Publish Date

Sep 23, 2020

Partnership Disposition Regulations Usher in New Age of Complexity

Special Tax Alert

“There is an ancient belief that the gods love the obscure and hate the obvious.  Without benefit of divinity, modern men of similar persuasion draft provisions of the Internal Revenue Code.  Section 341 is their triumph.” That quote is from an article written by Martin D. Ginsburg (late husband of recently deceased Justice Ruth Bader Ginsburg) in the 1970s. Section 341 was repealed in 2003. But its offering to the gods has been replaced by the many subsequent efforts by Congress at “simplification.”  The Tax Cuts and Jobs Act of 2017 (the TCJA) is their most recent triumph.

Unfortunately, new code section 864(c)(8), which was enacted as part of the TCJA, is no exception, as exemplified by Monday’s release of regulations which govern the taxation of a foreign person on the disposition of an interest in a partnership that is engaged in the conduct of a trade or business in the United States (section 864(c)(8)).  This alert provides a brief historical background leading up to the enactment of 864(c)(8), explains the regulation at a high level and then highlights some of the complexities associated with the regulations.


Prior to 1991, the conventional wisdom was that foreign persons were simply not subject to U.S. tax on gains from the disposition of a partnership interest (except to the extent that the partnership held U.S. real property). That changed dramatically when the IRS issued Rev. Rul. 91-32, which applied the aggregate theory of partnership taxation to, in essence, treat the foreign seller of a partnership interest as having sold a proportionate interest in each and every asset of the partnership.   As a result, if the partnership was engaged in a U.S. trade or business, a proportionate part of the foreign partner’s gain became subject to U.S. tax…