferor (or a predecessor of made to the general rule and the sourced by the partnership over a the foreign transferor), within the addition of a specific inventory sourcing specified period. The Treasury relevant testing period. Id. rule. Department and the IRS agree with the The asset-specific rules provided in suggestion. 2. Rules for Sourcing Deemed Sale Gain § 1.864(c)(8)–1(c)(2)(ii)(B) through (E) Section 1.864(c)(8)–1(c)(2)(ii)(B) and Loss for Purposes of Determining utilize available facts as a proxy for the provides a look-back rule for Deemed Sale EC Gain and Loss sourcing results, and the attendant determining the foreign source portion Proposed § 1.864(c)(8)–1(c)(2)(i) treats effectively connected determinations, of deemed sale gain or loss attributable all gain or loss from the deemed sale of that would occur in an actual sale by the to inventory property (as defined in an asset as attributable to an office or partnership of inventory, intangibles, or section 865(i)(1), but not including gain other fixed place of business maintained depreciable personal property. These sourced by reference to section

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865(c)(2)) that is held by the partnership in lieu of the simplifying factual of a trade or business within the United on the date of the deemed sale. assumptions supplied by the rule in States; the denominator includes the Specifically, the general rule provided proposed § 1.864(c)(8)–1(c)(2)(i) as it total gross ordinary income of the in § 1.864(c)(8)–1(c)(2)(ii)(A) will not applies to intangibles. The Treasury partnership (other than from apply, and the deemed sale of inventory Department and the IRS agree that it is dispositions of depreciable or property will not be treated as difficult to source deemed sale gain or amortizable property) during that attributable to an office or other fixed loss attributable to intangibles and that period. § 1.864(c)(8)–1(c)(2)(ii)(C)(1) and place of business maintained by the a single, administrable rule to address (2). This foreign source intangible ratio partnership in the United States, to the this issue is preferable. To minimize the looks specifically to the historic gross extent of foreign source inventory gain difficulty of applying the sourcing rules ordinary income of the partnership (as or loss. This amount is determined by to intangible property and to provide opposed to all the historic gross income multiplying deemed sale gain and loss more certainty, the final regulations of the partnership) in order to more attributable to inventory by a fraction provide a separate rule for intangibles accurately reflect the partnership’s that determines the foreign source (including going concern value) that income derived from the use of the inventory ratio. The numerator of the determines the foreign source portion of intangibles in the ordinary course of its fraction includes the gross income of the deemed sale gain or loss attributable to trade or business. This rule does not partnership that is attributable to foreign intangibles by using a proxy method apply to the extent of any depreciation source gain or loss from inventory that is based on the source of the adjustments (as defined in section property (as determined under the rules partnership’s historic gross ordinary 865(c)(4)(B)) with respect to an of sections 865(b) and 865(e)) sold income. amortizable intangible; instead, the within the shorter of the period Section 1.864(c)(8)–1(c)(2)(ii)(C) rules regarding depreciable personal comprised of the partnership’s three provides a look-back rule for property will apply to such adjustments. taxable years immediately preceding the determining the foreign source portion iii. Special Rules for Foreign Source date of the deemed sale, or the existence of deemed sale gain or loss attributable Inventory Ratio and Foreign Source of the partnership (measured by to an intangible (as defined in section Intangible Ratio partnership taxable years); the 865(d)(2)) held by the partnership on denominator of the fraction is the total the date of the deemed sale. This rule The foreign source inventory ratio and gross income of the partnership that is is similar to the look-back rule for foreign source intangible ratio may in attributable to inventory over that inventory property because it provides certain circumstances cause period. that the deemed sale of an intangible mathematically impossible results or This approach addresses the concerns will not be treated as attributable to an unclear application if cost of goods sold raised in the comment by looking to the office or other fixed place of business exceed gross receipts. Additional rules partnership’s past operations to maintained by the partnership in the were added to address these concerns. determine the relevant sourcing result United States to the extent of a foreign First, the foreign source inventory ratio for inventory property, instead of source amount. This amount is and the foreign source intangible ratio assuming that all of the gain or loss from determined by multiplying deemed sale cannot exceed one. § 1.864(c)(8)– the deemed sale of inventory property is gain or loss attributable to an intangible 1(c)(2)(ii)(B) and (C). Second, if the attributable to a U.S. office (unless the by the foreign source intangible ratio. foreign source gross income attributable ten-year exception is met). That is, Thus, the approach for determining to inventory or the foreign gross because sourcing the deemed sale gain the foreign source amount with respect ordinary income is not positive, then or loss attributable to inventory property to intangibles employs the same general respectively the foreign source will require facts that are not available approach provided for inventory inventory ratio or the foreign source in a deemed sale, this approach sources property, with certain modifications. intangible ratio is zero. Id. Third, if the the deemed sale gain or loss by Deemed sale gain or loss attributable to foreign source gross income attributable reference to the actual sourcing results intangibles, like that attributable to to inventory is positive, but the total from prior sales of inventory property inventory property, cannot be reliably gross income attributable to inventory is during the look-back period, as sourced in a deemed sale because an not positive, or if the foreign gross evidenced by the foreign source actual sale has not occurred. However, ordinary income is positive, but the inventory ratio. This rule can be applied unlike inventory property, intangibles total gross ordinary income is not by taxpayers and administered by the may not have relevant historical data positive, then respectively the foreign government with certainty. indicating how deemed sale gain and source inventory ratio or the foreign loss would be sourced in an actual sale source intangible ratio is one. Id. ii. Look-Back Rule for Intangibles (for example, some intangibles do not The comment on the interaction generate an identifiable income stream iv. Depreciable Personal Property between section 864(c)(8) and the on which a sourcing proxy could be Section 1.864(c)(8)–1(c)(2)(ii)(D) sourcing rules also discussed how the based). To address this issue, the provides a two-part approach for simplifying factual assumptions numerator of the foreign source determining the foreign source portion supplied by the rule in proposed intangible ratio includes the foreign of deemed sale gain and loss attributable § 1.864(c)(8)–1(c)(2)(i) may overstate the source gross ordinary income of the to depreciable personal property: The amount of effectively connected gain or partnership (other than from first part applies a recapture principle to loss with respect to a deemed sale of dispositions of depreciable or the extent of depreciation adjustments intangibles held by the partnership. amortizable property) during the shorter taken with respect to the property, and While acknowledging the difficulty of of the period comprised of the the second part focuses on where the determining the source of deemed sale partnership’s three taxable years property is located to the extent the gain and loss attributable to intangibles, preceding the date of the deemed sale or property has deemed sale gain in excess the comment described an approach the existence of the partnership of its depreciation adjustments or if the that would apply a separate rule to (measured by partnership taxable years), property has deemed sale loss. determine the source of deemed sale to the extent that such income was not Section 1.864(c)(8)–1(c)(2)(ii)(D)(1) gain and loss attributable to intangibles effectively connected with the conduct applies a recapture principle by

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providing that the deemed sale of by reference to a modified look-back material change in circumstances rule depreciable personal property (as period. applies, the applicable sourcing rule for defined in section 865(c)(4)(A)), or the The Treasury Department and the IRS inventory or intangibles may be applied deemed sale of an amortizable have determined that the general rule by reference to the modified look-back intangible (as defined in section provided in § 1.864(c)(8)–1(c)(2)(ii)(A) period. § 1.864(c)(8)–1(c)(2)(ii)(E). The 865(d)(2)), will not be treated as and the asset-specific determinations determination of whether a sourcing attributable to an office or other fixed provided in § 1.864(c)(8)–1(c)(2)(ii)(B) result is materially different is place of business maintained by the and (C) will reach an appropriate determined by comparing the foreign partnership in the United States to the sourcing result in most cases; that is, an source inventory ratio or foreign source extent the deemed sale gain is treated as actual sale of the partnership’s assets intangible ratio provided in sourced outside the United States after has not occurred, so relevant sourcing § 1.864(c)(8)–1(c)(2)(ii)(B) or (C) (as applying section 865(c)(1) at the time of information with respect to an actual applicable) with the foreign source the deemed sale. In contrast to the other sale of the assets on the date of the inventory ratio or foreign source sourcing rules that could apply to assets deemed sale will not be readily intangible ratio if that ratio were held by the partnership on the date of determinable in most cases, and the determined by reference to the modified the deemed sale, the recapture rule look-back rules use the partnership’s look-back period. The sourcing result is provided in section 865(c)(1) can be past operations as a proxy for reaching not materially different unless the applied with certainty at the time of the a sourcing determination with respect to percentage point difference between the deemed sale because it is based on data certain assets included in the deemed two ratios described in the preceding that is available at the time of the sale. See sections II.A.2.i and II.A.2.ii of sentence is at least 30 percentage points. deemed sale. this Summary of Comments and Id. See Example 2 in § 1.864(c)(8)– For deemed sale gain in excess of the Explanation of Revisions. 1(c)(2)(iii). depreciation adjustments with respect The Treasury Department and the IRS B. Treaty Coordination to depreciable personal property (other realize, however, that the look-back A comment questioned whether the than an amortizable intangible), or for rules provided in § 1.864(c)(8)– rules provided in proposed deemed sale loss from depreciable 1(c)(2)(ii)(B) and (C) for inventory § 1.864(c)(8)–1(c) for determining a personal property (other than an property and intangibles could reach foreign transferor’s deemed sale EC gain amortizable intangible), § 1.864(c)(8)– incorrect sourcing results in certain or deemed sale EC loss were intended 1(c)(2)(ii)(D)(2) provides that the cases; specifically, if a material change to apply in the treaty context without relevant sourcing determination is made in circumstances occurred during the regard to whether the partnership in fact based on where the property is located. relevant look-back period described in had a permanent establishment in the See § 1.864(c)(8)–1(c)(2)(ii)(C) and paragraph § 1.864(c)(8)–1(c)(2)(ii)(B)(1) United States under the terms of an section II.A.2.ii of this Summary of or § 1.864(c)(8)–1(c)(2)(ii)(C)(1), the income tax treaty at the time of the Comments and Explanation of Revisions partnership’s historical data for the transfer. for the rule that applies to gain in excess entire look-back period may not be an These final regulations clarify that the of depreciation adjustments with accurate proxy for reaching a sourcing U.S. office attribution rule described in respect to an amortizable intangible. determination with respect to deemed § 1.864(c)(8)–1(c)(2)(ii)(A) does not Although section 865(c)(2) sources the sale gain or loss attributable to such apply unless the partnership maintains excess gain as if it were attributable to property. In these cases, the final an office or other fixed place of business inventory property, such treatment regulations allow taxpayers to use this in the United States. A partnership would require further clarification for material change in circumstances rule to without a U.S. office or other fixed place purposes of these final regulations. remedy an incorrect sourcing result of business will also generally not have Specifically, in contrast to inventory with respect to inventory property and a permanent establishment in the property, depreciable personal property intangibles. United States. In addition, the treaty may not have historical data readily The application of § 1.864(c)(8)– coordination rule in § 1.864(c)(8)–1(f) available that evidences the location of 1(c)(2)(ii)(E), therefore, is limited to takes into account an applicable treaty the economic activity associated with situations in which a material change in when computing the amount of a the property or that otherwise indicates circumstances causes the look-back rule foreign transferor’s distributive share of how the excess gain or loss would be provided in § 1.864(c)(8)–1(c)(2)(ii)(B), deemed sale EC gain and deemed sale sourced in an actual sale. To address or the look-back rule provided in EC loss. As a result, for purposes of this issue, while also providing a clear § 1.864(c)(8)–1(c)(2)(ii)(C), to reach an § 1.864(c)(8)–1(c)(3) (that is, the third and administrable rule, § 1.864(c)(8)– inappropriate sourcing result; that is, a step in the three-step process to 1(c)(2)(ii)(D)(2) sources the excess gain sourcing result that is materially determine the foreign transferor’s or loss attributable to depreciable different from the sourcing result that aggregate deemed sale EC items), gain or personal property based on the location would occur if the applicable look-back loss derived by the foreign transferor of the property. period began on the date on which the attributable to assets deemed sold that v. Material Change in Circumstances material change in circumstance would be exempt from tax under an Rule occurred and ended on the last day of applicable U.S. income tax treaty if the partnership’s taxable year disposed of by the partnership are not Section 1.864(c)(8)–1(c)(2)(ii)(E) immediately preceding the year in taken into account. provides a material change in which the deemed sale occurs (the The final regulations retain the circumstances rule for inventory and modified look-back period).1 If the general rule that prevents taxation of intangibles. If this rule applies, the gain on assets that do not form part of foreign source portion of deemed sale 1 The material change in circumstances rule a permanent establishment, but also gain or loss attributable to inventory cannot apply to a change in circumstances that occurs in the year of the deemed sale because such address certain gains that may be taxed property or intangibles may be a change does not occur during the relevant look- determined by applying the relevant back period and, in that case, there is no modified results that otherwise occur under § 1.864(c)(8)– rule of § 1.864(c)(8)–1(c)(2)(ii)(B) or (C) look-back period against which to measure the 1(c)(2)(ii)(B) or (C).

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without regard to whether there is a permanent establishment or fixed place D. Section 731 Distributions permanent establishment (for example, of business in the United States. Under Under the proposed regulations, a gains from the disposition of certain this coordination rule, if, after applying foreign transferor determines the U.S. real property interests). The final treaty benefits in paragraph (c)(3) of this amount of outside gain and loss regulations also modify the structure of section, the only gains or losses that recognized on the transfer of a proposed § 1.864(c)(8)–1(f) by would be taken into account are gains partnership interest under all relevant consolidating proposed § 1.864(c)(8)– or losses attributable to United States provisions of the Code and regulations, 1(f)(1) through (3) into a single real property interests, the foreign including any applicable paragraph and make three additional transferor determines its effectively nonrecognition provision. Proposed changes. connected gain and effectively § 1.864(c)(8)–1(b)(2). Although section First, § 1.864(c)(8)–1(f) clarifies that a connected loss pursuant to section 897 864(c)(8)(E) authorizes regulations or foreign transferor is eligible for benefits and not under section 864(c)(8). This other guidance with respect to the under an income tax treaty only if the application of section 864(c)(8) to transferor meets the requirements of a addition is consistent with the approach limitation on benefits article, if any, in taken in the proposed regulations that nonrecognition transactions, the the treaty between the jurisdiction in the gain would be computed under proposed regulations generally do not which the foreign transferor is resident section 897 rather than section provide special rules that apply to and the United States. 864(c)(8). See section IV of the nonrecognition transactions. But see Second, § 1.864(c)(8)–1(f) modifies Explanation of Provisions section of the proposed § 1.864(c)(8)–1(h) (the anti- proposed § 1.864(c)(8)–1(f)(2), which preamble to the proposed regulations. stuffing rule). However, the Treasury stated that ‘‘[t]reaty provisions Department and the IRS recognized that C. Partner-Specific Exclusions and applicable to gains from the alienation certain nonrecognition transactions, for Exceptions of property forming part of a permanent example certain section 731 distributions, may have the effect of establishment, including gains from the A comment requested that the final reducing gain or loss that would be alienation of a permanent establishment regulations more clearly address the in the United States, apply to the taken into account under the rules interaction of section 864(c)(8) and provided in the proposed regulations. transfer by a foreign transferor of an § 1.864(c)(8)–1 with provisions of the interest in a partnership with a The preamble to the proposed Code providing for an exemption from regulations, therefore, requested permanent establishment in the United U.S. federal income tax. The Treasury States.’’ The final regulations clarify that comments regarding whether sections of Department and the IRS agree with this a gains article that permits the taxation the Code other than section 864(c)(8) suggestion; accordingly, the final of gain from the alienation of property adequately address transactions that forming part of a permanent regulations provide that a foreign rely on section 731 distributions to establishment or fixed place of business transferor’s distributive share of deemed reduce the scope of assets subject to in the United States also permits the sale EC gain or loss does not include U.S. federal income taxation as a result taxation of gain from the alienation of a any amount that is excluded from the of section 864(c)(8) and proposed partnership interest, to the extent the foreign transferor’s gross income or § 1.864(c)(8)–1. A comment identified partnership’s assets deemed sold under otherwise exempt from U.S. Federal several relevant Code sections and section 864(c)(8) form a part of the U.S. income tax by reason of an applicable analyzed the application of these permanent establishment or fixed place provision of the Code. Section sections to transactions involving of business of the partnership. Thus, the 1.864(c)(8)–1(c)(3)(i). For this purpose, section 731 distributions. The Treasury final regulations remove from the the final regulations refer to sections Department and the IRS continue to description of an applicable gains 864(b)(2), 872(b), and 883 as examples. study this issue and will, if necessary, provision the phrase ‘‘including gains Id. address it through future rulemaking. from the alienation of a permanent Similarly, § 1.864(c)(8)–1(c)(3) is E. Information Exchange Between a establishment,’’ as that phrase, as used modified to provide that a foreign Partnership and Non-Controlling in certain treaties, merely illustrates one transferor’s distributive share of deemed Partners application of the underlying words and sale EC gain or deemed sale EC loss A comment requested that foreign is not a separate rule. This approach does not include any amount to which also is consistent with the statutory partners that do not own a controlling an exception under section 897 applies, framework under section 864(c)(8), interest in a partnership be permitted to such as section 897(k) or section 897(l), which determines the amount of estimate their effectively connected gain provided that amount is not otherwise effectively connected gain or loss of a or loss for purposes of section 864(c)(8) foreign transferor based on the amount treated as effectively connected income because non-controlling partners may of the transferor’s distributive share of under a provision of the Code. This rule, not be able to obtain from the gain or loss that would have been which was provided in proposed partnership the information required to effectively connected if the partnership § 1.864(c)(8)–1(c)(2) as part of the perform the computations under these had sold all of its assets at fair market determination of a foreign transferor’s rules. The Treasury Department and the value. deemed sale EC gain and deemed sale IRS have determined that such a rule is Finally, § 1.864(c)(8)–1(f) adds a rule EC loss, is moved to § 1.864(c)(8)–1(c)(3) not needed under section 864(c)(8) coordinating these regulations with in these final regulations because the because the proposed withholding treaty provisions governing the exceptions under section 897(k) and regulations address this issue. disposition of United States real section 897(l) are specific to the foreign Specifically, the proposed withholding property interests, which allow the transferor. This modification is intended regulations provide rules in proposed United States to tax gain derived from to make the three step-process for § 1.864(c)(8)–2 that facilitate and the disposition of the United States real determining the foreign transferor’s encourage the transfer of information property interest without regard to aggregate deemed sale EC amounts more between a foreign partner and a whether the U.S. real property interest cohesive by placing all partner-specific partnership for purposes of section forms a part of a partnership’s adjustments in step 3. 864(c)(8). The information reporting

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requirements of the proposed coordination rule when a foreign do not establish a new collection of withholding regulations require the transferor transfers its partnership information nor modify an existing partnership to provide the foreign interest in a nonrecognition transaction. collection that requires the approval of partner with the information necessary The final regulations clarify the the Office of Management and Budget to perform the computations under interaction between the section 897 under the Paperwork Reduction Act (44 these rules, even if the foreign partner coordination rule and the U.S.C. chapter 35). does not hold a controlling interest in nonrecognition provision described in Section 864(c)(8) and the final the partnership. However, this comment § 1.864(c)(8)–1(b)(2)(ii). Specifically, regulations generally apply to will be considered as part of the § 1.864(c)(8)–1(d) provides that any nonresident alien individuals and proposed withholding regulations, transfer of an interest in a partnership foreign corporations on the transfer of which will be finalized separately in a as part of a nonrecognition transaction an interest in a partnership that is later issue of the Federal Register. will not be subject to section 864(c)(8) engaged in a trade or business within to the extent that the gain or loss on the F. Section 754 Elections the United States, and not directly to the transfer is not recognized; instead, if the trade or business the partnership A comment requested a special rule partnership owns one or more United conducts in the United States. Under for any foreign transferor that has a States real property interests, section section 605 of the Regulatory Flexibility difference between its basis in the 897(g) and the regulations thereunder Act (5 U.S.C. chapter 6), the Treasury partnership interest and its share of the will apply with respect to the Department and the IRS certify that the partnership’s inside basis that occurs unrecognized gain or loss. final regulations will not have a because no section 754 election is in III. Applicability Dates significant economic impact on a effect at the time of transfer; this special substantial number of small business rule would, in effect, deem a section 754 The proposed regulations were entities. The reason is that the final election. Specifically, the comment proposed to apply to transfers occurring regulations generally apply to indicated that a foreign transferor may on or after November 27, 2017. Because nonresident alien individuals and not have negotiated for the partnership the provisions contained in this foreign corporations on the transfer of to make a section 754 election upon rulemaking are finalized after June 22, an interest in a partnership and not acquisition of an interest in a 2019, these regulations generally apply directly to domestic small business partnership engaged in a trade or to transfers occurring on or after entities. Pursuant to section 7805(f), the business within the United States December 26, 2018 (that is, the date on notice of proposed rulemaking because the transferor considered Rev. which the proposed regulations were preceding these final regulations was Rul. 91–32, 1991–1 C.B. 107, to be filed with the Federal Register). See submitted to the Chief Counsel for incorrect. As a result, upon a later sections 7805(b)(1)(B) and (b)(2) and Advocacy of the Small Business transfer of the acquired partnership §§ 1.864(c)(8)–1(j) and 1.897–7(c); see Administration for comment on its interest, the foreign transferor would also the Applicability Dates section of impact on small business. No comments have received a different result under the Preamble to the proposed were received. the rules in the section 864(c)(8) regulations. While not subject to these proposed regulations than if the final regulations, transfers occurring on Drafting Information partnership had instead sold all of its or after November 27, 2017, but before The principal authors of these assets and then liquidated. Because this December 26, 2018, are subject to regulations are Chadwick Rowland and result occurs due to the failure to make section 864(c)(8). In addition, these final Ronald M. Gootzeit, Office of the a section 754 election and the regulations apply to amounts taken into Associate Chief Counsel (International). mismatches that follow from that account on or after December 26, 2018, However, other personnel from the failure, the Treasury Department and pursuant to an installment sale (as Treasury Department and the IRS the IRS have determined that it would defined in section 453(b)) occurring on participated in their development. be inappropriate to adopt a special rule or after November 27, 2017, and before in these circumstances. December 26, 2018. §§ 1.864(c)(8)–1(j) Statement of Availability G. Clarification of Section 897 and 1.897–7(c). This rule is consistent Revenue rulings and other guidance Coordination Rule With Respect to with the manner in which installment cited in this document are published in Nonrecognition Provisions sales are treated under existing law. See, the Internal Revenue Bulletin (or e.g., Snell v. Commissioner, 97 F.2d 891 Cumulative Bulletin) and are available Proposed § 1.864(c)(8)–1(d) (5th Cir. 1938) (the tax laws in effect for coordinates the taxation of United States from the Superintendent of Documents, the year the installment gain is U.S. Government Publishing Office, real property interests under section recognized apply to the gain); see also 897(g) with section 864(c)(8) by Washington, DC 20402, or by visiting Estate of Kearns v. Commissioner, 73 the IRS website at https://www.irs.gov. providing that when a partnership holds T.C. 1223 (1980); Klein v. United States real property interests and Commissioner, 42 T.C. 1000 (1964); Rev. List of Subjects in 26 CFR Part 1 a transfer of an interest in that Rul. 79–22, 1979–1 C.B. 275. Income taxes, Reporting and partnership is subject to section recordkeeping requirements. 864(c)(8) because the partnership is Special Analyses engaged in the conduct of a trade or These final regulations are not subject Amendments to the Regulations business within the United States to review under section 6(b) of Accordingly, 26 CFR part 1 is without regard to section 897, the Executive Order 12866 pursuant to the amended as follows: amount of the foreign transferor’s Memorandum of Agreement (April 11, effectively connected gain or loss will 2018) between the Treasury Department PART 1—INCOME TAXES be determined under section 864(c)(8) and the Office of Management and and not under section 897(g). However, Budget regarding review of tax ■ Paragraph 1. The authority citation the proposed regulations did not regulations. for part 1 is amended by adding entries provide explicit guidance on the The Treasury Department and the IRS in numerical order to read in part as application of the section 897 have assessed that the final regulations follows:

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Authority: 26 U.S.C. 7805 * * * (2) Determination of outside gain and (1) Step 1: Determine deemed sale Section 1.864(c)(8)–1 also issued under 26 loss—(i) In general. The amount of gain gain and loss. Determine the amount of U.S.C. 864(c)(8) and 897(g). or loss recognized by the foreign gain or loss that the partnership would * * * * * transferor in connection with the recognize with respect to each of its Section 1.897–7 also issued under 26 transfer of its partnership interest is assets (other than interests in U.S.C. 897(g). determined under all relevant partnerships described in paragraph (e) * * * * * provisions of the Internal Revenue Code of this section) upon a deemed sale of and the regulations thereunder. See, all of the partnership’s assets on the ■ Par. 2. Section 1.864(c)(8)–1 is added e.g., §§ 1.741–1(a) and 1.751–1(a)(2). For date of the transfer of the partnership to read as follows: purposes of this section, the amount of interest described in paragraph (b)(1) of § 1.864(c)(8)–1 Gain or loss by foreign gain or loss that is treated as capital gain this section (deemed sale). For this persons on the disposition of certain or capital loss under sections 741 and purpose, a deemed sale is treated as a partnership interests. 751 is referred to as outside capital gain sale by the partnership to an unrelated (a) Overview. This section provides or outside capital loss, respectively. The person of each of its assets (tangible and rules and definitions under section amount of gain or loss that is treated as intangible) in a fully taxable transaction 864(c)(8). Paragraph (b) of this section ordinary gain or ordinary loss under for cash in an amount equal to the fair provides the general rule treating gain or sections 741 and 751 is referred to as market value of each asset (taking into loss recognized by a nonresident alien outside ordinary gain or outside account section 7701(g)) immediately individual or foreign corporation from ordinary loss, respectively. before the partner’s transfer of the the sale or exchange of a partnership (ii) Nonrecognition provisions. A interest in the partnership. For rules interest as effectively connected gain or foreign transferor’s gain or loss concerning the deemed sale of certain effectively connected loss. Paragraph (c) recognized in connection with the partnership interests, see paragraph (e) of this section provides rules for transfer of its partnership interest does of this section. determining the limitations on the not include gain or loss to the extent (2) Step 2: Determine deemed sale EC amount of effectively connected gain or that the gain or loss is not recognized by gain and loss—(i) In general—(A) effectively connected loss under section reason of one or more nonrecognition Effectively connected determination. 864(c)(8) and paragraph (b) of this provisions of the Internal Revenue With respect to each asset deemed sold section. Paragraph (d) of this section Code. in paragraph (c)(1) of this section, (3) Limitations. For purposes of determine the amount of gain or loss provides rules regarding coordination applying this section, this paragraph from the deemed sale that would be with section 897. Paragraph (e) of this (b)(3) limits the amount of gain or loss treated as effectively connected gain or section provides rules regarding certain recognized by a foreign transferor that effectively connected loss (including by tiered partnerships. Paragraph (f) of this may be treated as effectively connected reason of section 897). Gain described in section provides rules regarding U.S. gain or effectively connected loss. this paragraph (c)(2) is referred to as income tax treaties. Paragraph (g) of this (i) Capital gain limitation. Outside deemed sale EC gain, and loss described section provides definitions. Paragraph capital gain recognized by a foreign in this paragraph (c)(2) is referred to as (h) of this section provides a rule transferor is treated as effectively deemed sale EC loss. Section 864 and regarding certain contributions of connected gain to the extent it does not the regulations thereunder apply for property to a partnership. Paragraph (i) exceed aggregate deemed sale EC capital purposes of determining whether of this section contains examples gain determined under paragraph deemed sale gain or loss would be illustrating the rules set forth in this (c)(3)(ii)(B) of this section. treated as effectively connected gain or section. Paragraph (j) of this section (ii) Capital loss limitation. Outside loss. See paragraph (c)(2)(ii) of this provides the applicability date. capital loss recognized by a foreign section for sourcing rules that apply for (b) Gain or loss treated as effectively transferor is treated as effectively purposes of determining deemed sale connected gain or loss—(1) In general. connected loss to the extent it does not EC gain and deemed sale EC loss. Notwithstanding any other provision of exceed aggregate deemed sale EC capital (B) 10-year exception. For purposes of subtitle A of the Internal Revenue Code, loss determined under paragraph applying paragraph (c)(2)(i)(A) of this if a foreign transferor owns, directly or (c)(3)(ii)(B) of this section. section, gain or loss from the deemed indirectly, an interest in a partnership (iii) Ordinary gain limitation. Outside sale of an asset (other than a United that is engaged in the conduct of a trade ordinary gain recognized by a foreign States real property interest within the or business within the United States, transferor is treated as effectively meaning of section 897(c)) will not be outside capital gain, outside capital loss, connected gain to the extent it does not treated as deemed sale EC gain or outside ordinary gain, or outside exceed aggregate deemed sale EC deemed sale EC loss if— ordinary loss (each as defined in ordinary gain determined under (1) No income or gain produced by paragraph (b)(2) of this section) paragraph (c)(3)(ii)(A) of this section. the asset was taxable as income that was recognized by the foreign transferor on (iv) Ordinary loss limitation. Outside effectively connected with the conduct the transfer of all (or any portion) of the ordinary loss recognized by a foreign of a trade or business within the United interest is treated as effectively transferor is treated as effectively States by the partnership (or the foreign connected gain or effectively connected connected loss to the extent it does not transferor, a predecessor of the foreign loss, subject to the limitations described exceed aggregate deemed sale EC transferor, or a predecessor of the in paragraph (b)(3) of this section. ordinary loss determined under partnership) during the lesser of the ten- Except as provided in paragraph (d) of paragraph (c)(3)(ii)(A) of this section. year period ending on the date of the this section, this section does not apply (c) Amount treated as effectively transfer or the period for which the to prevent any portion of the gain or loss connected with the conduct of a trade partnership (and, if applicable, the that is otherwise treated as effectively or business within the United States. foreign transferor, a predecessor of the connected gain or effectively connected This paragraph (c) describes the steps to foreign transferor, and a predecessor of loss under provisions of the Internal be followed in computing the the partnership) held the asset; and Revenue Code other than section limitations described in paragraph (b)(3) (2) The asset has not been used, or 864(c)(8) from being so treated. of this section. held for use, in the conduct of a trade

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or business within the United States by inventory property sold during that in excess of the property’s depreciation the partnership (or the foreign same period. adjustments (as defined in section transferor, a predecessor of the foreign (C) Look-back rule for intangibles. The 865(c)(4)(B)), or results in deemed sale transferor, or a predecessor of the deemed sale of an intangible (as defined loss, attribution to an office or other partnership) during that same period. in section 865(d)(2), including going fixed place of business maintained by (ii) Sourcing rules for determining concern value) will not be treated as the partnership in the United States deemed sale EC gain and deemed sale attributable to an office or other fixed with respect to the excess deemed sale EC loss—(A) In general. For purposes of place of business maintained by the gain, or deemed sale loss, will be applying section 865(e)(2)(A) in partnership in the United States to the determined based on where the property connection with the determination of extent of foreign source intangible gain is located: If the property is located deemed sale EC gain and deemed sale or loss. Foreign source intangible gain or outside the United States, the excess EC loss under this paragraph loss is determined by multiplying the deemed sale gain, or the deemed sale (c)(2)(ii)(A), except to the extent deemed sale gain or deemed sale loss loss, will not be treated as attributable provided in paragraphs (c)(2)(ii)(B) from an intangible, without regard to to an office or other fixed place of through (E) of this section, the deemed any gain described in section business maintained by the partnership sale of an asset will be treated as 865(d)(4)(A), by the foreign source in the United States; if the property is attributable to an office or other fixed intangible ratio. The foreign source located within the United States, the place of business maintained by the intangible ratio cannot exceed one. If excess deemed sale gain, or the deemed partnership in the United States. the amount in paragraph (c)(2)(ii)(C)(1) sale loss, will be treated as attributable However, if the partnership does not of this section is not positive, the to an office or other fixed place of maintain an office or other fixed place foreign source intangible ratio is zero. If business maintained by the partnership of business in the United States (within the amount in paragraph (c)(2)(ii)(C)(1) in the United States. the meaning of section 864(c)(5)(A) and of this section is positive, but the (E) Material change in circumstances § 1.864–7), neither the office attribution amount in paragraph (c)(2)(ii)(C)(2) of rule. If a material change in described in this paragraph (c)(2)(ii)(A), this section is not positive, the foreign circumstances occurred that causes the nor the rules of paragraphs (c)(2)(ii)(B) source inventory ratio is one. The applicable rule provided in paragraph through (E) of this section, will apply. foreign source intangible ratio is— (c)(2)(ii)(B) or (C) of this section to (B) Look-back rule for sale of (1) The gross ordinary income (other provide a sourcing result that is inventory property. The deemed sale of than from dispositions of depreciable or materially different from the sourcing inventory property (as defined in amortizable property) of the partnership result that would occur if the applicable section 865(i)(1)) will not be treated as from sources without the United States period described in paragraph attributable to an office or other fixed that was not effectively connected with (c)(2)(ii)(B)(1) or (c)(2)(ii)(C)(1) of this place of business maintained by the the conduct of a trade or business section began on the date on which the partnership in the United States to the within the United States, during the material change in circumstance extent of foreign source inventory gain lesser of— occurred and ended on the last day of or loss. Foreign source inventory gain or (i) The period comprised of the the partnership’s taxable year loss is determined by multiplying the partnership’s three taxable years immediately preceding the year in deemed sale gain or deemed sale loss immediately preceding the date of the which the deemed sale occurs (the attributable to inventory property by the deemed sale, or modified look-back period), the foreign source inventory ratio. The (ii) The period beginning on the date applicable rule provided in paragraph foreign source inventory ratio cannot the partnership (or any of its (c)(2)(ii)(B) or (C) of this section may be exceed one. If the amount in paragraph predecessors) is formed and ending on applied by reference to the modified (c)(2)(ii)(B)(1) of this section is not the last day of the partnership’s taxable look-back period. The difference positive, the foreign source inventory year immediately preceding the year in between the sourcing results is ratio is zero. If the amount in paragraph which the deemed sale occurs; over determined by comparing the foreign (c)(2)(ii)(B)(1) of this section is positive, (2) The total gross ordinary income source inventory ratio (as described in but the amount in paragraph (other than from dispositions of paragraph (c)(2)(ii)(B) of this section) or (c)(2)(ii)(B)(2) of this section is not depreciable or amortizable property) of the foreign source intangible ratio (as positive, the foreign source inventory the partnership during that period. described in paragraph (c)(2)(ii)(C) of ratio is one. The foreign source (D) Depreciable personal property— this section), as applicable, with the inventory ratio is— (1) Depreciation recapture. The deemed foreign source inventory ratio or foreign (1) The gross income of the sale of depreciable personal property (as source intangible ratio, as applicable, if partnership from sources without the defined in section 865(c)(4)(A)), that ratio were determined by reference United States (as determined under including from the sale of an to the modified look-back period. For sections 865(b) and 865(e)(2)) that was amortizable intangible (as defined in purposes of this paragraph (c)(2)(ii)(E), attributable to inventory property sold section 865(d)(2)), will not be treated as the sourcing results will not be during the lesser of— attributable to an office or other fixed materially different unless the (i) The period comprised of the place of business maintained by the percentage point difference between the partnership’s three taxable years partnership in the United States to the ratios described in the preceding immediately preceding the date of the extent the deemed sale gain would be sentence is at least 30 percentage points. deemed sale, or treated as from sources outside the (iii) Examples. This paragraph (ii) The period beginning on the date United States after applying section (c)(2)(iii) provides examples that the partnership (or any of its 865(c)(1) at the time of the deemed sale. illustrate the rules of paragraph (c)(2)(ii) predecessors) was formed and ending (2) Gain in excess of depreciation or of this section. Except as otherwise on the last day of the partnership’s loss with respect to depreciable personal provided, the following facts apply for taxable year immediately preceding the property. For purposes of this section, if purposes of this paragraph (c)(2)(iii). FP date of the deemed sale; over the deemed sale of depreciable personal is a foreign corporation and a partner in (2) The total gross income of the property (other than an amortizable PRS, a partnership that is engaged in the partnership that was attributable to intangible) results in deemed sale gain conduct of a trade or business within

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the United States (the U.S. Business) property under the material change in the period starting at the beginning of and a business in Country A (the circumstances rule—(1) Facts. The facts year 3, the date in which the material Country A Business). Both businesses are the same as in paragraph change in circumstances occurred, and purchase inventory property and sell (c)(2)(iii)(A)(1) of this section (the facts ending of the last day of year 3, the last the purchased inventory property to of Example 1 in this paragraph day of PRS’s taxable year immediately unrelated customers; this is the only (c)(2)(iii)), except that at the beginning preceding the date of the deemed sale. income-generating activity carried on by of year 3 (PRS’s taxable year Based on PRS’s sales records for the the businesses. PRS maintains an office immediately preceding the date of the three taxable years preceding the or fixed place of business within the deemed sale), PRS started a new deemed sale, the foreign source U.S. (within the meaning of section business in Country B (the Country B inventory ratio, expressed as a 864(c)(5)(A) and § 1.864–7) and, for its Business) to take advantage of favorable percentage, is 50% ($15x attributable to U.S. business, PRS sells its inventory market prospects for its products in PRS’s gross income from sources property through its U.S. office. For the Country B. For the Country B Business, without the United States with respect Country A business, PRS sells its PRS sells its inventory property through to sales of its inventory property, over inventory property through its Country its Country B office for consumption in $30x attributable to PRS’s total gross A office for consumption in Country A; Country B; PRS’s Country B office income with respect to sales of its PRS’s Country A office materially materially participates in each such inventory property). Due to the material participates in each sale. The gain or sale. The gain or loss from the inventory change in circumstances, however, 95% loss from the inventory sold through sold through PRS’s Country B office is of PRS’s inventory property is sold in its PRS’s Country A office is treated as from foreign source gain or loss. Also, at the Foreign Businesses. ($9.5x attributable sources without the United States and is beginning of year 3, PRS substantially to PRS’s gross income from sources not effectively connected with PRS’s reduced its U.S. Business as a result of without the United States with respect U.S. Business. In year 4, FP sells its market factors. As a result of these to sales of its inventory property, over entire interest in PRS, thereby triggering changes in year 3, 95% of PRS’s $10x attributable to PRS’s total gross the deemed sale described in paragraph inventory property is sold in its Country income with respect to sales of its (c)(1) of this section. In the deemed sale, A Business and Country B Business inventory property.) Accordingly, if PRS PRS recognizes $10x of gain on the sale (collectively, the Foreign Businesses) applied the sourcing rule provided in of its inventory property (the only asset beginning on the date in which these paragraph (c)(2)(ii)(B) of this section by PRS holds other than goodwill and changes occurred; accordingly, 5% of reference to the modified look-back going concern value). The 10-year PRS’ inventory property is sold in its period, 95% ($9.5x/$10x), or $9.5x, of exception provided in paragraph U.S. Business after these changes. Based the gain would be attributable to sales (c)(2)(i)(B) of this section does not on PRS’s sales records for the three for PRS’s Foreign Businesses (gain from apply. taxable years preceding the date of the sources without the United States), and (A) Example 1: Determining foreign deemed sale, PRS’s gross income from only 5% ($.5x/$10x), or $0.5x, of the source inventory gain—(1) Facts. Based sources without the United States that gain would be attributable to sales for on PRS’s sales records for the three are attributable to sales of inventory PRS’s U.S. Business (gain from United taxable years immediately preceding the property is $15x and PRS’s total gross States sources). The excess of the date of the deemed sale, PRS’s gross income attributable to sales of inventory foreign source inventory ratio income from sources without the United property during that period is $30x; for determined by reference to the modified States that is attributable to sales of year 3, PRS’s gross income from sources look-back period (expressed as a inventory property is $12x and PRS’s without the United States that are percentage), over the foreign source total gross income attributable to sales attributable to sales of inventory inventory ratio (also expressed as a of inventory property during that period property is $9.5x, and PRS’s total gross percentage) is 45%; that is 95% (as is $30x. (2) Analysis. To determine foreign income attributable to sales of inventory determined under the modified look- source inventory gain or loss described property in Year 3 is $10x. back period) minus 50% (as determined in paragraph (c)(2)(ii)(B) of this section, (2) Analysis. The material change in under the foreign source inventory the $10x deemed sale gain attributable circumstances rule described in ratio). Accordingly, the sourcing results to inventory property is multiplied by paragraph (c)(2)(ii)(E) of this section are materially different because the 45 PRS’s foreign source inventory ratio. applies if due to a material change in percentage point difference is greater PRS’s foreign source inventory ratio is circumstances, the sourcing rule than the 30 percentage point threshold PRS’s gross income from sources provided in paragraph (c)(2)(ii)(B) of provided in paragraph (c)(2)(ii)(E) of without the United States that are this section provides a sourcing result this section. Thus, the material change attributable to sales of inventory that is materially different from the in circumstances rule of paragraph property within PRS’s three taxable sourcing result that would occur if that (c)(2)(ii)(E) of this section applies and years preceding the date of the deemed sourcing rule was applied by reference the foreign source inventory gain sale, over PRS’s total gross income to the modified look-back period; that determined under paragraph (c)(2)(ii)(B) attributable to sales of inventory is, the period beginning on the date in of this section, determined by reference property during the same period. Thus, which a material chance in to the modified look-back period, is based on PRS’s sales records from the circumstances occurred and ending on $9.5x; that is, the deemed sale gain three taxable years preceding the date of the last day of the PRS’s taxable year attributable to inventory property the deemed sale, the foreign source immediately preceding the date of the ($10x), multiplied by the foreign source inventory gain for PRS’s inventory is deemed sale. For this purpose, the inventory ratio determined by reference $4x (the $10x deemed sale gain reduction in PRS’s U.S. business in year to the modified look-back period ($9.5x/ attributable to inventory multiplied by 3, coupled with the creation of the $10x). the foreign source inventory ratio of Country B Business in the same year, (3) Step 3: Determine the foreign $12x over $30x). qualifies as a material change in transferor’s distributive share of deemed (B) Example 2: Determining deemed circumstances. Thus, the modified look- sale EC gain or deemed sale EC loss— sale EC gain attributable to inventory back period consists of year 3; that is, (i) In general. A foreign transferor’s

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distributive share of deemed sale EC deemed asset sales described in transfer is treated as not subject to gain or deemed sale EC loss with respect paragraph (e)(1)(i) of this section. section 864(c)(8) to the extent of the to each asset is the amount of the (B) Capital gain or loss. A foreign gain or loss that is not recognized; deemed sale EC gain and deemed sale transferor’s aggregate deemed sale EC instead, if the partnership owns one or EC loss determined under paragraph capital gain (if the net aggregate of the more United States real property (c)(2) of this section that would have foreign transferor’s distributive share of interests at the time of transfer, the rules been allocated to the foreign transferor the deemed sale EC capital gain and loss of section 897(g) and the regulations by the partnership under all applicable is a gain) or aggregate deemed sale EC thereunder apply to the unrecognized Internal Revenue Code sections capital loss (if the net aggregate of the gain or loss. (including section 704) upon the foreign transferor’s distributive share of (e) Tiered partnerships—(1) Transfers deemed sale described in paragraph the deemed sale EC capital gain and loss of upper-tier partnerships. Assets sold (c)(1) of this section, taking into account is a loss) is determined by taking into in a deemed sale described in paragraph allocations of tax items applying the account— (c)(1) of this section do not include principles of section 704(c), including (1) The portion of the foreign interests in partnerships that are any remedial allocations (see § 1.704– transferor’s distributive share of deemed engaged in the conduct of a trade or 3(d)), and any section 743(b) basis sale EC gain and deemed sale EC loss business within the United States or adjustments (see § 1.743–1(j)(3)). For that is attributable to the deemed sale of interests in partnerships that hold, this purpose, a foreign transferor’s assets that are not section 751(a) directly or indirectly, partnerships that distributive share of deemed sale EC property; and are engaged in the conduct of a trade or gain or deemed sale EC loss does not (2) Deemed sale EC gain and deemed business within the United States. include any amount that is excluded sale EC loss from the sale of assets that Rather, if a foreign transferor transfers from the foreign transferor’s gross are not section 751(a) property and that an interest in a partnership (upper-tier income or otherwise exempt from U.S. would be allocated to the foreign partnership) that owns, directly or Federal income tax by reason of an transferor with respect to all interests in indirectly, an interest in one or more partnerships that are engaged in the applicable provision of the Internal partnerships that are engaged in the conduct of a trade or business within Revenue Code (including, for example, conduct of a trade or business within the United States under paragraph by reason of section 864(b)(2), 872(b), or the United States, then— (e)(1)(ii) of this section upon the 883). Similarly, a foreign transferor’s (i) Beginning with the lowest-tier deemed asset sales described in distributive share of deemed sale EC partnership that is engaged in the paragraph (e)(1)(i) of this section. conduct of a trade or business within gain or deemed sale EC loss does not (iii) Partial transfers. If a foreign include any amount to which an the United States in a chain of transferor transfers less than all of its partnerships and going up the chain, exception under section 897 applies, interest in a partnership, then for each partnership that is engaged in the such as section 897(k) or section 897(l), purposes of paragraph (c)(3)(i) of this conduct of a trade or business within if that amount is not otherwise treated section, the foreign transferor’s the United States is treated as selling its as effectively connected under a distributive share of deemed sale EC assets in a deemed sale in accordance provision of the Code. For rules gain and deemed sale EC loss is with the principles of paragraph (c)(1) of regarding the determination of a foreign determined by reference to the amount this section; and transferor’s distributive share of deemed of deemed sale EC gain or deemed sale (ii) Each partnership must determine sale EC gain and deemed sale EC loss EC loss determined under paragraph its deemed sale EC gain and deemed under an applicable U.S. income tax (c)(3)(i) of this section that is sale EC loss in accordance with the treaty, see paragraph (f) of this section. attributable to the portion of the foreign principles of paragraph (c)(2) of this (ii) Aggregate deemed sale EC items— transferor’s partnership interest that was section, and determine the distributive (A) Ordinary gain or loss. A foreign transferred. share of deemed sale EC gain and transferor’s aggregate deemed sale EC (d) Coordination with section 897. If deemed sale EC loss for each partner ordinary gain (if the net aggregate of the a foreign transferor transfers an interest that is either a partnership (in which the foreign transferor’s distributive share of in a partnership in a transfer that is foreign transferor is a direct or indirect the deemed sale EC ordinary gain and subject to section 864(c)(8) and the partner) or a foreign transferor, in loss is a gain) or aggregate deemed sale partnership owns one or more United accordance with the principles of EC ordinary loss (if the net aggregate of States real property interests (as defined paragraph (c)(3)(i) of this section. the foreign transferor’s distributive in section 897(c)), then the foreign (2) Transfers by upper-tier share of the deemed sale EC ordinary transferor determines its effectively partnerships. If a foreign transferor is a gain and loss is a loss) is determined by connected gain and effectively direct or indirect partner in an upper- taking into account— connected loss under this section, and tier partnership and the upper-tier (1) The portion of the foreign not pursuant to section 897(g). partnership transfers an interest in a transferor’s distributive share of deemed Accordingly, with respect to a transfer partnership that is engaged in the sale EC gain and deemed sale EC loss that is subject to section 864(c)(8), conduct of a trade or business within that is attributable to the deemed sale of section 864(c)(8)(C) does not reduce the the United States (including a the partnership’s assets that are section amount of gain or loss treated as partnership held indirectly through one 751(a) property; and effectively connected gain or loss under or more partnerships), then the (2) Deemed sale EC gain and deemed this section. For rules regarding a principles of this section (including sale EC loss from the deemed sale of transfer not subject to section 864(c)(8) paragraph (e)(1) of this section) apply assets that are section 751(a) property of an interest in a partnership that owns with respect to the gain or loss on the that would be allocated to the foreign one or more United States real property transfer that is allocated to the foreign transferor with respect to interests in interests, see section 897(g) and the transferor by the upper-tier partnership. partnerships that are engaged in the regulations thereunder. If a foreign (3) Coordination with section 897. For conduct of a trade or business within transferor transfers an interest in a purposes of this paragraph (e), a lower- the United States under paragraph partnership in the manner described in tier partnership that holds one or more (e)(1)(ii) of this section upon the paragraph (b)(2)(ii) of this section, the United States real property interests is

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treated as engaged in the conduct of a however, after applying treaty benefits the amount of loss treated as effectively trade or business within the United in paragraph (c)(3) of this section, the connected loss, under section 864(c)(8) States. only gains or losses that would be taken or section 897, the transfer is (f) Treaty coordination. This into account are gains or losses disregarded for purposes of section paragraph (f) describes how paragraph attributable to United States real 864(c)(8) or section 897, as appropriate. (c)(3) of this section applies in the case property interests, the foreign transferor (i) Examples. This paragraph (i) of a transfer of an interest in a determines its effectively connected provides examples that illustrate the partnership by a foreign transferor that gain and effectively connected loss rules of this section. Except as otherwise is eligible for benefits under an pursuant to section 897 and not under provided, the following facts are applicable U.S. income tax treaty. As a this section. presumed for purposes of this paragraph (g) Definitions. The following general matter, a foreign transferor must (i). FP is a foreign corporation. USP is definitions apply for purposes of this satisfy the requirements of the a domestic corporation. PRS is a section. limitation on benefits article, if any, in partnership that was formed on January (1) Effectively connected gain. The 1, 2018, when FP and USP each the treaty between the jurisdiction in term effectively connected gain means which the transferor is resident and the contributed $100x in cash. PRS has gain that is treated as effectively made no distributions and received no United States to be eligible for treaty connected with the conduct of a trade benefits. In the case of a foreign contributions other than those described or business within the United States. in the preceding sentence. FP’s adjusted transferor that is entitled to treaty (2) Effectively connected loss. The basis in its interest in PRS is $100x. X benefits, in determining the foreign term effectively connected loss means is a foreign corporation that is unrelated transferor’s distributive share of deemed loss treated as effectively connected to FP, USP, or PRS. Upon the formation sale EC gain and deemed sale EC loss, with the conduct of a trade or business of PRS, FP and USP entered into an gain or loss derived by the foreign within the United States. transferor attributable to assets deemed (3) Foreign transferor. The term agreement providing that all income, sold that would be exempt from tax foreign transferor means a nonresident gain, loss, and deduction of PRS will be under an applicable U.S. income tax alien individual or foreign corporation. allocated equally between FP and USP. treaty if disposed of by the partnership (4) Section 751(a) property. The term PRS is engaged in the conduct of a trade are not taken into account under section 751(a) property means or business within the United States paragraph (c)(3) of this section. In unrealized receivables described in (the U.S. Business) and an unrelated general, gain or loss on the alienation of section 751(c) and inventory items business in Country A (the Country A a partnership interest will be treated as described in section 751(d). Business). In a deemed sale described in effectively connected gain or loss under (5) Transfer. The term transfer means paragraph (c)(1) of this section, gain or section 864(c)(8) to the extent that the a sale, exchange, or other disposition, loss on assets of the U.S. Business gain or loss is either attributable to and includes a distribution from a would be treated as effectively assets forming part of a U.S. permanent partnership to a partner to the extent connected gain or effectively connected establishment or fixed place of business, that gain or loss is recognized on the loss, and gain or loss on assets of the or taxable under a provision governing distribution, as well as a transfer treated Country A Business would not be so the disposition of United States real as a sale or exchange under section treated (including by reason of property interests. Gain or loss from the 707(a)(2)(B). paragraph (c)(2)(i)(B) of this section). alienation of a partnership interest will (h) Anti-stuffing rule. If a foreign PRS has no liabilities. be considered gain or loss attributable to transferor (or a person that is related to (1) Example 1. Deemed sale the alienation of assets forming part of a foreign transferor within the meaning limitation—(i) Facts. On January 1, a permanent establishment or fixed of section 267(b) or 707(b)) transfers 2019, FP sells its entire interest in PRS place of business in the United States to property (including another partnership to X for $105x. FP does not qualify for the extent the assets deemed sold under interest) to a partnership in a the benefits of an income tax treaty section 864(c)(8) form a part of the U.S. transaction with a principal purpose of between the United States and another permanent establishment or fixed place reducing the amount of gain treated as country. Immediately before the sale, of business of the partnership. If, effectively connected gain, or increasing PRS’s balance sheet appears as follows:

Fair market Adjusted basis value

U.S. Business section 1231 asset ...... $100x $104x Country A Business capital asset ...... 100x 106x

Total ...... 200x 210x

(ii) Analysis—(A) Outside gain or loss. section 741, which is an outside capital determined according to the three-step FP is a foreign transferor (within the gain within the meaning of paragraph process set forth in paragraph (c) of this meaning of paragraph (g)(3) of this (b)(2)(i) of this section. Under paragraph section. First, the amount of gain or loss section) and transfers (within the (b)(1) of this section, FP’s $5x capital that PRS would recognize with respect meaning of paragraph (g)(5) of this gain is treated as effectively connected to each of its assets upon a deemed sale section) its interest in PRS to X. For gain to the extent that it does not exceed described in paragraph (c)(1) of this purposes of this example, for simplicity, the limitation described in paragraph section is a $4x gain with respect to the PRS is assumed to hold no section (b)(3)(i) of this section, which is FP’s U.S. Business section 1231 asset and a 751(a) property and depreciation aggregate deemed sale EC capital gain. $6x gain with respect to the Country A recapture is assumed to be zero. FP (B) Deemed sale. FP’s aggregate Business capital asset. Second, under recognizes a $5x capital gain under deemed sale EC capital gain is paragraph (c)(2) of this section, PRS’s

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deemed sale EC gain is $4x. Third, (C) Limitation. Under paragraph (2) Example 2. Outside gain under paragraph (c)(3)(ii)(B) of this (b)(3)(i) of this section, the $5x outside limitation—(i) Facts. On January 1, section, FP’s aggregate deemed sale EC capital gain recognized by FP is treated 2019, FP sells its entire interest in PRS capital gain is $2x (that is, the aggregate as effectively connected gain to the to X for $110x. FP does not qualify for of its distributive share of deemed sale extent that it does not exceed FP’s $2x the benefits of an income tax treaty EC gain attributable to the deemed sale aggregate deemed sale EC capital gain. between the United States and another of assets that are not section 751(a) Accordingly, FP recognizes $2x of country. Immediately before the sale, property, which is 50% of $4x). capital gain that is treated as effectively PRS’s balance sheet appears as follows: connected gain.

Fair market Adjusted basis value

U.S. Business section 1231 asset ...... $100x $150x Country A Business capital asset ...... 100x 70x

Total ...... 200x 220x

(ii) Analysis—(A) Outside gain or loss. determined according to the three-step capital gain recognized by FP is treated FP is a foreign transferor (within the process set forth in paragraph (c) of this as effectively connected gain to the meaning of paragraph (g)(3) of this section. First, the amount of gain or loss extent that it does not exceed FP’s $25x section) and transfers (within the that PRS would recognize with respect aggregate deemed sale EC capital gain. meaning of paragraph (g)(5) of this to each of its assets upon a deemed sale Accordingly, FP recognizes $10x of section) its interest in PRS to X. For described in paragraph (c)(1) of this capital gain that is treated as effectively purposes of this example, for simplicity, section is a $50x gain with respect to the connected gain. PRS is assumed to hold no section U.S. Business section 1231 asset and a 751(a) property and depreciation $30x loss with respect to the Country A (3) Example 3. Interaction with recapture is assumed to be zero. FP Business capital asset. Second, under section 751(a)—(i) Facts. On January 1, recognizes a $10x capital gain under paragraph (c)(2) of this section, PRS’s 2019, FP sells its entire interest in PRS section 741, which is an outside capital deemed sale EC gain is $50x. Third, to X for $95x. FP does not qualify for the gain within the meaning of paragraph under paragraph (c)(3)(ii)(B) of this benefits of an income tax treaty between (b)(2)(i) of this section. Under paragraph section, FP’s aggregate deemed sale EC the United States and another country. (b)(1) of this section, FP’s $10x capital capital gain is $25x (that is, the Through both its U.S. Business and its gain is treated as effectively connected aggregate of its distributive share of Country A Business, PRS holds gain to the extent that it does not exceed deemed sale EC gain attributable to the inventory items and receivables that are the limitation described in paragraph deemed sale of assets that are not section 751 property (as defined in (b)(3)(i) of this section, which is FP’s section 751(a) property, which is 50% of § 1.751–1(a)). Immediately before the aggregate deemed sale EC capital gain. $50x). sale, PRS’s balance sheet appears as (B) Deemed sale. FP’s aggregate (C) Limitation. Under paragraph follows: deemed sale EC capital gain is (b)(3)(i) of this section, the $10x outside

Fair market Adjusted basis value

U.S. Business section 1231 asset ...... $20x $50x U.S. Business inventory and receivables ...... 30x 50x Country A Business capital asset ...... 100x 80x Country A Business inventory ...... 50x 10x

Total ...... 200x 190x

(ii) Analysis—(A) Outside gain or loss. does not exceed the applicable to each of its assets upon a deemed sale FP is a foreign transferor (within the limitation described in paragraph (b)(3) described in paragraph (c)(1) of this meaning of paragraph (g)(3) of this of this section. In the case of FP’s section is as follows: section) and transfers (within the outside ordinary loss, the applicable meaning of paragraph (g)(5) of this limitation is FP’s aggregate deemed sale Asset Gain/(loss) section) its interest in PRS to X. Under EC ordinary loss. In the case of FP’s sections 741 and 751, FP recognizes a outside capital gain, the applicable U.S. Business section 1231 $10x ordinary loss and a $5x capital asset ...... $30x limitation is FP’s aggregate deemed sale U.S. Business inventory and gain. See § 1.751–1(a). Under paragraph EC capital gain. receivables ...... 20x (b)(2)(i) of this section, FP has outside (B) Deemed sale. FP’s aggregate Country A Business capital ordinary loss equal to $10x and outside deemed sale EC ordinary loss and asset ...... (20x) capital gain equal to $5x. Under aggregate deemed sale EC capital gain Country A Business inven- paragraph (b)(1) of this section, FP’s are determined according to the three- tory ...... (40x) outside ordinary loss and outside step process set forth in paragraph (c) of capital gain are treated as effectively this section. (2) Step 2. Under paragraph (c)(2) of connected loss and effectively (1) Step 1. The amount of gain or loss this section, PRS’s deemed sale EC gain connected gain to the extent that each that PRS would recognize with respect and deemed sale EC loss must be

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determined with respect to each asset. aggregate deemed sale EC capital gain is capital gain. Accordingly, the amount of The amounts determined under $15x (that is, the aggregate of its FP’s capital gain that is treated as paragraph (c)(2) of this section are as distributive share of deemed sale EC effectively connected gain is $5x. follows: gain that is attributable to the deemed (ii) Ordinary loss. Under paragraph sale of assets that are not section 751(a) (b)(3)(iv) of this section, the $10x Asset Deemed sale property, which is 50% of $30x) and outside ordinary loss recognized by FP EC gain/(loss) FP’s aggregate deemed sale EC ordinary is treated as effectively connected loss U.S. Business section 1231 loss is $0 (that is, the aggregate of its to the extent that it does not exceed FP’s asset ...... $30x distributive share of deemed sale EC $0 aggregate deemed sale EC ordinary U.S. Business inventory and loss that is attributable to the deemed loss. Accordingly, the amount of FP’s receivables ...... 20x sale of assets that are section 751(a) ordinary loss that is treated as Country A Business capital property). effectively connected loss is $0. asset ...... 0 (C) Limitation—(i) Capital gain. (4) Example 4. Coordination with Country A Business inven- Under paragraph (b)(3)(i) of this section, income tax treaties—(i) Facts—(A) Sale tory ...... 0 the $5x outside capital gain recognized of interest. On January 1, 2019, FP sells by FP is treated as effectively connected its entire interest in PRS to X for $105x. (3) Step 3. Under paragraph gain to the extent that it does not exceed Immediately before the sale, PRS’s (c)(3)(ii)(B) of this section, FP’s FP’s $15x aggregate deemed sale EC balance sheet appears as follows:

Fair market Adjusted basis value

U.S. Business section 1231 asset ...... $100x $104x Country A Business capital asset ...... 100x 106x

Total ...... 200x 210x

(B) Treaty benefits. FP is a qualified described in paragraph (c)(1) of this since all of it would exceed FP’s $0x resident of Country A under a U.S. section is as follows: aggregate deemed sale EC capital gain. income tax treaty between the United (j) Applicability date. This section States and Country A that is similar or Asset Gain/(loss) applies to transfers occurring on or after identical in all material respects to the December 26, 2018, and to amounts 2006 U.S. Model Income Tax U.S. Business section 1231 received on or after December 26, 2018, Convention (the Treaty). PRS is treated asset ...... $4x pursuant to an installment sale (as Country A Business capital defined in section 453(b)) occurring on as fiscally transparent for purposes of asset ...... 6x Country A tax law. PRS does not carry or after November 27, 2017. on its U.S. Business through a U.S. ■ Par. 3. Section 1.897–7 is added to permanent establishment (PE). (2) Step 2. Under paragraph (c)(2) of read as follows: (ii) Analysis—(A) Outside gain or loss. this section, PRS’s deemed sale EC gain FP is a foreign transferor (within the is as follows: § 1.897–7 Treatment of certain partnership meaning of paragraph (g)(3) of this interests, trusts and estates under section section) and transfers (within the Asset Gain/(loss) 897(g). meaning of paragraph (g)(5) of this (a) through (b) [Reserved]. For further U.S. Business section 1231 guidance, see § 1.897–7T(a) through (b). section) its interest in PRS to X. For asset ...... $4x purposes of this example, for simplicity, (c) Coordination with section Country A Business capital 864(c)(8). Except as provided in PRS is assumed to hold no section asset ...... 0x 751(a) property and depreciation § 1.864(c)(8)–1, the amount of any recapture is assumed to be zero. FP money, and the fair market value of any (3) Step 3. FP is eligible for benefits recognizes a $5x capital gain under property, received by a nonresident under the Treaty and derives the gain on section 741, which is an outside capital alien individual or foreign corporation the deemed sale of U.S. Business section gain within the meaning of paragraph in exchange for all or part of its interest 1231 asset. Under paragraph (c)(3)(i) (b)(2)(i) of this section. Under paragraph in a partnership, trust, or estate will, to and paragraph (f) of this section, (b)(1) of this section, FP’s $5x capital the extent attributable to United States because gain from the disposition of the gain is treated as effectively connected real property interests, be considered as U.S. Business section 1231 asset does gain to the extent that it does not exceed an amount received from the sale or not form part of a U.S. PE, the gain is the limitation described in paragraph exchange in the United States of such exempt from U.S. tax under the Treaty, (b)(3)(i) of this section, which is FP’s property. See also § 1.864(c)(8)–1(h) for and is not taken into account in aggregate deemed sale EC capital gain. an anti-stuffing rule that may apply to (B) Deemed sale. FP’s aggregate determining FP’s distributive share of transactions subject to section 897. This deemed sale EC capital gain is deemed sale EC gain under paragraphs paragraph applies to transfers occurring determined according to the three-step (c)(3)(i) and paragraph (f) of this section. on or after December 26, 2018, and to process set forth in paragraph (c) of this Therefore, FP’s aggregate deemed sale amounts received on or after December section by taking into account the treaty EC capital gain is $0x under paragraph 26, 2018, pursuant to an installment sale coordination rule under paragraph (f) of (c)(3)(ii)(B) of this section. (as defined in section 453(b)) occurring this section. (C) Limitation. Under paragraph on or after November 27, 2017. (1) Step 1. The amount of gain or loss (b)(3)(i) of this section, the $5x outside ■ Par. 4. Section 1.897–7T is amended that PRS would recognize with respect capital gain recognized by FP is not by adding paragraph (c) to read as to each of its assets upon a deemed sale treated as effectively connected gain follows:

VerDate Sep<11>2014 18:59 Nov 05, 2020 Jkt 253001 PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 E:\FR\FM\06NOR1.SGM 06NOR1 70972 Federal Register / Vol. 85, No. 216 / Friday, November 6, 2020 / Rules and Regulations

§ 1.897–7T Treatment of certain II. Submission of the Amendments effect changes concerning the special partnership interests as entirely U.S. real III. OSMRE’s Findings reclamation tax and apportionment of property interests under sections 897(g) IV. Summary and Disposition of Comments this tax. This amendment was intended and 1445(e) (temporary). V. OSMRE’s Decision to increase and extend the special VI. Statutory and Executive Order Reviews * * * * * reclamation tax. Moreover, a specific (c) Coordination with section I. Background on the West Virginia portion of this tax was allocated to the 864(c)(8). [Reserved]. For further Program Special Reclamation Water Trust Fund guidance, see § 1.897–7(c). Section 503(a) of the Act (30 U.S.C. for the purpose of designing, Sunita Lough, 1253(a)) permits a State to assume constructing and maintaining water Deputy Commissioner for Services and primacy for the regulation of surface treatment systems on forfeited mine Enforcement. coal mining and reclamation operations sites. We approved the reinstatement of Approved: September 10, 2020. on non-Federal and non-Indian lands the special reclamation tax, its increase to twenty-seven and nine-tenths cents David J. Kautter, within its borders by demonstrating that its State program includes, among other per ton of clean coal mined, as well as Assistant Secretary of the Treasury (Tax fifteen cents of the amount collected Policy). things, State laws and regulations that govern surface coal mining and allocated for deposit to the Special [FR Doc. 2020–21165 Filed 11–5–20; 8:45 am] Reclamation Water Trust Fund on a BILLING CODE 4830–01–P reclamation operations in accordance with the Act and consistent with the temporary basis. OSRME’s approval Federal regulations. See 30 U.S.C. took effect upon publication of this interim rule in the Federal Register on DEPARTMENT OF THE INTERIOR 1253(a)(1) and (7). On the basis of these criteria, the Secretary of the Interior July 11, 2012 (77 FR 40793) (Administrative Record No. WV–1583). Office of Surface Mining Reclamation conditionally approved the West and Enforcement Virginia program on January 21, 1981. III. OSMRE’s Findings You can find background information A. WV–121–FOR: WVSCMRA § 22–3– 30 CFR Part 948 on the West Virginia program, including the Secretary’s findings, the disposition 33—Award of Attorney Fees, Costs, and [WV–119–FOR (Interim) OSM 2012–0013; of comments, and conditions of Expenses. WV–121–FOR; OSM–2013–0010 S1D1S SS08011000 SX064A000 201S180110; approval of the West Virginia program A new section is created in the West S2D2S SS08011000 SX064A000 in the January 21, 1981, Federal Virginia Code, designated as § 22–3–33 20XS501520] Register (46 FR 5915). You can also find to award attorney fees and costs by the later actions concerning West Virginia’s SMB and courts of appeals from actions West Virginia Regulatory Program program and program amendments at 30 taken by the WVDEP under the CFR 948.10, 948.12, 948.13, 948.15, and approved State surface mining program. AGENCY: Office of Surface Mining 948.16. The SMB or the court may authorize an Reclamation and Enforcement, Interior. award to the petitioner the amount of II. Submission of the Amendments ACTION: Final rule; approval of cost and expenses, including attorney amendment. By letter dated and received by fees. OSMRE on September 11, 2013 This action is being taken due to the SUMMARY: We, the Office of Surface (Administrative Record No. WV–1584), deletion of State statutory provisions Mining Reclamation and Enforcement the West Virginia Department of from the approved State program which (OSMRE), are approving an amendment Environmental Protection (WVDEP) provided that any person involved in to the West Virginia regulatory program submitted an amendment to revise any administrative or judicial (the West Virginia program) under the WVSCMRA. Enrolled Senate Bill 497 proceeding is entitled to reimbursement Surface Mining Control and created a new section in the West of all costs and expenses, including Reclamation Act of 1977 (SMCRA or the Virginia Code, designated as § 22–3–33, attorney fees, incurred by his Act). West Virginia is submitting a relating to the award of attorney fees participation in proceedings as proposed amendment to revise the West and costs by the Surface Mine Board determined by the SMB or State court. Virginia Surface Coal Mining and (SMB), which replaced the Reclamation We find the proposed State statutory Reclamation Act (WVSCMRA) by Board of Review (RBR), and Courts in revisions, as amended, to be no less creating a new section relating to the appeals from actions taken by WVDEP effective than the Federal requirements award of attorney fees and costs by the under the approved State surface at 43 CFR 4.1295 and no less stringent Surface Mine Board. On July 11, 2012, mining program. than section 525(e) of SMCRA (30 OSMRE on an interim basis, approved In 1994, the West Virginia Legislature U.S.C. 1275), which states that costs and statutory amendments (WV–119) to the adopted House Bill 4065 expenses, including attorney fees that West Virginia regulatory program under (Administrative Record No. WV–933). are reasonably incurred may be SMCRA. West Virginia revised the This bill deleted the provisions dealing awarded, and can be approved. WVSCMRA to effect changes concerning with the RBR and replaced them in the special reclamation tax and another Chapter and Article of the West B. WV–119–FOR: WVSCMRA § 22–3– apportionment of this tax. Virginia Code with provisions 11(h)(1)—Special Reclamation Tax DATE: The effective date is December 7, establishing the current SMB, which Subsection 22–3–11(h)(1) of the 2020. performs the same functions formerly WVSCMRA is substantively amended FOR FURTHER INFORMATION CONTACT: Mr. performed by the RBR. OSMRE by increasing the amount of the special Ben Owens, Acting Director, Charleston approved the provisions establishing the reclamation tax to twenty-seven and Field Office, Telephone: (412) 937– SMB on February 21, 1996, (61 FR 6511) nine-tenths cents per ton of clean coal 2827. Email: [email protected]. (Administrative Record No. WV–1022). mined. The former special reclamation On April 27, 2012, West Virginia tax, effective as of July 1, 2009, required SUPPLEMENTARY INFORMATION: submitted a program amendment, WV– remittance of fourteen and four-tenths I. Background on the West Virginia Program 119–FOR, to revise its WVSCMRA to cents per ton of clean coal mined; the

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