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In brief

On 21 September 2020, the US Treasury and the IRS finalized regulations under Section 864(c)(8), generally retaining the basic approach and structure of the proposed regulations issued on 20 December 2018 (REG-113604-18).

Section 864(c)(8), which was added to the Code by the Tax Cuts and Jobs Act in 2017, generally provides that if a nonresident alien individual or foreign corporation owns an interest in a partnership engaged in a US trade or business, the gain or loss on the sale or exchange of the partnership interest by the foreign person is taxable in the US. This means that the gain or loss is treated as effectively connected with the conduct of a trade or business within the US (“effectively connected gain” or “effectively connected loss”). However, this treatment applies only to the extent that the foreign person would have had effectively connected gain or loss if the partnership had sold all of its assets at fair market value as of the date of the sale or exchange (“deemed sale limitation”). This rule generally overturns the result of Grecian Magnesite Mining v. Commissioner, 149 T.C. No. 3 (2017), aff’d, 926 F.3d 819 (D.C. Cir. 2019). That ruling held that the gain or loss on the sale or exchange by a foreign person of an interest in a partnership engaged in a US trade or business was foreign-source and was not taxable as effectively connected income in the US.

Read the full alert within the North America Tax and News Developments Newsletter.


Steven R. Schneider is a partner in Baker McKenzie's Washington, DC office, and leads the Firm's passthroughs tax group. He started his career as a lawyer in the IRS' national office and has had many years of national-level law firm and Big-4 accounting firm experience. Mr. Schneider also previously chaired the ABA Partnership Tax Committee. He has been teaching an advanced tax course on drafting partnership and LLC agreements at Georgetown University Law Center since 2005, is a regular speaker at national tax venues, and has published numerous articles on tax for Taxes: The Tax Magazine, Tax Notes, Bloomberg BNA and Journal of Taxation, among many others.


Leah Gruen is counsel in the Firm's Global Tax Practice Group in Chicago. She provides tax structuring advice to corporations, partnerships, limited liability companies, REITs and other pass-through entities.


Murtuza Hussain is an associate in the North America Tax Practice Group and resides in the Houston Office. Prior to joining Baker McKenzie, Murtuza was an associate in the Houston office of a national law firm where he represented public and private companies on a variety of tax matters.