The document discusses the impact of the Tax Cuts and Jobs Act (TCJA) on foreign partners in US partnerships. It explains that the TCJA enacted IRC Section 864(c)(8) to treat gains from the sale of partnership interests as effectively connected income (ECI) if the partnership conducts a US trade or business. The new law aims to tax foreign partners on disposition of partnership interests and requires transferee withholding of 10% of the amount realized on such dispositions.

1. THE EFFECT OF TAX REFORM
ON REAL ESTATE AND PROFESSIONAL SERVICE FIRMS
Roger Royse
rroyse@rroyselaw.com
www.rroyselaw.com
Research Assistant: Natalie Ryang
The Santa Clara County Bar
Part I. Tax Cuts and Job Acts (TCJA)
Part II. Foreign Partners in U.S. Partnerships
Part III. Foreign Investment in the U.S. Real Estate

2. No information contained in this presentation is to be construed as legal advice.
No information contained in this presentation is intended or related to any
particular factual situation. Nothing herein forms an attorney-client relationship.
If legal advice or other expert assistance is required, the services of a competent
professional should be sought.
Part II. Cryptocurrency Regulation 2
Disclaimer

3. Foreign partners in the U.S. Partnership
• Is a foreign partner’s sale proceeds treated as “effectively connected
income” taxable under Rev. Rule 91-32?
• Effectively Connected Income (ECI) is taxable in the U.S.
• If treated as capital gain, generally not taxable in the U.S.
• Rev. Rul. 91-32: a foreign partner who sells an interest in a partnership is
subject to US taxation if the partnership is engaged in a US trade or
business – “ECI”
• Many US taxpayers tried to ignore this Revenue Ruling, arguing any gain should be
capital gain
• Obama Administration, in its proposed budget, recommended codifying Rev. Rul. 91-
32 and adding a withholding obligation.
Part I. Tax Cuts and Jobs Acts 3

4. Grecian Magnesite and New IRC § 864(c)(8):
• Grecian Magnesite v. CIR, 149 T.C. (2017): US Tax Court rejected Rev.
Rul. 91-32, holding that gain or loss recognized by a foreign partner
disposing of a P/S interest is generally not considered ECI
• New IRC § 864(c)(8): effectively reverses Grecian Magnesite holding
• Enacted as part of the 2017 TCJA
• Treats as ECI the foreign partner’s “distributive share of the amount of gain
(or loss) which would have been ECI if the partnership entity has sold all of its
assets at FMV just prior to the foreign partner’s disposition (but reduced for
any gain already subject to the FRPTA regime).
Part I. Tax Cuts and Jobs Acts 4

5. Part I. Tax Cuts and Jobs Acts 5
864(c)(8) Gain or loss of foreign persons from sale or exchange of certain partnership interests (A) In general. Notwithstanding
any other provision of this subtitle, if a nonresident alien individual or foreign corporation owns, directly or indirectly, an
interest in a partnership which is engaged in any trade or business within the United States, gain or loss on the sale or exchange
of all (or any portion of) such interest shall be treated as effectively connected with the conduct of such trade or business to the
extent such gain or loss does not exceed the amount determined under subparagraph (B).
(B) Amount treated as effectively connected. The amount determined under this subparagraph with respect to any partnership
interest sold or exchanged— (i) in the case of any gain on the sale or exchange of the partnership interest, is— (I) the portion of
the partner’s distributive share of the amount of gain which would have been effectively connected with the conduct of a trade
or business within the United States if the partnership had sold all of its assets at their fair market value as of the date of the
sale or exchange of such interest, or
(II) zero if no gain on such deemed sale would have been so effectively connected,

6. Foreign partners in the Partnership
Part I. Tax Cuts and Jobs Acts 6
Non-US
Partner
P/S
US
Trade/Biz
#2 (ECI
assets)
US Trade/ Biz
#1 (no ECI)
Partner
3rd
Party
Buyer
Sale of P/S Interest
US Group
Issue: To what extent, if any, should Foreign Partner’s sale proceeds be treated as
ECI (taxable in US) or as capital gain (generally not taxable in US)?

7. New IRC § 864(c)(8)
• Foreign partners will be taxed on sales/exchange of their interests in
partnerships that conduct a trade or business in the U.S.
• § 864(c)(8)(A) applies to tiered P/S structures: interests in a
partnership that holds ECI assets, and is held by a partner indirectly
through other partnerships, is subject to new 864(c)(8)
Part I. Tax Cuts and Jobs Acts 7

8. New IRC § 864(c)(8)
• Coordination with the FIRPTA rules to avoid double taxation: the
amount of gain or loss on the sale, exchange or other disposition of
the partnership interest that is treated as ECI under subparagraph (A)
shall be reduced by the amount of gain or loss on such disposition
that is treated as effectively connected under §897 (i.e., the FIRPTA
rules).
• The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)
authorizes the US to tax foreign persons on dispositions of “U.S. real
property interests.”
• When a foreign person disposes of a U.S. real property interest in a sale,
exchange, or transactions that normally would be a non-recognition
transactions, FIRPTA treats such gains as “effectively connected income” (ECI),
and imposes withholding obligations under § 1445. 15% withholding rate.
Part I. Tax Cuts and Jobs Acts 8

9. New IRC § 864(c)(8)
• § 864(c)(8)(E) grants regulatory authority to Treasury to promulgate
Regs or other appropriate guidance for the applying § 864(c)(8),
• Example: If a P/S interest is contributed by a non-US partner to a
corporation, should the non-recognition rule of §351 be turned off?
• Section 864(c)(8) does not purport to override any non-recognition
provisions.
Part I. Tax Cuts and Jobs Acts 9

10. New IRC § 864(c)(8)
Part I. Tax Cuts and Jobs Acts 10
(C) Coordination with United States real property interests. If a
partnership described in subparagraph (A) holds any United States
real property interest (as defined in section 897(c)) at the time of the
sale or exchange of the partnership interest, then the gain or loss
treated as effectively connected income under subparagraph (A) shall
be reduced by the amount so treated with respect to such United
States real property interest under section 897.
(D) Sale or exchange. For purposes of this paragraph, the term “sale
or exchange” means any sale, exchange, or other disposition.
.

11. New §1446(f) Transferee Withholding
• As part of the 2017 US Tax Act, Congress also enacted a new
withholding requirement—IRC section 1446(f).
• Section 1446(f) provides that, if the portion of the gain (if any) on a
disposition of an interest in a partnership would be treated under §
864(c)(8) as ECI, the transferee of the partnership interest [i.e.,
Buyer] must withhold tax equal to 10% of the amount realized on
the disposition.
Part I. Tax Cuts and Jobs Acts 11

12. • Notice 2018-29 provides guidance with respect to the new
withholding provision IRC §1446(f)
• Notice directs transferees to apply § 1445 principles and forms for
reporting and paying withholding tax until specific guidance and
forms are issued under § 1446(f).
• Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign
Persons of U.S. Real Property Interests
• Form 8288-A, Statement of Withholding on Dispositions by Foreign
Persons of U.S. Real Property Interests.
Part I. Tax Cuts and Jobs Acts 12
IRS Notice 2018-29: re new §1446(f)

13. • Provide guidance on
• How to determine liabilities in calculating the “amount realized”
• Coordination withholding rules of § 1446(f) with FIRPTA’s withholding
regime
• Application of withholding in the context of tiered partnerships
• Partnership’s backup withholding on distributions to the new transferee
partner.
• Complete redemptions of a foreign partner’s P/S interest
Part I. Tax Cuts and Jobs Acts 13
IRS Notice 2018-29: re new §1446(f)

14. • Provide LIMITED EXCEPTIONS from duty to withhold: may be temporary
• Not a “foreign person” transferor furnishes affidavits signed under penalty of
perjury
• Zero realized gain: Transferee receives a certification
• 1st de minimis rule: Transferee receives a certification that Transferor’s
allocable share of ECI was < 25 % of its distributive share of income for each
of the three prior taxable years in which Transferor was a partner (for the
entire year).
• 2nd de minimis rule – ECI would be < 25% of total gain on the deemed sale:
Transferee receives a certification . Notice says the < 25% threshold will be
reduced in forthcoming Regs.
• Non-Recognition Transactions: Transferor is not required to recognized any
gain or loss by reason of a non-recognition provision. (E.g., § 351
incorporating transactions.)
Part I. Tax Cuts and Jobs Acts 14
IRS Notice 2018-29: re new §1446(f)

15. Case Study: Disposition of P/S Interest
(with US Trade/Biz) by Foreign Partner
• Facts: Foreign Co. sells its 30%
interest in US P/S to an unrelated
party on Feb 14, 2018
• Question: How much of the
remaining outside gain is treated
as ECI, thus taxable in the U.S.?

16. Case Study: Disposition of P/S Interest
(with US Trade/Biz) by Foreign Partner
• Under §864(c)(8), For Co’s realized
gain is treated as ECI
• Income “effectively connected with the
conduct of a US trade/business
• Will be reduced by real property gains
that would already be separately taxed
as ECI under the FIRPTA regime).

17. Case Study: Disposition of P/S Interest
(with US Trade/Biz) by Foreign Partner
•Hypothetical sale of all of P/S’s assets
•$600 US Real Property gain
•$300 ECI gain in personal property
assets
• Total of $900 ECI gain.
• The amount treated as ECI is reduced
by the amount that would already be
taxed as ECI under the § 896(g) of the
FIRPTA regime—here $600.
•FIRPTA gain: treated as ECI

18. Case Study: Disposition of P/S Interest
(with US Trade/Biz) by Foreign Partner
• Thus, 30% of the inherent
$600 FIRPTA gain (i.e., $180) is
allowed to first offset
•For Co.’s OUTSIDE gain on the
sale of its P/S interest--($450
realized gain less $180 = $270.

19. Case Study: Disposition of P/S Interest
(with US Trade/Biz) by Foreign Partner
• For Co.’s 30% distributive share
of the $900 total ECI gains =
$270.
•That $270, representing For Co’s
share of total ECI gain is also
offset by 30% of the FIRPTA gain:
($270 - $180 =$90).
•Answer: Under § 864(c), $90 of
For. Co.’s realized gain on the sale
of its P/S interest is treated as
ECI—and taxed in the U.S.

20. Case Study: Disposition of P/S Interest
(with US Trade/Biz) by Foreign Partner
• Analysis of transferee withholding
duty under §1446(f) and Notice
2018-29:
• §1446(f) became effective Jan. 1, 2018,
and it applies to this sale of For Co’s P/S
interest which occurred on Feb. 14, 2018.
• Section 10 of Notice 2018-29 provides
that if a transferee is required to withhold
on an “amount realized” under
§1446(e)(5) or Reg. § 1.1445-11T(d) only
FIRPTA withholding applies.

21. Case Study: Disposition of P/S Interest
(with US Trade/Biz) by Foreign Partner
• Analysis of transferee withholding
duty under §1446(f) and Notice
2018-29:
• However, there is no FIRPTA withholding
in this example because the P/S assets are
not 90% US Real Property Interests and
cash. *
• Thus, withholding under new 1446(f)
conceivably applies to the ENTIRE amount
realized—i.e., 10% w/h X $600 = $60.
* A partnership interest is a USRPI in its entirety if
50% or more of the value of the gross assets consists
of USRPIs and 90% or more of the value of the gross
assets consists of USRPIs plus any cash or cash
equivalents (50/90 test).

22. ROYSE LAW FIRM, PC
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22Part I. Tax Cuts and Jobs Acts