Requirements for Certain Foreign Persons and Certain Foreign-Owned Partnerships Investing in Qualified Opportunity Funds and Flexibility for Working Capital Safe Harbor Plans, 19585-19599 [2021-06143]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 86, Number 70 (Wednesday, April 14, 2021)]
[Proposed Rules]
[Pages 19585-19599]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-06143]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-121095-19]
RIN 1545-BP50


Requirements for Certain Foreign Persons and Certain Foreign-
Owned Partnerships Investing in Qualified Opportunity Funds and 
Flexibility for Working Capital Safe Harbor Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that include 
requirements that certain foreign persons and certain foreign-owned 
partnerships must meet in order to elect the Federal income tax 
benefits provided by section 1400Z-2 of the Internal Revenue Code 
(Code). This document also contains proposed regulations that allow, 
under certain circumstances, for the reduction or elimination of 
withholding under section 1445, 1446(a), or 1446(f) of the Code on 
transfers that give rise to gain that is deferred under section 1400Z-
2(a). Finally, this document contains additional guidance regarding the 
24-month extension of the working capital safe harbor in the case of 
Federally declared disasters. The proposed regulations affect qualified 
opportunity funds and their investors.

[[Page 19586]]


DATES: Written or electronic comments and requests for a public hearing 
must be received by June 11, 2021. Requests for a public hearing must 
be submitted as prescribed in the ``Comments and Requests for Public 
Hearing'' section.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-121095-
19) by following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The IRS expects to have limited personnel available to 
process public comments that are submitted on paper through the mail. 
Until further notice, any comments submitted on paper will be 
considered to the extent practicable. The Department of the Treasury 
(Treasury Department) and the IRS will publish for public availability 
any comment submitted electronically, and to the extent practicable on 
paper, to its public docket. Send paper submissions to: CC:PA:LPD:PR 
(REG-121095-19), Room 5203, Internal Revenue Service, PO Box 7604, Ben 
Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning proposed Sec. Sec.  
1.1400Z2(a)-2 and 1.1445-3, Milton Cahn at (202) 317-4934; concerning 
proposed Sec. Sec.  1.1446-3, 1.1446-6 and 1.1446-7, Ronald Gootzeit at 
(202) 317-4953; concerning proposed Sec.  1.1446(f)-2, Subin Seth at 
(202) 317-5003; concerning proposed Sec. Sec.  1.1400Z2(a)-1(a), 
1.1400Z2(b)-1(c), and 1.1400Z2(d)-1(d), Erika Reigle at (202) 317-7006; 
concerning submissions of comments and/or requests for a public 
hearing, Regina L. Johnson, (202) 317-5177 (not toll free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to 26 CFR part 1 under 
sections 1400Z-2, 1445, and 1446 (proposed regulations). Section 13823 
of Public Law 115-97, 131 Stat. 2054, 2184 (2017), commonly referred to 
as the Tax Cuts and Jobs Act (TCJA), added sections 1400Z-1 and 1400Z-2 
to the Code. The purposes of section 1400Z-2 and the section 1400Z-2 
regulations (that is, the final regulations set forth in Sec. Sec.  
1.1400Z2(a)-1 through 1.1400Z2(f)-1, 1.1502-14Z, and 1.1504-3) are to 
provide specified Federal income tax benefits to owners of qualified 
opportunity funds (QOFs) to encourage the making of longer-term 
investments, through QOFs and qualified opportunity zone businesses, of 
new capital in one or more qualified opportunity zones designated under 
section 1400Z-1 and to increase economic growth in such qualified 
opportunity zones. See Sec.  1.1400Z2(f)-1(c)(1) (describing the 
purposes of section 1400Z-2 and the section 1400Z-2 regulations; Notice 
2018-48, 2018-28 I.R.B. 9, and Notice 2019-42, 2019-29 I.R.B. 352 
(setting forth the combined list of population census tracts designated 
as qualified opportunity zones).
    Section 1400Z-1 provides the procedural rules for designating 
qualified opportunity zones and related definitions. Section 1400Z-2 
provides two main tax incentives to encourage investment in qualified 
opportunity zones. See section 1400Z-2(b) and (c). First, a taxpayer, 
upon making a valid election, may generally defer, until the earlier of 
an inclusion event or December 31, 2026, certain gains in gross income 
that would otherwise be recognized in the tax year if the taxpayer 
invests a corresponding amount in a qualifying investment in a QOF 
within 180 days of the date of the sale or exchange. See section 1400Z-
2(b)(1)(A) and (B). The taxpayer may potentially exclude ten percent of 
such deferred gain from gross income if the taxpayer holds the 
qualifying investment in the QOF for at least five years. See section 
1400Z-2(b)(2)(B)(iii). An additional five percent of such gain may 
potentially be excluded from gross income if the taxpayer holds the 
qualifying investment for at least seven years. See section 1400Z-
2(b)(2)(B)(iv). Second, a taxpayer, upon making a second valid election 
under section 1400Z-2(c), may also exclude from gross income any 
appreciation on the taxpayer's qualifying investment in the QOF if the 
qualifying investment is held for at least ten years. Section 1400Z-
2(e)(4) provides that the Secretary of the Treasury or his delegate 
shall prescribe regulations as may be necessary or appropriate to carry 
out the purposes of section 1400Z-2, including rules to prevent abuse.
    On October 29, 2018, the Treasury Department and the IRS published 
in the Federal Register (83 FR 54279) a notice of proposed rulemaking 
(REG-115420-18) providing guidance under section 1400Z-2 for investing 
in qualified opportunity funds (83 FR 54279 (October 29, 2018)) 
(October 2018 proposed regulations). A second notice of proposed 
rulemaking (REG-120186-18) was published in the Federal Register (84 FR 
18652) on May 1, 2019, containing additional proposed regulations under 
section 1400Z-2 (May 2019 proposed regulations). The May 2019 proposed 
regulations also updated portions of the October 2018 proposed 
regulations. On January 13, 2020, final regulations (TD 9889) under 
section 1400Z-2 were published in the Federal Register (85 FR 1866, as 
corrected at 85 FR 19082), effective for taxable years beginning after 
March 13, 2020 (section 1400Z-2 regulations).
    Under the section 1400Z-2 regulations, a taxpayer qualifies for 
deferral under section 1400Z-2(a) only if the taxpayer is an eligible 
taxpayer. Section 1.1400Z2(a)-1(a)(1). An eligible taxpayer is defined 
as a person that is required to report the recognition of gains during 
the taxable year under Federal income tax accounting principles. 
Section 1.1400Z2(a)-1(b)(13). If an eligible taxpayer that is a 
partnership does not elect to defer gain, a partner of such partnership 
may elect to defer its distributive share of the gain. Section 
1.1400Z2(a)-1(c)(8).
    The section 1400Z-2 regulations provide that only gains that are 
eligible gains may be deferred. Section 1.1400Z2(a)-1(b)(11). In 
general, an eligible gain is gain that (i) is treated as a capital gain 
or is a qualified 1231 gain, (ii) would be recognized for Federal 
income tax purposes and subject to tax under subtitle A of the Code 
before January 1, 2027, if section 1400Z-2(a)(1) did not apply to defer 
the gain, and (iii) does not arise from a sale or exchange of property 
with certain related persons. Id. Thus, for example, a nonresident 
alien individual or foreign corporation generally may make a deferral 
election with respect to an item of capital gain that is effectively 
connected with a U.S. trade or business, because this gain otherwise is 
subject to Federal income tax. When a partnership chooses to make a 
deferral election, the section 1400Z-2 regulations provide an exception 
to the general requirement that gain be subject to Federal income tax 
in order to constitute eligible gain, subject to an anti-abuse rule. 
Section 1.1400Z2(a)-1(b)(11)(ix)(B).
    Foreign persons are generally subject to U.S. income tax on amounts 
that are effectively connected with the conduct of a trade or business 
within the United States (ECI). A foreign person that directly or 
indirectly is engaged in a trade or business in the United States must 
file a U.S. income tax return and pay any tax due.
    To ensure the collection of tax, in certain circumstances, the Code 
imposes withholding requirements on payments or allocations of ECI to 
foreign persons. See sections 1445, 1446(a), and 1446(f). The amount of 
withholding under these provisions is intended to serve as a

[[Page 19587]]

proxy for the amount of the foreign person's substantive tax liability 
and may not match the actual amount of tax due. The amount withheld may 
be claimed as a credit against the amount of tax due and shown on the 
foreign person's tax return.
    Specifically, section 1445(a) requires a transferee to withhold tax 
on a disposition of a United States real property interest (as defined 
in section 897(c)) (U.S. real property interest) by a foreign person. 
Generally, the transferee must withhold 15 percent of the amount 
realized and deposit the tax with the IRS within 20 days of the 
transfer. Certain exceptions and reductions to the rate of withholding 
can apply, including by the foreign person obtaining a withholding 
certificate from the IRS to reduce or eliminate the amount required to 
be withheld on the transfer.
    Section 1445(e)(1) requires a domestic partnership, trust, or 
estate that disposes of a United States real property interest to 
withhold on any portion of the gain that is allocable to a foreign 
partner or beneficiary. The rate of withholding is the highest rate of 
tax in effect under section 11(b) (currently 21 percent).
    Section 1445(e)(2) requires a foreign corporation that recognizes 
gain on the distribution of a United States real property interest to 
withhold on the gain at the highest rate of tax in effect under section 
11(b).
    Section 1445(e)(3) requires a domestic corporation that is or has 
been a United States real property holding corporation to withhold 15 
percent of a distribution to a nonresident alien or foreign 
corporation.
    Section 1445(e)(6) requires a qualified investment entity to 
withhold at the highest rate of tax specified in section 11(b) on the 
amount of the distribution that is treated as gain from the sale or 
exchange of a United States real property interest.
    Section 1446(a) generally requires a partnership to withhold tax on 
effectively connected taxable income as determined under Sec.  1.1446-2 
(ECTI) allocable to a foreign partner, with limited adjustments, 
regardless of whether the income is distributed to the partner (section 
1446(a) tax). A partnership must generally withhold section 1446(a) tax 
on a foreign partner's allocable share of ECTI at the highest rate of 
tax specified in section 1 (for a foreign partner other than a 
corporation) or section 11(b) (for a foreign partner that is a 
corporation). A partnership is generally required to pay the section 
1446(a) tax in four installment payments. The partnership may consider 
certain partner-level deductions and losses as a reduction to the ECTI 
on which it must withhold section 1446(a) tax. See Sec.  1.1446-6.
    Section 1446(f) requires withholding under certain circumstances in 
connection with a disposition of a partnership interest. Specifically, 
if, on a disposition (which includes a distribution from a partnership 
to a partner) of a partnership interest, section 864(c)(8) treats any 
portion of a foreign partner's gain as effectively connected gain, 
section 1446(f) requires the transferee to withhold tax equal to 10 
percent of the amount realized, unless an exemption or reduced rate of 
withholding applies. The transferee must deposit the tax with the IRS 
within 20 days of the transfer. See Sec.  1.1446(f)-2. For purposes of 
section 1446(f), a transferor may in certain cases certify to the 
transferee that the transfer is not subject to withholding or otherwise 
qualifies for an exception to withholding or an adjustment to the 
amount required to be withheld. Id.
    Under sections 33 and 1462, a foreign person subject to withholding 
under section 1445, 1446(a), or 1446(f) may credit the amount withheld 
against the amount of income tax liability shown on the person's tax 
return.

Explanation of Provisions

I. Overview of Proposed Regulations

    These proposed regulations provide requirements for certain foreign 
persons and certain foreign-owned partnerships investing in QOFs and 
flexibility for working capital safe harbor plans.

II. Requirements for Certain Foreign Persons and Certain Foreign-Owned 
Partnerships Investing in QOFs

A. Coordination of the Deferral Election Under Section 1400Z-2(a) With 
the Withholding Rules Under Sections 1445, 1446(a) and 1446(f)
    The existing section 1400Z-2 regulations do not coordinate the 
deferral election under section 1400Z-2(a) with the withholding rules 
in sections 1445, 1446(a), and 1446(f). Generally, these withholding 
provisions subject a foreign person to withholding to ensure the 
collection of tax due to the increased risk of noncompliance by a 
person that is not a United States person. In general, the withholding 
may be claimed as a credit or refund when the foreign person files its 
return and pays any substantive tax due. Thus, a foreign person subject 
to withholding that elects to defer gain under section 1400Z-2(a) may 
be entitled to apply the credit for withholding against tax on other 
income or claim a refund for the year in which withholding was applied, 
as the foreign person will not be required to pay substantive tax on 
all or a portion of the deferred gain until the gain is recognized upon 
the earlier of an inclusion event or December 31, 2026. In these 
circumstances, the withholding will not serve its intended purpose to 
ensure that the substantive tax is collected. To address the risk of 
noncompliance by certain foreign persons with respect to their U.S. tax 
obligations related to deferred gain under section 1400Z-2(a), the 
Treasury Department and the IRS have determined that coordination is 
needed between section 1400Z-2 and sections 1445, 1446(a), and 1446(f).
    To ensure that the compliance purposes of sections 1445, 1446(a), 
and 1446(f) are not undermined when a foreign person elects to defer 
gain under section 1400Z-2(a), these proposed regulations provide that 
security-required persons (certain foreign persons and foreign-owned 
partnerships) investing gain that is a security-required gain 
(generally, gain from a transfer subject to withholding under section 
1445, 1446(a), or 1446(f)) may not make a deferral election under 
section 1400Z-2(a) unless an eligibility certificate is obtained with 
respect to that gain. See section II.B of this Explanation of 
Provisions. At the same time, the proposed regulations eliminate or 
reduce withholding under section 1445, 1446(a), or 1446(f) on security-
required persons that obtain an eligibility certificate and provide 
security to the IRS before the transaction giving rise to the gain. As 
discussed in Part II.C of this Explanation of Provisions, this 
exemption responds to comments received on the proposed regulations 
under section 1400Z-2 requesting withholding relief so that foreign 
persons have funds available to invest the entire amount of eligible 
gain into a QOF. A security-required person that does not obtain an 
eligibility certificate before the transfer, and thus is withheld upon, 
must still obtain an eligibility certificate to make a deferral 
election under section 1400Z-2(a). The security-required person (or, if 
applicable, its partner, owner, or beneficiary) may also claim a credit 
or refund for the amount withheld on the deferred gain when filing its 
return. The IRS intends to require any claim for credit or refund for 
amounts withheld under section 1445, 1446(a), or 1446(f) on deferred 
gain under section 1400Z-2(a) to include a copy of the eligibility 
certificate for the covered transfer (or a statement providing that the 
transfer was not a covered transfer).

[[Page 19588]]

B. Requirement for Certain Persons To Obtain Eligibility Certificate
1. In General
    The proposed regulations provide that a taxpayer that is a 
security-required person may not make a deferral election under section 
1400Z-2(a) with respect to part or all of a security-required gain from 
a covered transfer unless the taxpayer obtains an eligibility 
certificate from the IRS with respect to such security-required gain by 
the date on which the deferral election is filed with the IRS. Proposed 
Sec.  1.1400Z2(a)-1(a)(3). The eligibility certificate must specify the 
permitted deferral amount, and the taxpayer may not make a deferral 
election with respect to the security-required gain in an amount that 
exceeds the permitted deferral amount. Id.
2. Security-Required Persons
    A security-required person means a person that is either (i) a 
foreign person other than a partnership or (ii) a specified 
partnership. Proposed Sec.  1.1400Z2(a)-2(b)(1). To minimize burden, 
the Treasury Department and the IRS have decided not to require that 
all partnerships electing to defer gain under section 1400Z-2(a) obtain 
an eligibility certificate. Rather, the rules regarding specified 
partnerships are intended to impose this requirement only on 
partnerships that pose a compliance risk with respect to the collection 
of tax on any deferred gain and that either hold a significant amount 
of U.S. real property interests or assets used in a U.S. trade or 
business or that generate a significant amount of gain that the 
partnership elects to defer. An abusive avoidance of the rules 
regarding specified partnerships is subject to the existing anti-abuse 
rule in Sec.  1.1400Z2(f)-1(c)(1) (providing that if a significant 
purpose of a transaction is to achieve a Federal income tax result that 
is inconsistent with the purposes of section 1400Z-2 and the section 
1400Z-2 regulations, a transaction (or series of transactions) will be 
recast or recharacterized for Federal income tax purposes as 
appropriate to achieve tax results that are consistent with the 
purposes of section 1400Z-2 and the section 1400Z-2 regulations).
    A specified partnership is a partnership, foreign or domestic, that 
meets three tests with respect to a transfer that produces a security-
required gain: An ownership test, a closely-held test, and a gain or 
asset test. Proposed Sec.  1.1400Z2(a)-2(b)(3). The ownership test is 
met if, at the time of transfer, 20 percent or more of the capital or 
profits interests in the partnership are owned (directly or indirectly 
through one or more partnerships, trusts, or estates) by one or more 
nonresident aliens or foreign corporations. Proposed Sec.  1.1400Z2(a)-
2(b)(3)(i). The closely-held test is met if, at any time during a look-
back period, a partnership has 10 or fewer direct partners that own 90 
percent or more of the capital or profits interests in the partnership, 
with any related partners (within the meaning of section 267(b) or 
707(b)(1)) being treated as a single partner. Proposed Sec.  
1.1400Z2(a)-2(b)(3)(ii). For purposes of the closely-held test, the 
look-back period is the period that begins on the later of the date 
that is one year before the date of the transfer or the date on which 
the partnership was formed, and that ends on the date of the transfer. 
Id. Further, a partner that is a partnership or trust is considered a 
direct partner. Id. The gain or asset test is met if either: (i) The 
amount of security-required gain from the transfer exceeds $1 million 
(the gain test) or (ii) at any time during a look-back period, the 
value of the partnership's assets that are U.S. real property interests 
or assets used in a U.S. trade or business exceeds 25 percent of the 
total value of the partnership's assets (the asset test). Proposed 
Sec.  1.1400Z2(a)-2(b)(3)(iii). For purposes of the asset test, the 
look-back period is the same as the look-back period for purposes of 
the closely held test. Id. The proposed regulations allow the 
partnership to determine the value of an asset on the last day of the 
taxable year preceding the year in which the look-back period begins 
or, for any asset acquired after this date (including upon formation of 
the partnership), on the date of acquisition. Id. The proposed 
regulations also provide rules for looking through interests in other 
partnerships to value assets that are held indirectly. Id. Finally, the 
proposed regulations state that the value of each asset will be 
measured according to its gross fair market value. Id. The Treasury 
Department and the IRS request comments on whether a method of valuing 
assets other than fair market value should be used for purposes of the 
asset test. The Treasury Department and the IRS also request comments 
on whether net value, instead of gross value, should be used for 
purposes of the asset test.
3. Covered Transfer and Security-Required Gain
    A covered transfer is defined as: (i) A disposition by, or a 
distribution to, a security-required person that is subject to 
withholding under section 1445; (ii) a disposition by, or a 
distribution to, a security-required person that is subject to 
withholding under section 1446(f); (iii) a disposition by a specified 
partnership of property, other than an interest in another partnership 
or a U.S. real property interest, or a distribution to a specified 
partnership, if any gain that arises is included in computing ECTI; or 
(iv) a disposition by a partnership that is not a specified partnership 
of property, or a distribution to such a partnership, if any gain that 
arises is included in determining the allocable share of a security-
required person's ECTI.\1\ Proposed Sec.  1.1400Z2(a)-2(c)(2)(i). The 
proposed regulations generally provide that a transfer subject to 
section 1445 or 1446(f) is not a covered transfer if an exception to 
withholding applies under those provisions. Proposed Sec.  1.1400Z2(a)-
2(c)(2)(ii). However, in order to impose the eligibility certificate 
requirements on security-required persons that are domestic specified 
partnerships, if the exception to withholding is based on the non-
foreign status of the transferor, the transfer will continue to be 
treated as a covered transfer. Id. For the same reason, a domestic 
specified partnership is treated as a foreign person in determining 
whether a transfer is a covered transfer as defined in (A), (B), and 
(D) of proposed Sec.  1.1400Z2(a)-2(c)(2)(i).
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    \1\ While both categories (iii) and (iv) describe dispositions 
or distributions, the gain from which is used in the calculation of 
ECTI under Sec.  1.1446-2, category (iii) describes transactions 
directly involving a specified partnership, while category (iv) 
describes transactions involving a partnership that is not a 
specified partnership that produce gain allocable to a partner that 
is a security-required person. The transactions described in 
category (iii) are limited to those involving property other than 
partnership interests and U.S. real property interests because the 
direct transfer by a specified partnership of a partnership interest 
is subject to withholding under section 1446(f) (and thus is already 
described in category (ii)), and the direct transfer of a U.S. real 
property interest is subject to withholding under section 1445 (and 
thus is already described in category (i)).
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    Security-required gain is certain gain that arises from a covered 
transfer. Proposed Sec.  1.1400Z2(a)-2(c)(1). For a covered transfer 
defined in proposed Sec.  1.1400Z2(a)-2(c)(2)(i)(C) (described in (iii) 
in the first sentence of the preceding paragraph), the amount of 
security-required gain is the gain that is included in computing ECTI 
under Sec.  1.1446-2, disregarding Sec.  1.1446-2(b)(4)(i). Id. For a 
covered transfer defined in proposed Sec.  1.1400Z2(a)-2(c)(2)(i)(D) 
(described in (iv) in the first sentence of the preceding paragraph), 
the amount of security-required gain is the gain that is included in 
computing ECTI under Sec.  1.1446-2 that is allocable to the security-
required person. Id.

[[Page 19589]]

4. Application for an Eligibility Certificate and Acceptable Security
    To obtain an eligibility certificate with respect to any security-
required gain, a security-required person must submit an application to 
the IRS. Proposed Sec.  1.1400Z2(a)-2(d)(2). The IRS is considering 
requiring electronic submission of the application; this process would 
be described in forms, instructions, publications, or guidance 
published in the Internal Revenue Bulletin. The application must 
generally include the following: (i) Certain information about the 
security-required person and the covered transfer; (ii) an agreement 
for the deferral of tax and provision of security (deferral agreement); 
(iii) an agreement with a U.S. agent (as defined in proposed Sec.  
1.1400Z2(a)-2(d)(4)(ii)(D)); and (iv) acceptable security that secures 
the amount of security-required gain for which the eligibility 
certificate is being obtained. Proposed Sec.  1.1400Z2(a)-2(d)(3). The 
application includes the requirement to provide a U.S. taxpayer 
identification number. If applicants do not yet have a U.S. taxpayer 
identification number, additional time should be allocated to ensure 
that a U.S. taxpayer identification number can be obtained; see the 
instructions to Forms W-7 and SS-4. The IRS may prescribe in forms or 
instructions or in publications or guidance published in the Internal 
Revenue Bulletin (see Sec. Sec.  601.601(d)(2) and 601.602 of this 
chapter) procedures for obtaining a U.S. taxpayer identification number 
under these circumstances.
    Acceptable security is defined as an irrevocable standby letter of 
credit issued by a U.S. bank that meets certain capital and other 
requirements specified in these proposed regulations. Proposed Sec.  
1.1400Z2(a)-2(d)(6)(ii). The proposed regulations provide that the IRS 
may identify in published guidance additional financial institutions 
that may qualify as issuers of letters of credit. Id. The Treasury 
Department and the IRS request comments on financial institutions other 
than banks that should qualify as issuers of letters of credit. The 
Treasury Department and the IRS also request comments on whether 
additional types of security are needed. Any additional proposed types 
of security should preserve administrative flexibility to require 
electronic submission of applications and protect the IRS's collection 
ability.
5. Deferral Agreement and Events of Default
    In general, under the deferral agreement, the security-required 
person agrees to do the following: Timely file a Federal income tax 
return and pay any tax liability due on the security-required gain for 
which the security-required person seeks to defer gain under section 
1400Z-2(a) when required; report any security-required gain in 
accordance with the regulations under section 1400Z-2; provide security 
to the IRS with respect to any tax liability due on security-required 
gain for which the security-required person seeks to defer gain under 
section 1400Z-2(a); and appoint a U.S. person to act as the security-
required person's limited agent for certain purposes specified in the 
deferral agreement. Proposed Sec.  1.1400Z2(a)-2(d)(4)(ii). The 
deferral agreement must conform to the template provided in guidance 
published in the Internal Revenue Bulletin. Proposed Sec.  1.1400Z2(a)-
2(d)(4)(i).
    An event of default under the deferral agreement is an inclusion 
event that triggers recognition of the security-required gain for which 
the security-required person seeks to defer gain under section 1400Z-
2(a). Proposed Sec.  1.1400Z2(a)-2(d)(4)(ii)(E). Defaults, upon which 
an event of default may be based, will be specified in the deferral 
agreement, and may include the following: A determination that the 
security is no longer adequate to protect the IRS's interests; a change 
in the creditworthiness of the issuer of a letter of credit; and a 
failure by the security-required person to file returns or attach an 
eligibility certificate (when required) during the period covered by 
the deferral agreement. Proposed Sec.  1.1400Z2(a)-2(d)(4)(ii)(E). In 
addition, the deferral agreement will specify whether notice of default 
and an opportunity to cure will be provided to the security-required 
person before an event of default arises. Id.
6. Amount of Eligibility Certificate
    The proposed regulations provide that an eligibility certificate 
will be issued for a permitted deferral amount. Proposed Sec.  
1.1400Z2(a)-2(d)(1). If a security-required person provides security in 
an amount equal to the maximum security amount, the permitted deferral 
amount is the total amount of security-required gain. Proposed Sec.  
1.1400Z2(a)-2(d)(7)(i). If a security-required person provides security 
in an amount less than the maximum security amount, the permitted 
deferral amount is the total amount of security-required gain 
multiplied by the ratio of the amount of security provided over the 
maximum security amount. Id.
    The proposed regulations provide specific rules for determining the 
maximum security amount, which is generally computed by reference to 
either a percentage of the amount realized on the covered transfer or 
the amount of tax due on the security-required gain. See proposed Sec.  
1.1400Z2(a)-2(d)(7)(ii). The maximum security amount on a direct 
disposition by, or a distribution to, a security-required person that 
is subject to withholding under section 1445 is the lesser of: (i) The 
amount realized multiplied by the rate specified under section 1445(a) 
(or, for transfers subject to section 1445(e)(1), (e)(2), or (e)(6), 
the rate specified in the applicable provision) or (ii) the security-
required gain multiplied by the highest rate of tax applicable to the 
gain, based on the type of property, holding period, and the 
classification of the security-required person. Proposed Sec.  
1.1400Z2(a)-2(d)(7)(ii)(A). The maximum security amount on a direct 
disposition by, or a distribution to, a security-required person that 
is subject to withholding under section 1446(f) is the lesser of: (i) 
The amount realized multiplied by the rate specified under section 
1446(f)(1) or (ii) the security-required gain multiplied by the highest 
rate of tax applicable to the gain based on the type of property, 
holding period, and the classification of the security-required person. 
Proposed Sec.  1.1400Z2(a)-2(d)(7)(ii)(B). If a direct disposition of a 
partnership interest is subject to withholding under both sections 1445 
and 1446(f), the proposed regulations provide that the rate specified 
in section 1445 is used for purposes of determining the maximum 
security amount. Proposed Sec.  1.1400Z2(a)-2(d)(7)(ii)(A) and (B).
    For a direct disposition of property, other than an interest in 
another partnership or a U.S. real property interest, by a specified 
partnership, or a distribution to a specified partnership, the maximum 
security amount is the security-required gain multiplied by the highest 
rate of tax applicable to the gain, treating the specified partnership 
as an individual for this purpose, and taking into account the type of 
property and holding period. Proposed Sec.  1.1400Z2(a)-2(d)(7)(ii)(C). 
Therefore, a specified partnership that has gain arising from the 
direct sale or exchange of an asset used in a U.S. trade or business 
(other than a U.S. real property interest) will generally be required 
to obtain an eligibility certificate for such gain if it wants to elect 
to defer all or part of the gain by investing in a QOF.
    For a disposition of property (including an interest in another 
partnership or a U.S. real property interest) by a partnership that is 
not a specified partnership, or a distribution

[[Page 19590]]

to such a partnership, that gives rise to gain that is included in 
determining the allocable share of a security-required person's ECTI, 
the maximum security amount is the security-required gain multiplied by 
the highest rate of tax applicable to the gain, taking into account the 
type of property, holding period, and the classification of the 
security-required person. Proposed Sec.  1.1400Z2(a)-2(d)(7)(ii)(D).
C. Elimination or Reduction of Withholding Based on an Eligibility 
Certificate
    Comments on the May 2019 proposed regulations requested relief from 
withholding under section 1445, 1446(a), or 1446(f) on transactions if 
gain from those transactions was deferred under section 1400Z-2. One 
comment requested that a foreign taxpayer engaging in a sale subject to 
withholding under section 1445 be able to provide a certificate or 
other form of documentation to avoid withholding based on the 
taxpayer's intention to invest the resulting gain in a QOF pursuant to 
a deferral election under section 1400Z-2(a)(1). In addition, the 
comment suggested that a foreign taxpayer would be required to certify 
that it will file a tax return in the year the QOF interest is sold. 
Another comment requested an exemption from withholding when a foreign 
person enters into an agreement with the IRS to pay the tax when the 
deferred gain is included under section 1400Z-2(a)(1)(B) and (b), 
similar to when a gain recognition agreement is ``triggered'' under 
section 367 and the regulations thereunder. Another comment suggested 
that the IRS provide a reduced FIRPTA withholding certificate for 
foreign persons who intend to invest in QOFs.
    The comments noted that withholding may reduce the amount of funds 
available to the foreign person to invest in the QOF fund within the 
180-day investment period. Even though the foreign person may later 
obtain a refund of the amount withheld, there may be a temporary lack 
of liquidity that could prevent an investor from investing all of its 
eligible gain into a QOF.
    The proposed regulations address these comments by allowing a 
security-required person to use an eligibility certificate as a basis 
for reducing or eliminating withholding under section 1445, 1446(a), or 
1446(f) on a covered transfer. For purposes of section 1445, a 
security-required person may apply for a withholding certificate from 
the IRS based on an eligibility certificate. For purposes of section 
1446(f), the proposed regulations add a rule to allow a transferee to 
rely on an eligibility certificate to qualify for an exception or 
adjustment to withholding.
    Section 1.1446-3 currently allows a partnership to consider certain 
partner level deductions and losses certified in accordance with Sec.  
1.1446-6 in determining its section 1446 tax. The proposed regulations 
modify the rules in Sec. Sec.  1.1446-3 and 1.1446-6 to allow a 
partnership to also consider in determining its section 1446 tax the 
permitted deferral amount of an eligibility certificate submitted by a 
partner. When determining installments of 1446 tax, to ensure that the 
reduction in effectively connected items by the permitted deferral 
amount is fully taken into account, the eligibility certificate must be 
considered before the effectively connected items are annualized. 
Proposed Sec. Sec.  1.1446-3(b)(2)(i)(B)(1) and 1.1446-6(c)(1)(iv).
    Because the withholding requirement on a transfer or distribution 
with respect to an interest in a publicly traded partnership (PTP) is 
generally imposed on a broker (or nominee), and it would be 
administratively difficult for a broker to timely obtain an eligibility 
certificate, the procedures for using an eligibility certificate to 
reduce or eliminate withholding do not apply for these purposes. A 
security-required person that has gain arising from a disposition or 
distribution with respect to a PTP interest is, however, still required 
to obtain an eligibility certificate to defer security-required gain.

III. Flexibility With Respect to Working Capital Safe Harbor Plans in 
the Event of a Federally Declared Disaster

    After the major disaster declarations issued in response to the 
ongoing novel coronavirus 2019 (COVID-19) pandemic, \2\ commenters 
expressed a need for additional regulatory guidance regarding the 
operation of the 24-month extension for the working capital safe harbor 
included in the section 1400Z-2 regulations for Federally declared 
disasters. Although the final regulations provide a qualified 
opportunity zone business an additional 24 months to expend its working 
capital assets, the qualified opportunity zone business must do so in a 
manner substantially consistent with the original, pre-disaster written 
designation in which the amount of working capital assets subject to 
the safe harbor are designated and according to the original, pre-
disaster written schedule for expending such amounts. In some cases, 
the commenters pointed out, the post-disaster environment facing the 
qualified opportunity zone business may render the original plan 
suboptimal or even infeasible.
---------------------------------------------------------------------------

    \2\ See https://www.fema.gov/coronavirus/disaster-declarations.
---------------------------------------------------------------------------

    In response, this notice of proposed rulemaking proposes to add 
three new sentences at the end of Sec.  1.1400Z2(d)-1(d)(3)(v)(D) that 
provide flexibility for qualified opportunity zone businesses to revise 
or replace the original written designation and written plan, provided 
that the remaining working capital assets are expended within the 
original regulatorily required 31-month period, increased by the 24 
additional months provided in response to the Federally declared 
disaster.

IV. Applicability Dates

A. Proposed Regulations Related to Covered Transfers
    The proposed regulations relating to covered transfers, including 
the requirement for eligibility certificates, will apply to any covered 
transfer that occurs after the date that these regulations are 
published as final regulations in the Federal Register. Taxpayers 
should not submit applications for eligibility certificates before the 
date that these regulations are published as final regulations in the 
Federal Register. Any applications submitted before such date will not 
be processed by the IRS.
B. Proposed Regulations Related to Federally Declared Disasters
    The three new sentences proposed to be added at the end of Sec.  
1.1400Z2(d)-1(d)(3)(v)(D) are proposed to apply to taxable years 
beginning after the date these regulations are published as final 
regulations in the Federal Register. Additionally, a taxpayer may rely 
on the three new sentences proposed to be added at the end of Sec.  
1.1400Z2(d)-1(d)(3)(v)(D) for taxable years beginning after December 
31, 2019.

Special Analyses

I. Regulatory Planning and Review

    This proposed regulation is not subject to review under section 
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement 
(April 11, 2018) between the Treasury Department and the Office of 
Management and Budget regarding review of tax regulations.

II. Paperwork Reduction Act

A. Collection of Information for Proposed Sec.  1.1400Z2(a)-2
    Proposed Sec.  1.1400Z2(a)-2 contains collections of information 
that are not on existing or new IRS forms. The proposed regulations 
require that security-required persons submit to the

[[Page 19591]]

IRS an application that includes the following information and 
documents to obtain an eligibility certificate with respect to 
security-required gain.
    1. Identification of security-required person (proposed Sec.  
1.1400Z2(a)-2(d)(3)(ii));
    2. Information about the covered transfer (proposed Sec.  
1.1400Z2(a)-2(d)(3)(iii));
    3. Agreement for deferral of tax and provision of security 
(proposed Sec.  1.1400Z2(a)-2(d)(4));
    4. U.S. agent agreement (proposed Sec.  1.1400Z2(a)-2(d)(5)); and
    5. Security and any related required documents (proposed Sec.  
1.1400Z2(a)-2(d)(6)).
    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
(OMB) for review in accordance with the Paperwork Reduction Act. 
Commenters are strongly encouraged to submit public comments 
electronically. Comments and recommendations for the proposed 
information collection may be submitted via www.reginfo.gov/public/do/PRAMain. Find this particular information collection by selecting 
``Currently under Review--Open for Public Comments'' then by using the 
search function. Comments can also be emailed to the IRS at 
[email protected] (indicate REG-121095-19 on the subject line). Comments 
also may be mailed to OMB, Attn: Desk Officer for the Department of the 
Treasury, Office of Information and Regulatory Affairs, Washington, DC 
20503, with copies mailed to the IRS, Attn: IRS Reports Clearance 
Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the 
collections of information should be received by June 14, 2021. 
Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the IRS, including whether the information will 
have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (including underlying assumptions and 
methodology);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The likely respondents required to comply with these proposed 
regulations are business, other for-profit taxpayers, or individuals. 
The proposed frequency of recordkeeping and reporting requirement will 
be as needed.
    Estimated total annual reporting burden: 35,000 hours.
    Estimated average annual burden hours per respondent: Approximately 
10 hours.
    Estimated number of respondents: 3,500.
    Estimated annual frequency of responses: On occasion (as the 
collections of information do not occur on an annual basis).
B. Collection of Information for Proposed Sec.  1.1400Z2(d)-
1(d)(3)(v)(D)
    Proposed Sec.  1.400Z2(d)-1(d)(3)(v)(D) imposes an additional 
information collection requirement in the form of recordkeeping. The 
creation of, or modification of, existing written schedules as required 
under proposed Sec.  1.1400Z2(d)-1(d)(3)(v)(D) will be performed by 
qualified opportunity zone businesses that want to receive an 
additional 24 months to expend their working capital assets, under the 
extension of time permitted by proposed Sec.  1.1400Z2(d)-
1(d)(3)(v)(D). This recordkeeping requirement will not be conducted 
using a new or existing IRS form. Such businesses must maintain, as 
part of their records, a copy of the written working plan including any 
modifications to the plan and provide these records to the IRS upon its 
request. This modification encourages investment in QOFs by providing 
greater specificity to how an entity may consistently satisfy the 
statutory requirements to be a qualified opportunity zone business in 
light of the current economic climate. However, the increase in burden 
on these entities is minimal as these entities were required to 
maintain such records prior to the proposed modification if they wanted 
to utilize a working capital safe harbor under Sec.  1.1400Z2(d)-
1(d)(3)(v).
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

III. Regulatory Flexibility Act

    It is hereby certified that the proposed regulations under 
Sec. Sec.  1.1400Z2(a)-1, 1.1400Z2(a)-2, 1.1400Z2(b)-1, 1.1445-3, 
1.1446-3, 1.1446-6, 1.1446-7 and 1.1446(f)-2, if adopted, will not have 
a significant economic impact on a substantial number of domestic small 
entities within the meaning of section 601(6) of the Regulatory 
Flexibility Act (5 U.S.C. chapter 6). Although these proposed 
regulations would primarily affect foreign persons, they may have an 
impact on a small number of domestic partnerships. The domestic 
partnerships affected by these regulations are closely-held 
partnerships with significant foreign ownership and that either have 
substantial assets that are either U.S. real property interests or 
assets used in a U.S. trade or business or a large amount of gain from 
the sale of such assets. This is a narrow set of taxpayers and is 
likely a small subset of persons that invest in a QOF.
    It is hereby certified that the proposed regulation under Sec.  
1.1400Z2(d)-1(d)(3)(v)(D), if adopted, will not have a significant 
economic impact on a substantial number of small entities within the 
meaning of section 601(6) of the Regulatory Flexibility Act. The 
Treasury Department and the IRS anticipate that this proposed 
regulation will provide added clarity for qualified opportunity zone 
businesses to create or modify existing written plans to expend working 
capital in the event of a Federally declared disaster.
    Taxpayers affected by these proposed regulations include QOFs, 
investors in QOFs and qualified opportunity zone businesses in which a 
QOF holds an ownership interest. The proposed regulations will not 
directly affect the taxable incomes and tax liabilities of qualified 
opportunity zone businesses; they will affect only the taxable income 
and tax liabilities of QOFs (and owners of QOFs) that invest in such 
businesses. Although there is a lack of available data regarding the 
extent to which small entities invest in QOFs, will certify as QOFs, or 
receive equity investments from QOFs, the Treasury Department and the 
IRS project that most of the investment flowing into QOFs will come 
from large corporations and wealthy individuals though some of these 
funds would likely flow through an intermediary investment partnership. 
It is expected that some QOFs and qualified opportunity zone businesses 
would be classified as small entities; however, the number of small 
entities significantly affected is not likely to be substantial. 
Accordingly, the Secretary certifies that these rules will not have a

[[Page 19592]]

significant economic impact on a substantial number of small entities.
    Notwithstanding this certification, the Treasury Department and the 
IRS invite comments on any impact these regulations would have on small 
entities.
    Pursuant to section 7805(f), these regulations have been submitted 
to the Chief Counsel for the Office of Advocacy of the Small Business 
Administration for comment on their impact on small business.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a state, 
local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. This rule does not include any Federal mandate that may 
result in expenditures by state, local, or tribal governments, or by 
the private sector in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive Order. This proposed rule does not have 
federalism implications, does not impose substantial direct compliance 
costs on state and local governments, and does not preempt state law 
within the meaning of the Executive Order.

Comments and Requests for Public Hearing

    Before these proposed amendments to the regulations are adopted as 
final regulations, consideration will be given to comments that are 
submitted timely to the IRS as prescribed in the preamble under the 
ADDRESSES section. The Treasury Department and the IRS request comments 
on all aspects of the proposed regulations. Any electronic comments 
submitted, and to the extent practicable any paper comments submitted, 
will be made available at www.regulations.gov or upon request.
    A public hearing will be scheduled if requested in writing by any 
person who timely submits electronic or written comments. Requests for 
a public hearing are also encouraged to be made electronically. If a 
public hearing is scheduled, notice of the date and time for the public 
hearing will be published in the Federal Register. Announcement 2020-4, 
2020-17 IRB 1, provides that until further notice, public hearings 
conducted by the IRS will be held telephonically. Any telephonic 
hearing will be made accessible to people with disabilities.

Drafting Information

    The principal authors of these proposed regulations are Milton 
Cahn, L. Ulysses Chatman, Ronald M. Gootzeit, and Subin Seth of the 
Office of the Associate Chief Counsel (International) and Erika Reigle 
of the Office of the Associate Chief Counsel (Income Tax & Accounting). 
However, other personnel from the Treasury Department and the IRS 
participated in their development.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, Notices, and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin or Cumulative Bulletin and are available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry for Sec.  1.1400Z2(a)-2 and revising the entries for 
Sec. Sec.  1.1445-3, 1.1446-3, 1.1446-6, 1.1446-7 and 1.1446(f)-2 to 
read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *
    Section 1.1400Z2(a)-2 also issued under 26 U.S.C. 1400Z-2(e)(4).
* * * * *
    Section 1.1445-3 also issued under 26 U.S.C. 1400Z-2(e)(4) and 
26 U.S.C. 1445(e)(7).
* * * * *
    Section 1.1446-3 also issued under 26 U.S.C. 1400Z-2(e)(4) and 
26 U.S.C. 1446(g).
* * * * *
    Section 1.1446-6 also issued under 26 U.S.C. 1400Z-2(e)(4) and 
26 U.S.C. 1446(g).
    Section 1.1446-7 also issued under 26 U.S.C. 1400Z-2(e)(4) and 
26 U.S.C. 1446(g).
* * * * *
    Section 1.1446(f)-2 also issued under 26 U.S.C. 1400Z-2(e)(4), 
26 U.S.C. 1446(f)(6), and 26 U.S.C. 1446(g).
* * * * *


0
Par. 2. Section 1.1400Z2-0 is amended by:
0
1. Revising the introductory text.
0
2. Adding an entry for Sec.  1.1400Z2(a)-1(a)(3).
0
3. Revising the entry for Sec.  1.1400Z2(a)-1(g)(2).
0
4. Adding an entry for Sec.  1.1400Z2(a)-2.
0
5. Adding an entry for Sec.  1.1400Z2(b)-1(j)(3).
0
6. Revising the entry for Sec.  1.1400Z2(d)-1(e)(2).
    The revisions and additions read as follows:


Sec.  1.1400Z2-0  Table of Contents.

    This section lists the table of contents for Sec. Sec.  
1.1400Z2(a)-1 through 1.1400Z2(f)-2.


Sec.  1.1400Z2(a)-1  Deferring tax on capital gains by investing in 
opportunity zones.

    (a) * * *
    (3) Eligibility certificate needed to establish the permitted 
deferral amount for certain foreign persons and foreign-owned 
partnerships.
* * * * *
    (g) * * *
    (2) Exceptions.


Sec.  1.1400Z2(a)-2  Certain foreign persons and foreign-owned 
partnerships required to provide security.

    (a) In general.
    (b) Security-required person.
    (1) In general.
    (2) Foreign person.
    (3) Specified partnership.
    (c) Security-required gain.
    (1) Definition.
    (2) Covered transfer.
    (d) Eligibility certificate.
    (1) In general.
    (2) Application materials.
    (3) Application.
    (4) Deferral agreement.
    (5) U.S. agent agreement.
    (6) Security.
    (7) Permitted deferral amount.
    (e) Example.
    (f) Applicability date.


Sec.  1.1400Z2(b)-1  Inclusion of gains that have been deferred under 
section 1400Z-2(a).

* * * * *
    (j) * * *
    (3) Specific rules.


Sec.  1.1400Z2(d)-1  Qualified opportunity funds and qualified 
opportunity zone businesses.

* * * * *

[[Page 19593]]

    (e) * * *
    (2) Exceptions.
* * * * *
0
Par. 3. Section 1.1400Z2(a)-1 is amended by:
0
1. Adding paragraph (a)(3).
0
2. Revising paragraph (g)(1).
0
3. Redesignating paragraphs (g)(2) introductory text and (g)(2)(i) and 
(ii) as paragraphs (g)(2)(i) and (g)(2)(i)(A) and (B), respectively.
0
4. Adding a subject heading for newly redesignated paragraph (g)(2).
0
5. Adding new paragraph (g)(2)(ii).
    The revisions and additions read as follows:


Sec.  1.1400Z2(a)-1  Deferring tax on capital gains by investing in 
opportunity zones.

    (a) * * *
    (3) Eligibility certificate needed to establish the permitted 
deferral amount for certain foreign persons and foreign-owned 
partnerships. Notwithstanding any other provision of this section, if a 
taxpayer is a security-required person (as defined in Sec.  
1.1400Z2(a)-2(b)(1)) with respect to a gain and that gain is a 
security-required gain (as defined in Sec.  1.1400Z2(a)-2(c)(1)), then 
the taxpayer may not make a deferral election under section 1400Z-2(a) 
with respect to part or all of that gain unless the requirements in 
paragraph (a)(3)(i), (ii), and (iii) of this section are satisfied.
    (i) Not later than the date on which the deferral election is filed 
with the IRS under paragraph (a)(2) of this section, the person obtains 
an eligibility certificate with respect to that gain (as defined in 
Sec.  1.1400Z2(a)-2(d)(1));
    (ii) The eligibility certificate provides a permitted deferral 
amount (as defined in Sec.  1.1400Z2(a)-2(d)(7)); and
    (iii) The amount of gain sought to be deferred does not exceed the 
permitted deferral amount.
    (iv) See Sec.  1.1400Z2(a)-2 for additional requirements for 
certain foreign persons and foreign-owned partnerships to make a valid 
deferral election.
    (v) Examples. The examples in this paragraph (a)(3)(v) illustrate 
the rule in paragraph (a)(3) of this section.

    (A) Example 1. Eligibility certificate for a permitted deferral 
amount that is less than the total amount of security-required gain. 
Taxpayer realizes a $100x gain, which is an eligible gain. In 
addition, Taxpayer is a security-required person with respect to 
that gain, and the gain is a security-required gain. Taxpayer 
invests $100x in a QOF, and, without taking into account the 
limitation in paragraph (a)(3)(i) of this section, Taxpayer would be 
able to make a valid deferral election with respect to the entire 
$100x gain. Taxpayer applies for an eligibility certificate with 
respect to that gain and receives the eligibility certificate before 
timely filing Taxpayer's Federal income tax return for the taxable 
year in which the gain would be recognized. The eligibility 
certificate, however, provides a permitted deferral amount of $75x. 
Under paragraph (a)(3) of this section, therefore, a valid deferral 
election is limited to that deferral amount. Consequently, $75x of 
Taxpayer's investment in the QOF is a qualifying investment, which 
is described in section 1400Z-2(e)(1)(A)(i), and no election under 
section 1400Z-2(a) can apply to the remaining $25x ($100x-$75x) 
investment. As a result, that remaining investment in the QOF is a 
non-qualifying investment, which is described in section 1400Z-
2(e)(1)(A)(ii).
    (B) Example 2. Deferring gain from inclusion. In 2022, Taxpayer 
realizes a gain of $x, Taxpayer was a security-required person with 
respect to that gain, and the gain was a security-required gain. 
Complying with all the requirements in this section (including 
paragraph (a)(3) of this section), Taxpayer made a valid election to 
defer a gain of $x, after having invested $x in a QOF. In 2025, 
after Taxpayer's interest in the QOF had appreciated by $y, Taxpayer 
sold that interest for $x + $y. The sale was an inclusion event, 
requiring Taxpayer to include in income the deferred gain of $x. 
Under paragraph (c)(1) of this section, the $x inclusion is a 
security-required gain because the deferred gain was a security-
required gain. If Taxpayer wants to elect to defer the $x of 
included gain and Taxpayer is a security-required person with 
respect to the included gain, the limitation in paragraph (a)(3) of 
this section applies. Whether the $y gain from the sale is a 
security-required gain is determined by whether, independent of the 
treatment of the inclusion, the $y gain on the sale is within the 
definition of security-required gain in Sec.  1.1400Z2(a)-2(c).
* * * * *
    (g) * * *
    (1) In general. Except as provided in paragraph (g)(2) of this 
section, the provisions of this section are applicable for taxable 
years beginning after March 13, 2020.
    (2) Exceptions. * * *
    (ii) Eligibility certificate requirement. Paragraph (a)(3) of this 
section applies to any security-required gain (as defined in Sec.  
1.1400Z2(a)-2(c)(1)) from a covered transfer (as defined in Sec.  
1.1400Z2(a)-2(c)(2)) that occurs after [DATE OF PUBLICATION OF FINAL 
RULE].
0
Par. 4. Section 1.1400Z2(a)-2 is added to read as follows:


Sec.  1.1400Z2(a)-2  Certain foreign persons and foreign-owned 
partnerships required to provide security.

    (a) In general. This section provides definitions and procedures 
for certain foreign persons and foreign-owned partnerships to obtain an 
eligibility certificates in order to meet the requirement in Sec.  
1.1400Z2(a)-1(a)(3) to make a deferral election with respect to certain 
gains. Paragraph (b) of this section describes the persons required to 
obtain an eligibility certificate. Paragraph (c) of this section 
describes the gains for which an eligibility certificate must be 
obtained. Paragraph (d) of this section provides the procedures for 
obtaining an eligibility certificate and defines the type and amount of 
security required.
    (b) Security-required person--(1) In general. A security-required 
person is, with respect to a gain, a person that would be required to 
report the recognition of the gain under Federal income tax principles 
and that is either--
    (i) A foreign person that is not a partnership, or
    (ii) A specified partnership (as defined in paragraph (b)(3) of 
this section).
    (2) Foreign person. The term foreign person means a person that is 
not a United States person under section 7701(a)(30).
    (3) Specified partnership. The term specified partnership means, 
with respect to a transfer that gives rise to a security-required gain, 
a partnership that satisfies the requirements of paragraphs (b)(3)(i) 
through (iii) of this section. For purposes of paragraphs (b)(3)(ii) 
and (iii) of this section, the look-back period is the period that 
begins on the later of the date that is one year before the date of the 
transfer or the date on which the partnership was formed, and that ends 
on the date of such transfer. A domestic specified partnership means a 
specified partnership that is a domestic partnership.
    (i) Ownership test. A partnership satisfies the requirements of 
this paragraph (b)(3)(i) if, at the time of transfer, 20 percent or 
more of the capital or profits interests in the partnership are owned 
(directly or indirectly through one or more partnerships, trusts, or 
estates) by one or more nonresident aliens or foreign corporations.
    (ii) Closely-held test. A partnership satisfies the requirements of 
this paragraph (b)(3)(ii) if, at any time during the look-back period, 
it has ten or fewer direct partners that own 90 percent or more of the 
capital or profits interests in the partnership. For this purpose, any 
partners that are related (within the meaning of section 267(b) or 
707(b)(1)) are treated as one partner.
    (iii) Gain or asset test. A partnership satisfies the requirements 
of this paragraph (b)(3)(iii) if either the security-required gain is 
$1 million or more (the gain test), or the aggregate value of the 
partnership's assets that are United States real property interests (as 
defined in section 897(c)) or assets used in the conduct of a trade or 
business

[[Page 19594]]

within the United States is, at any time during the look-back period, 
equal to or greater than 25 percent of the value of all of the assets 
of the partnership (the asset test). In making the calculation under 
the asset test described in this paragraph (b)(3)(iii)--
    (A) The value of each asset is determined on the last day of the 
taxable year before the year in which the look-back period begins or, 
for any asset acquired after this date, on the date of acquisition 
(including upon formation of the partnership);
    (B) The value of each asset is measured according to its gross fair 
market value; and
    (C) The partnership must include the value of the proportionate 
share of any assets held by a partnership in which the first-mentioned 
partnership is a direct or indirect partner, but the first-mentioned 
partnership must not include the value of a direct or indirect interest 
in another partnership.
    (c) Security-required gain--(1) Definition. The term security-
required gain means--
    (i) The gain from a covered transfer described in paragraphs 
(c)(2)(i)(A) or (B) of this section;
    (ii) The gain from a covered transfer described in paragraph 
(c)(2)(i)(C) of this section that is included in computing effectively 
connected taxable income, as determined under Sec.  1.1446-2 (ECTI), 
disregarding Sec.  1.1446-2(b)(4)(i); or
    (iii) The gain from a covered transfer described in paragraph 
(c)(2)(i)(D) of this section that is included in computing ECTI 
allocated to a security-required person.
    (2) Covered transfer--(i) In general. The term covered transfer 
means--
    (A) A disposition by, or a distribution to, a security-required 
person that is subject to withholding under section 1445 (treating a 
security-required person that is a domestic specified partnership as a 
foreign person for this purpose);
    (B) A disposition by, or a distribution to, a security-required 
person that is subject to withholding under section 1446(f) (treating a 
security-required person that is a domestic specified partnership as a 
foreign person for this purpose);
    (C) A disposition by a specified partnership of property, other 
than an interest in another partnership or a U.S. real property 
interest, or a distribution to a specified partnership, if any gain 
that arises is includible in computing ECTI; or
    (D) A disposition by a partnership of property, or a distribution 
to such a partnership, if any gain that arises is includible (by any 
partnership) in determining the allocable share of a security-required 
person's ECTI (treating a security-required person that is a domestic 
specified partnership as a foreign person for this purpose).
    (ii) Exceptions to withholding. A disposition or distribution 
described in paragraph (c)(2)(i)(A) or (B) of this section is not a 
covered transfer if an exception under Sec.  1.1445-2, 1.1446(f)-2(b), 
or 1.1446(f)-4(b) applies (other than an exception pertaining to non-
foreign status in Sec.  1.1445-2(b), Sec.  1.1446(f)-2(b)(2), or Sec.  
1.1446(f)-4(b)(2)). In determining whether an exception applies for 
purposes of this paragraph (c)(2)(ii), any requirement to provide a 
certification to the transferee in order to claim the applicable 
exception is disregarded.
    (d) Eligibility certificate--(1) In general. This paragraph (d) 
defines an eligibility certificate with respect to a gain and describes 
the procedures for obtaining such a certificate. The term eligibility 
certificate means, with respect to a security-required gain, a document 
issued by the IRS pursuant to this paragraph (d) that provides the 
permitted deferral amount. The eligibility certificate will also 
include the maximum security amount, the amount of security provided, 
and any other information as may be prescribed in forms or instructions 
or in publications or guidance published in the Internal Revenue 
Bulletin (see Sec. Sec.  601.601(d)(2) and 601.602 of this chapter). 
Generally, the IRS will make a determination with respect to a complete 
application for an eligibility certificate not later than the 90th day 
after the date that all information necessary for the IRS to make a 
determination is received. At its discretion, the IRS may extend this 
period in unusual circumstances after notifying the security-required 
person no later than the 45th day after the date that all information 
necessary for the IRS to make a determination is received. The IRS will 
send a notification to the security-required person of its 
determination and, if the application is approved, provide an 
eligibility certificate to the security-required person. For the use of 
an eligibility certificate to reduce or eliminate certain withholding 
taxes, see Sec. Sec.  1.1445-3(e)(5), 1.1446-6(c)(1)(iv), and 
1.1446(f)-2(b)(8) and (c)(5).
    (2) Application materials. To obtain an eligibility certificate 
with respect to security-required gain, a security-required person must 
submit to the IRS the application described in paragraph (d)(3) of this 
section, the deferral agreement described in paragraph (d)(4) of this 
section, the U.S. agent agreement described in paragraph (d)(5) of this 
section, and the security (or evidence of security) of the type and in 
the amount described in paragraphs (d)(6) and (7) of this section.
    (3) Application--(i) In general. An application for an eligibility 
certificate must be submitted in the form and in the manner prescribed 
in forms or instructions or in publications or guidance published in 
the Internal Revenue Bulletin (see Sec. Sec.  601.601(d)(2) and 601.602 
of this chapter). An application for an eligibility certificate must 
include the information described in paragraphs (d)(3)(ii) and (iii) of 
this section and any other information prescribed in forms or 
instructions or in publications or guidance published in the Internal 
Revenue Bulletin (see Sec. Sec.  601.601(d)(2) and 601.602 of this 
chapter). The security-required person must sign the application and 
represent under penalties of perjury that all information provided on 
or with the application is true, correct, and complete to the best of 
that person's knowledge and belief.
    (ii) Identification of security-required person and U.S. agent. The 
application for an eligibility certificate must include the name, 
address, and U.S. taxpayer identification number of the security-
required person, and the name, address, and U.S. taxpayer 
identification number of the security-required person's U.S. agent (as 
defined in paragraph (d)(4)(ii)(D) of this section).
    (iii) Information about the covered transfer--(A) Required 
information. The application must identify the type of covered 
transfer. For a covered transfer described in paragraph (c)(2)(i)(A), 
(B), or (C) of this section that is not a distribution, the application 
must include a description of the property transferred in the covered 
transfer, the amount of security-required gain, the amount realized, 
the adjusted basis in the property, and the maximum security amount. 
For a covered transfer described in paragraph (c)(2)(i)(A), (B), or (C) 
of this section that is a distribution, the application must include 
the amount of the distribution, a description of the property 
distributed (including cash), the amount of security-required gain, and 
the maximum security amount. For a covered transfer described in 
paragraph (c)(2)(i)(D) of this section, the application must include 
the amount of security-required gain and the maximum security amount. 
In each case, the application for the eligibility certificate must also 
identify the amount of security that has been provided and the amount 
of security-required gain for which the eligibility certificate is 
being obtained. If an

[[Page 19595]]

amount described in this paragraph is not known when the application is 
submitted, a security-required person may include a reasonable estimate 
of the amount if the estimate is determined no earlier than 120 days 
before the covered transfer and the security-required person also 
includes in the application documentation of the basis for the estimate 
(for example, a purchase contract).
    (B) Definition of amount realized. The term amount realized means 
for a covered transfer described in paragraph (c)(2)(i)(A) of this 
section, the amount determined under Sec.  1.1445-1(g)(5); for a 
covered transfer described in paragraph (c)(2)(i)(B) of this section, 
the amount determined under Sec.  1.1446(f)-2(c)(2)(i) (or the amount 
determined using the alternative procedures under Sec.  1.1446(f)-
2(c)(2)(ii), disregarding any requirement to provide a certification) 
or Sec.  1.1446(f)-4(c)(2)(i); and for a covered transfer described in 
paragraph (c)(2)(i)(C) of this section, the amount determined under 
section 1001(b).
    (4) Deferral agreement--(i) In general. A deferral agreement is an 
agreement entered into between a security-required person and the IRS 
for the deferral of tax and provision of security. The term of the 
deferral agreement must not end sooner than 36 months after the due 
date (with extensions) for the filing of the security-required person's 
Federal income tax return for the taxable year that includes the date 
specified in section 1400Z-2(b)(1). The deferral agreement must conform 
to any template provided in forms or instructions or in publications or 
guidance published in the Internal Revenue Bulletin (see Sec. Sec.  
601.601(d)(2) and 601.602 of this chapter).
    (ii) Minimum terms and conditions. The minimum terms and conditions 
of a deferral agreement are provided in paragraphs (d)(4)(ii)(A) 
through (D) of this section. The deferral agreement must also include 
any additional terms and conditions provided in a template provided in 
forms or instructions or in publications or guidance published in the 
Internal Revenue Bulletin (see Sec. Sec.  601.601(d)(2) and 601.602 of 
this chapter).
    (A) The security-required person will timely file a Federal income 
tax return and pay any tax liability due on security-required gain 
deferred under section 1400Z-2(a) and the regulations thereunder for 
each taxable year in which the security-required person is required to 
include the gain or a portion thereof in income under Sec.  
1.1400Z2(b)-1.
    (B) The security-required person will report any security-required 
gain invested in a QOF held at any point during the taxable year in 
accordance with Sec.  1.1400Z2(a)-1(d)(2).
    (C) The security-required person provides security to the IRS in 
the amount required for the security-required gain for which the 
security-required person seeks to defer gain under section 1400Z-2(a). 
The security may be replaced during the term of the deferral agreement, 
to the extent provided in forms or instructions or in publications or 
guidance published in the Internal Revenue Bulletin (see Sec. Sec.  
601.601(d)(2) and 601.602 of this chapter). Upon a failure to pay any 
tax due on security-required gain for which the security-required 
person seeks to defer gain under section 1400Z-2(a) when the tax is due 
or upon an event of default (as described in paragraph (d)(4)(iii) of 
this section) under the deferral agreement, the IRS may collect the 
entire amount of the liability by recourse to the security and may 
exercise any other rights and remedies of a secured party under 
applicable law.
    (D) The security-required person appoints a U.S. person to act as 
the security-required person's limited agent for purposes of accepting 
communication related to the deferral agreement from the IRS, accepting 
service of process for the timely enforcement of the terms of the 
deferral agreement, and any other purposes specified in the deferral 
agreement (U.S. agent). See paragraph (d)(5) of this section for the 
agreement that the security-required person must enter into with the 
U.S. agent.
    (iii) Events of default. The deferral agreement will specify what 
is considered a default, the circumstances that give rise to an event 
of default, and whether a notice of default and an opportunity to cure 
will be provided to the security-required person before an event of 
default arises. Defaults include, but are not limited to, a failure by 
an issuer of a letter of credit to continue to meet the requirements of 
paragraph (d)(6)(ii) of this section throughout the term of the 
deferral agreement; a determination by the IRS that the security does 
not otherwise adequately secure the interests of the IRS; a 
determination by the IRS that the U.S. agent agreement is no longer in 
effect; a resignation of the U.S. agent; a failure by the security-
required person to file any required Federal income tax returns and 
information returns or pay any tax due during the term of the deferral 
agreement; and a failure by the security-required person to attach a 
copy of the eligibility certificate to any tax returns, information 
returns, forms, or other filings with the IRS as required in the 
deferral agreement. The deferral agreement will specify which defaults 
will require notification from the IRS and an opportunity to cure 
before a default becomes an event of default. For example, the deferral 
agreement will provide that a security-required person that fails to 
report any security-required gain invested in a QOF held at any point 
during the taxable year in accordance with Sec.  1.1400Z2(a)-1(d)(2) 
for any given taxable year will be permitted to cure the default by 
making the report described in the first sentence of Sec.  1.1400Z2(a)-
1(d)(2) or establishing to the satisfaction of the Commissioner that an 
inclusion event described in Sec.  1.1400Z2(b)-1(c) did not occur 
during that taxable year. The deferral agreement will specify the date 
of an event of default. See Sec.  1.1400Z2(b)-1(c)(1)(v) for the 
consequences of an event of default under a deferral agreement.
    (5) U.S. agent agreement. The security-required person must enter 
into a binding agreement with a U.S. agent (as defined in paragraph 
(d)(4)(ii)(D) of this section) authorizing the U.S. agent to act as an 
agent (U.S. agent agreement). The U.S. agent agreement must include the 
terms and conditions provided in forms or instructions or in 
publications or guidance published in the Internal Revenue Bulletin 
(see Sec. Sec.  601.601(d)(2) and 601.602 of this chapter). The U.S. 
agent agreement must be executed by the security-required person and 
the U.S. agent and must remain in effect for as long as the deferral 
agreement remains in effect.
    (6) Security--(i) In general. The security-required person must 
provide to the IRS security described in paragraph (d)(6)(ii) of this 
section. The proposed security (and any required documents described in 
forms or instructions or in publications or guidance published in the 
Internal Revenue Bulletin (see Sec. Sec.  601.601(d)(2) and 601.602 of 
this chapter)) must generally be submitted to the IRS with the 
security-required person's application for an eligibility certificate. 
The maturity date or expiration of the security must not be earlier 
than 36 months after the due date (with extensions) for the filing of 
the security-required person's Federal income tax return for the 
taxable year that includes the date specified in section 1400Z-2(b)(1). 
The security cannot be accelerated, cancelled, or otherwise terminated 
before maturity, other than at the direction of, or with the consent 
of, the IRS. Additional terms and conditions for the security may be 
specified in forms or instructions or in publications or guidance 
published in

[[Page 19596]]

the Internal Revenue Bulletin (see Sec. Sec.  601.601(d)(2) and 601.602 
of this chapter). See paragraph (d)(7) of this section for determining 
the required amount of the security.
    (ii) Letter of credit. The IRS may accept as security an 
irrevocable standby letter of credit that is issued by a U.S. bank that 
is categorized as well capitalized in accordance with applicable 
Federal banking regulations and regularly issues letters of credit in 
the ordinary course of business to customers other than security-
required persons under this paragraph (d)(6), or any other financial 
institution acceptable to the IRS, as provided in forms or instructions 
or in publications or guidance published in the Internal Revenue 
Bulletin (see Sec. Sec.  601.601(d)(2) and 601.602 of this chapter).
    (7) Permitted deferral amount--(i) In general. The permitted 
deferral amount is the amount for which an eligibility certificate is 
issued to a security-required person with respect to a security-
required gain. If a security-required person provides security in an 
amount equal to the maximum security amount, the permitted deferral 
amount is the total amount of security-required gain. If a security-
required person provides security in an amount less than the maximum 
security amount, the permitted deferral amount is the total amount of 
security-required gain multiplied by the ratio of the amount of 
security provided over the maximum security amount.
    (ii) Maximum security amount. The term maximum security amount 
means--
    (A) For a covered transfer described in paragraph (c)(2)(i)(A) of 
this section, the lesser of the amount realized (as defined in 
paragraph (d)(3)(iii)(B) of this section) multiplied by the rate 
specified in section 1445(a) (or, for a covered transfer subject to 
section 1445(e)(1), (e)(2), or (e)(6), the security-required gain 
multiplied by the rate specified under the applicable provision) or the 
security-required gain multiplied by the highest rate of tax applicable 
to the gain, taking into account the type of property, holding period, 
and classification of the security-required person (treating a 
security-required person that is a partnership or trust as an 
individual for this purpose);
    (B) For a covered transfer described solely in paragraph 
(c)(2)(i)(B) of this section, the lesser of the amount realized (as 
defined in paragraph (d)(3)(iii)(B) of this section) multiplied by the 
rate specified in section 1446(f)(1), or the security-required gain 
multiplied by the highest rate of tax applicable to the gain, taking 
into account the type of property, holding period, and classification 
of the security-required person (treating a security-required person 
that is a partnership or trust as an individual for this purpose);
    (C) For a covered transfer described in paragraph (c)(2)(i)(C) of 
this section, the security-required gain multiplied by the highest rate 
of tax applicable to the gain, taking into account the type of property 
and the specified partnership's holding period, and treating the 
specified partnership as an individual for this purpose; or
    (D) For a covered transfer described in paragraph (c)(2)(i)(D) of 
this section, the security-required gain multiplied by the highest rate 
of tax applicable to the gain, taking into account the type of 
property, the holding period and classification of the security-
required person (treating a security-required person that is a 
partnership or trust as an individual for this purpose).

    (iii) Example. SRP, an individual who is a security-required 
person, disposes of U.S. real property that SRP has held for more 
than one year and that has a basis of $80x in a covered transfer 
subject to withholding under section 1445(a). The amount realized is 
$200x, and the amount of the security-required gain is $120x of 
long-term capital gain ($200x amount realized less $80x basis). 
Because the covered transfer is described in paragraph (c)(2)(i)(A) 
of this section, the maximum security amount is $24x (the lesser of 
$30x (the amount realized of $200x multiplied by the rate specified 
in section 1445(a), (in 2021, 15%)) and $24x (the security-required 
gain of $120x multiplied by the highest rate of tax applicable to 
the gain taking into account the type of property, holding period 
and the classification of the security-required person (in 2021, 
20%))). SRP applies for and receives an eligibility certificate in 
accordance with paragraph (d)(1). SRP provides security in the 
amount of $15x. Because SRP has provided security in an amount less 
than the maximum security amount, the eligibility certificate will 
be issued for less than the total amount of security-required gain. 
The permitted deferral amount shown on the eligibility certificate 
is the total amount of security-required gain ($120x) multiplied by 
the ratio of the amount of security provided by SRP ($15x) over the 
maximum security amount ($24x). Therefore, SRP will obtain an 
eligibility certificate for a permitted deferral amount of $75x 
($120x multiplied by 62.5%).
    (e) Example. The example in this paragraph (e) illustrates the 
rules in this section and Sec.  1.1400Z2(a)-1(a)(3).
    (1) Facts. Partnership P is an eligible taxpayer within the 
meaning of Sec.  1.1400Z2(a)-1(b)(13) of this section. The relevant 
events take place during Years 1 through 3, all of which end earlier 
than 2027. At all times during those years, P was owned by 10 equal 
partners.
    (i) Three eligible gains. During Year 2, P recognized three 
gains--G1, G2, and G3--for, 
respectively, $750,000 on September 1, $2 million on October 1, and 
$2 million on December 20. All three gains were eligible gains 
within the meaning of Sec.  1.1400Z2(a)-1(b)(11) and the 
transactions that gave rise to the gains were subject to withholding 
under section 1445 or 1446.
    (ii) Ownership test. On September 1, Year 2, P satisfied the 
ownership test in paragraph (b)(3)(i) of this section because on 
that date partners O1 through O7 were United 
States persons, and partners O8 through O10 
were foreign individuals. On October 1, Year 2, P did not satisfy 
the ownership test in paragraph (b)(3)(i) of this section because as 
of that date partners O9 and O10 had been 
replaced by O11 and O12, who were both United 
States persons. On December 20, Year 2, P satisfied the ownership 
test in paragraph (b)(3)(i) of this section because as of that date 
partners O11 and O12 had been replaced by 
O13 and O14, which were both foreign 
corporations.
    (iii) Closely-held test. At all times during Years 1 through 2, 
P satisfied the closely-held test in paragraph (b)(3)(ii) of this 
section because P was owned by 10 partners.
    (iv) Asset test. At all times during Years 1 through 3, P did 
not satisfy the asset test in paragraph (b)(3)(iii) of this section 
because P had total assets in excess of $100 million, of which less 
than $25 million was United States real property interests or assets 
used in the conduct of a trade or business within the United States.
    (v) Investment in a QOF and election to defer. On January 15 of 
Year 3, P invested $4.75 million in a QOF, and on P's timely filed 
Federal income tax return for Year 2, P indicated that it was 
electing to defer all three gains under Sec.  1.1400Z2(a)-1(a). 
These three elections are proper unless they are barred by Sec.  
1.1400Z2(a)-1(a)(3).
    (2) Analysis--(i) G1. P satisfies the ownership test as of the 
date of the transfer. P also satisfies the closely-held test during 
the look-back period for G1, but does not satisfy the 
asset test during the look-back period for G1. P does not 
satisfy the gain test in paragraph (b)(3)(iii) of this section 
because the amount of the G1 gain is less than $1 
million. As a result, P is not a specified partnership with respect 
to G1. Accordingly, P is not a security-required person 
with respect to G1, and, thus, P does not need an 
eligibility certificate with respect to G1 in order to 
make a proper deferral election with respect to G1.
    (ii) G2. Unlike G1, G2 ($2 million) is 
large enough to satisfy the gain test in paragraph (b)(3)(iii) of 
this section ($1 million or more). P also satisfies the closely-held 
test during the look-back period for G2. However, P does 
not satisfy the ownership test as of the date of transfer. 
Accordingly, P is not a specified partnership with respect to 
G2 and, thus, P is not a security-required person with 
respect to G2. P does not need an eligibility certificate 
with respect to G2 in order to make a proper deferral 
election with respect to G2.
    (iii) G3. P satisfies the ownership test as of the 
date of the transfer. P also satisfies the closely-held test during 
the look-back period for G3. Also, G3 is large 
enough to satisfy the gain test. Accordingly, P is a security-
required person with respect to G3, and G3 is

[[Page 19597]]

a security-required gain. Consequently, P may not elect to defer 
G3 unless, not later than the date on which P files its 
Federal income tax return for Year 2, P has received an eligibility 
certificate with respect to G3. Even if P has received 
such an eligibility certificate, P may not elect to defer a larger 
amount of G3 than the permitted deferral amount shown on 
the eligibility certificate.

    (f) Applicability date. This section applies to any covered 
transfer that occurs after [DATE OF PUBLICATION OF FINAL RULE].
0
Par. 5. Section 1.1400Z2(b)-1 is amended by:
0
1. Revising paragraph (c)(1)(iv).
0
2. Adding paragraph (c)(1)(v).
0
3. Revising paragraph (j)(1).
0
4. Adding paragraph (j)(3).
    The revisions and additions read as follows:


Sec.  1.1400Z2(b)-1  Inclusion of gains that have been deferred under 
section 1400Z-2(a).

* * * * *
    (c) * * *
    (1) * * *
    (iv) A QOF in which an eligible taxpayer holds a qualifying 
investment loses its status as a QOF; or
    (v) An event of default occurs under a deferral agreement 
(described in Sec.  1.1400Z2(a)-2(d)(4)) entered into between a 
security-required person and the IRS (in which case the deferred gain 
to be included is the gain whose deferral was made possible by the 
eligibility certificate that was based on the agreement).
* * * * *
    (j) * * *
    (1) In general. Except as provided in paragraph (j)(3) of this 
section, the provisions of this section are applicable for taxable 
years beginning after March 13, 2020.
* * * * *
    (3) Specific rules. Paragraph (c)(1)(v) of this section applies to 
any deferral agreement (as defined in Sec.  1.1400Z2(a)-2(d)(4)) 
entered into after [DATE OF PUBLICATION OF FINAL RULE].
0
Par. 6. Section 1.1400Z2(d)-1 is amended by:
0
1. Revising paragraphs (d)(3)(v)(D) and (e)(1).
0
2. Redesignating paragraphs (e)(2) introductory text and (e)(2)(i) and 
(ii) as paragraphs (e)(2)(i) and (e)(2)(i)(A) and (B).
0
3. Adding a subject heading for newly redesignated paragraph (e)(2).
0
4. Adding new paragraph (e)(2)(ii).
    The revisions and additions read as follows:


Sec.  1.1400Z2(d)-1  Qualified opportunity funds and qualified 
opportunity zone businesses.

* * * * *
    (d) * * *
    (3) * * *
    (v) * * *
    (D) Federally declared disasters. If the qualified opportunity zone 
business is located in a qualified opportunity zone impacted by a 
federally declared disaster (as defined in section 165(i)(5)(A)), the 
qualified opportunity zone business may receive not more than an 
additional 24 months to expend its working capital assets, as long as 
it otherwise meets the requirements of paragraph (d)(3)(v) of this 
section. For purposes of the preceding sentence, meeting the 
requirements of paragraph (d)(3)(v) of this section may be determined 
by reference either to the original amount of working capital assets 
designated in writing under paragraph (d)(3)(v)(A) of this section and 
reasonable written schedule under paragraph (d)(3)(v)(B) of this 
section or to a new or revised written designation and written schedule 
that satisfy the requirements of paragraph (d)(3)(v)(A) and (B) of this 
section, respectively. A new or revised written designation of the 
amount of working capital assets and reasonable written schedule for 
expending that amount may be used only if adopted not later than 120 
days after the close of the incident period, as defined in 44 CFR 
206.32(f), with respect to that disaster. In determining whether a new 
or revised schedule satisfies the requirements of paragraph 
(d)(3)(v)(B) of this section, the planned completion of spending must 
take into account the up-to-31 month period originally allowed under 
paragraph (d)(3)(v)(B) of this section, plus the up-to-24 additional 
months provided in this paragraph (d)(3)(v)(D).
* * * * *
    (e) * * *
    (1) In general. Except as provided in paragraph (e)(2) of this 
section, the provisions of this section are applicable for taxable 
years beginning after March 13, 2020.
    (2) Exceptions. * * *
    (ii) Flexibility with respect to working capital safe harbor plans 
in the event of a federally declared disaster. The final three 
sentences in paragraph (d)(3)(v)(D) are applicable for taxable years 
beginning after [DATE OF PUBLICATION OF FINAL RULE].
0
Par. 7. Section 1.1445-3 is amended by adding paragraph (e)(5) to read 
as follows:


Sec.  1.1445-3  Adjustments to amount required to be withheld pursuant 
to withholding certificate.

* * * * *
    (e) * * *
    (5) Special rule for gain deferred under section 1400Z-2(a). The 
Internal Revenue Service will issue a withholding certificate under 
this paragraph (e) that excuses withholding or that permits a 
transferee to withhold a reduced amount if the transferor has obtained 
an eligibility certificate under Sec.  1.1400Z2(a)-2 from the IRS with 
respect to the transfer. The amount by which the transferee may reduce 
the withholding (including a reduction to zero) is the amount of 
security provided on the eligibility certificate. If this paragraph 
(e)(5) applies, the requirements in paragraphs (e)(1) through (e)(4) of 
this section are deemed to have been satisfied. This paragraph (e)(5) 
applies to any covered transfer defined in Sec.  1.1400Z2(a)-2(c)(2) 
that occurs after [DATE OF PUBLICATION OF FINAL RULE].
* * * * *
0
Par. 8. Section 1.1446-3 is amended by revising paragraph 
(b)(2)(i)(B)(1) introductory text to read as follows:


Sec.  1.1446-3  Time and manner of calculating and paying over the 1446 
tax.

* * * * *
    (b) * * *
    (2) * * *
    (i) * * *
    (B) * * *
    (1) To the extent applicable, in computing the 1446 tax due with 
respect to a foreign partner, a partnership may consider a certificate 
received from such partner under Sec.  1.1446-6(c)(1)(i), (ii) or (iv) 
and the amount of state and local taxes permitted to be considered 
under Sec.  1.1446-6(c)(1)(iii). For this purpose, a partnership shall 
first consider under Sec.  1.1446-6(c)(1)(iv) the partner's permitted 
deferral amounts and then annualize the partner's allocable share of 
the partnership's items of effectively connected income, gain, 
deduction, and loss before--
* * * * *
0
Par. 9. Section 1.1446-6 is amended by:
0
1. Revising paragraph (a)(1).
0
2. Revising the first sentence of paragraph (a)(2).
0
3. Adding a sentence at the end of paragraph (c)(1).
0
4. Adding paragraph (c)(1)(iv).
0
5. Adding a sentence at the end of paragraph (c)(2)(i).
0
6. Revising the seventh sentence of paragraph (d)(3)(i).
0
7. Adding a sentence at the end of paragraph (f).
    The revisions and additions read as follows:

[[Page 19598]]

Sec.  1.1446-6  Special rules to reduce a partnership's 1446 tax with 
respect to a foreign partner's allocable share of effectively connected 
taxable income.

    (a) In general--(1) Purpose and scope. This section provides rules 
regarding when a partnership required to pay withholding tax under 
section 1446 (1446 tax), or an installment of 1446 tax, may consider 
certain partner-level deductions and losses and eligibility 
certificates under Sec.  1.1400Z2(a)-2(d) in computing its 1446 tax 
obligation under Sec.  1.1446-3. This section also provides rules 
regarding when a partnership is not required to pay a de minimis amount 
of 1446 tax due with respect to a nonresident alien individual partner. 
A partnership determines the applicability of the rules of this section 
on a partner-by-partner basis for each installment period and when 
completing its Form 8804, ``Annual Return for Partnership Withholding 
Tax (Section 1446),'' and paying 1446 tax for the partnership taxable 
year. Except with respect to certain state and local taxes paid by the 
partnership on behalf of the partner, to apply the rules of this 
section with respect to a foreign partner, the partnership must receive 
a certificate described in Sec.  1.1446-6(c)(1)(i) and (ii) from such 
partner for each partnership taxable year or an eligibility certificate 
described in Sec.  1.1400Z2(a)-2(d) for each security-required gain (as 
defined in Sec.  1.1400Z2(a)-2(c)(1)). Paragraph (b) of this section 
identifies the foreign partners to which this section applies. 
Paragraph (c) of this section identifies the deductions and losses and 
security-required gains that a foreign partner may certify to the 
partnership as well as the state and local taxes paid by the 
partnership on behalf of the foreign partner that can be taken into 
account without a certification, and establishes an exception that 
permits a partnership to not pay a de minimis amount of 1446 tax with 
respect to a nonresident alien partner. Paragraph (c) of this section 
also sets forth the requirements for a valid certificate. Paragraphs 
(a)(2) and (d) of this section establish when a partnership may rely on 
and consider a foreign partner's certificate in computing its 1446 tax, 
and the effects of relying on such a certificate. Paragraph (d) of this 
section also describes the effects of a partnership relying on a 
certificate (including an updated certificate) and the reporting 
requirements of a partnership with respect to a certificate. Paragraph 
(e) of this section sets forth examples that illustrate the rules of 
this section. Paragraph (f) of this section provides the Effective/
Applicability date. Paragraph (g) of this section provides a transition 
rule.
    (2) Reasonable reliance on a certificate. Subject to Sec.  1.1446-2 
and the rules of this section, a partnership receiving a certificate 
(including an updated certificate or status update under paragraph 
(c)(2)(ii)(B) of this section) of deductions and losses or an 
eligibility certificate from a partner provided in accordance with the 
provisions of this section may reasonably rely on the certificate of 
deductions and losses (to the extent of the certified deductions and 
losses or other representations set forth in the certificate) or 
eligibility certificate (to the extent of the permitted deferral amount 
determined in Sec.  1.1400Z2(a)-2(d)(7)) until such time that it has 
actual knowledge or reason to know that the certificate is defective or 
that the time for receiving an updated certificate or status update 
from the partner under paragraph (c)(2)(ii)(B) of this section has 
expired. * * *
* * * * *
    (c) * * *
    (1) * * * Under paragraph (c)(1)(iv) of this section, a partnership 
may take into account eligibility certificates submitted by a foreign 
partner with respect to security-required gains.
* * * * *
    (iv) Consideration of eligibility certificates. A partner that is a 
nonresident alien or foreign corporation that satisfies the 
requirements of Sec.  1.1400Z2(a)-1(a)(3) may provide a copy of an 
eligibility certificate, as defined in Sec.  1.1400Z2(a)-2(d)(1), for 
each of the partner's security-required gains, as defined in Sec.  
1.1400Z2(a)-2(c)(1).
* * * * *
    (2) * * *
    (i) * * * A partner's certification under paragraph (c)(1)(iv) of 
this section shall be the eligibility certificate described in Sec.  
1.1400Z2(a)-2(d)(1).
* * * * *
    (d) * * *
    (3) * * *
    (i) * * * For an installment period other than the first 
installment period for which the partnership considers a foreign 
partner's certificate or updated certificate, the partnership may, 
instead of attaching any partner's certificate, attach to Form 8813 a 
list containing the name, TIN, the amount of certified deductions and 
losses, the amount of gain excluded resulting from an eligibility 
certificate, and the amount of state and local taxes the partnership 
may consider under paragraph (c)(1)(iii) of this section for each 
foreign partner whose certificate was relied upon.
* * * * *
    (f) * * * Paragraph (c)(1)(iv) of this section and the references 
in paragraphs (a)(1), (a)(2), (c)(1), and (d)(3)(i) of this section to 
eligibility certificates, covered transfers and security-required 
gains, apply to any covered transfers (as defined in Sec.  1.1400Z2(a)-
2(c)(2)) occurring after [DATE OF PUBLICATION OF FINAL RULE].
* * * * *
0
Par. 10. Section 1.1446-7 is amended by adding a sentence at the end of 
the section to read as follows:


Sec.  1.1446-7  Effective/Applicability date.

    * * * The references in Sec.  1.1446-3(b)(2)(i)(B)(1) to Sec.  
1.1446-6(c)(1)(iv) apply to partnership taxable years ending after 
[DATE OF PUBLICATION OF FINAL RULE].
0
Par. 11. Section 1.1446(f)-2 is amended by adding paragraphs (b)(8) and 
(c)(5) and by adding a sentence to the end of paragraph (f) to read as 
follows:


Sec.  1.1446(f)-2  Withholding on the transfer of a non-publicly traded 
partnership interest.

* * * * *
    (b) * * *
    (8) Gain deferred under section 1400Z-2(a). A transferee may rely 
on a certification from the transferor that includes a copy of an 
eligibility certificate (as described in Sec.  1.1400Z2(a)-2(d)) with 
respect to the transfer for an amount of security that is greater than 
or equal to the maximum security amount. See paragraph (c)(5) of this 
section for when an eligibility certificate provides an amount of 
security that is less than the maximum security amount.
    (c) * * *
    (5) Gain deferred under section 1400Z-2(a). A transferee may rely 
on a certification from a transferor that includes a copy of an 
eligibility certificate (as described in Sec.  1.1400Z2(a)-2(d)) with 
respect to the transfer to reduce the amount required to be withheld 
under this section by the amount of security provided on the 
eligibility certificate.
* * * * *
    (f) Applicability date. * * * Paragraphs (b)(8) and (c)(5) of this 
section apply to any covered transfer (as defined in Sec.  1.1400Z2(a)-
2(c)(2)) that

[[Page 19599]]

occurs after [DATE OF PUBLICATION OF FINAL RULE].

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2021-06143 Filed 4-12-21; 4:15 pm]
BILLING CODE 4830-01-P