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

As Enacted ( Federal Register)

Cited authorities 5

Cited in

Published date	14 April 2021
Citation	86 FR 19585
Record Number	2021-06143
Section	Proposed rules
Court	Internal Revenue Service,Treasury Department

This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

19585

Vol. 86, No. 70

Wednesday, April 14, 2021

DEPARTMENT OF THE INTERIOR

Bureau of Indian Affairs

25 CFR Part 15

Office of the Secretary

43 CFR Part 30

[212A2100DD/AAKC001030/

A0A501010.999900 253G]

RIN 1094–AA55

American Indian Probate Regulations

AGENCY

: Bureau of Indian Affairs, Office

of the Secretary, Interior.

ACTION

: Proposed rule; reopening of

comment period.

SUMMARY

: The Department of the

Interior (Department) proposed

revisions to its regulations governing

probate of property that the United

States holds in trust or restricted status

for American Indians. We are reopening

the comment period to effectively

extend original March 8, 2021 comment

deadline. Any comments received after

the original March 8, 2021 comment

deadline and before the new comment

deadline will be accepted as timely

submitted. Comments previously

submitted need not be resubmitted and

will be fully considered in preparation

of the final rule.

DATES

: The comment period for the

proposed rule published January 7, 2021

(86 FR 1037), is reopened. Submit

written comments by April 29, 2021.

ADDRESSES

: You may submit comments

by any one of the following methods:

•Federal rulemaking portal

www.regulations.gov. The rule is listed

under Agency Docket Number DOI–

2019–0001.

•Email: Tribes may email comments

to: consultation@bia.gov. All others

should email their comments to:

comments@bia.gov.

•Mail or Courier: Ms. Elizabeth

Appel, Office of Regulatory Affairs &

Collaborative Action, U.S. Department

of the Interior, 1849 C Street NW, Mail

Stop 4660 MIB, Washington, DC 20240.

We cannot ensure that comments

received after the close of the comment

period (see

DATES

) will be included in

the docket for this rulemaking and

considered. Comments sent to an

address other than those listed above

will not be included in the docket for

this rulemaking.

FOR FURTHER INFORMATION CONTACT

Elizabeth K. Appel, Director, Office of

Regulatory Affairs & Collaborative

Action—Indian Affairs,

Elizabeth.appel@bia.gov, (202) 273–

4680.

SUPPLEMENTARY INFORMATION

Background

On January 7, 2021, we published a

proposed rule (86 FR 1037) to revise

regulations governing probate of

property that the United States holds in

trust or restricted status for American

Indians. The proposed rule had a 60-day

public comment period, ending March

8, 2021. During the comment period for

the proposed rule, we received a request

for additional time to submit comments.

In response to that request, we are

allowing additional time for the public

to comment on the proposed rule.

Public Comments

We will accept comments from the

public during this reopened comment

period on our proposed rule. If you

already submitted comments on the

proposed rule, please do not resubmit

them. Any comments received before

the new comment deadline will be

accepted as timely submitted, including

comments received after the original

March 8, 2021 comment deadline, as

long as they are received before the new

comment deadline listed in the

DATES

section of this document. Any such

comments are incorporated as part of

the public record of the rulemaking

proceeding, and we will fully consider

them in preparation of our final

determination.

You may submit your comments by

any one of the methods listed in

ADDRESSES

. Please note that your

comment—including your personal

identifying information—will be posted

on www.regulations.gov, regardless of

which method you submit your

comments. Before including your

address, phone number, email address,

or other personal identifying

information in your comment, you

should be aware that your entire

comment—including your personal

identifying information—may be made

publicly available at any time. While

you can ask us in your comment to

withhold your personal identifying

information from public review, we

cannot guarantee that we will be able to

do so.

Bryan Newland,

Principal Deputy Assistant Secretary—Indian

Affairs.

Rachael S. Taylor,

Principal Deputy Assistant Secretary-Policy,

Management and Budget.

[FR Doc. 2021–07188 Filed 4–13–21; 8:45 am]

BILLING CODE 4337–15–P

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.

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.

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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 §§ 1.1400Z2(a)–2

and 1.1445–3, Milton Cahn at (202)

317–4934; concerning proposed

§§ 1.1446–3, 1.1446–6 and 1.1446–7,

Ronald Gootzeit at (202) 317–4953;

concerning proposed § 1.1446(f)–2,

Subin Seth at (202) 317–5003;

concerning proposed §§ 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

§§ 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

§ 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

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

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

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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 § 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 § 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 § 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).

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While both categories (iii) and (iv) describe

dispositions or distributions, the gain from which

is used in the calculation of ECTI under §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)).

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 § 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

§ 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

§ 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 § 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 § 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 § 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 § 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.

Proposed § 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

§ 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 § 1.1400Z2(a)–

2(c)(2)(i).

Security-required gain is certain gain

that arises from a covered transfer.

Proposed § 1.1400Z2(a)–2(c)(1). For a

covered transfer defined in proposed

§ 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

§ 1.1446–2, disregarding §1.1446–

2(b)(4)(i). Id. For a covered transfer

defined in proposed § 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 § 1.1446–2 that is allocable

to the security-required person. Id.

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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 § 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

§ 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 § 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

§§ 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

§ 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

§ 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

§ 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

§ 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

§ 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 § 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 § 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

§ 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 § 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

§ 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

§ 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 § 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

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See https://www.fema.gov/coronavirus/disaster-

declarations.

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

§ 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 § 1.1446–6 in

determining its section 1446 tax. The

proposed regulations modify the rules

in §§ 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 §§ 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,

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.

In response, this notice of proposed

rulemaking proposes to add three new

sentences at the end of § 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 § 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 § 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 § 1.1400Z2(a)–2

Proposed § 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

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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 § 1.1400Z2(a)–

2(d)(3)(ii));

2. Information about the covered

transfer (proposed § 1.1400Z2(a)–

2(d)(3)(iii));

3. Agreement for deferral of tax and

provision of security (proposed

§ 1.1400Z2(a)–2(d)(4));

4. U.S. agent agreement (proposed

§ 1.1400Z2(a)–2(d)(5)); and

5. Security and any related required

documents (proposed § 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 omb.unit@irs.gov

(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 § 1.1400Z2(d)–1(d)(3)(v)(D)

Proposed § 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

§ 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

§ 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 § 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 §§ 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 § 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

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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 http://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 § 1.1400Z2(a)–2 and revising the

entries for §§ 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).

* * * * *

■Par. 2. Section 1.1400Z2–0 is

amended by:

■1. Revising the introductory text.

■2. Adding an entry for § 1.1400Z2(a)–

1(a)(3).

■3. Revising the entry for

§ 1.1400Z2(a)–1(g)(2).

■4. Adding an entry for § 1.1400Z2(a)–

■5. Adding an entry for § 1.1400Z2(b)–

1(j)(3).

■6. Revising the entry for

§ 1.1400Z2(d)–1(e)(2).

The revisions and additions read as

follows:

§ 1.1400Z2–0 Table of Contents.

This section lists the table of contents

for §§ 1.1400Z2(a)–1 through

1.1400Z2(f)–2.

§ 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.

§ 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.

(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.

§ 1.1400Z2(b)–1 Inclusion of gains that

have been deferred under section 1400Z–

2(a).

* * * * *

(j) * * *

(3) Specific rules.

§ 1.1400Z2(d)–1 Qualified opportunity

funds and qualified opportunity zone

businesses.

* * * * *

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(e) * * *

(2) Exceptions.

* * * * *

■Par. 3. Section 1.1400Z2(a)–1 is

amended by:

■1. Adding paragraph (a)(3).

■2. Revising paragraph (g)(1).

■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.

■4. Adding a subject heading for newly

redesignated paragraph (g)(2).

■5. Adding new paragraph (g)(2)(ii).

The revisions and additions read as

follows:

§ 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 § 1.1400Z2(a)–2(b)(1))

with respect to a gain and that gain is

a security-required gain (as defined in

§ 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 § 1.1400Z2(a)–2(d)(1));

(ii) The eligibility certificate provides

a permitted deferral amount (as defined

in § 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 § 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 § 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 § 1.1400Z2(a)–2(c)(1)) from a covered

transfer (as defined in § 1.1400Z2(a)–

2(c)(2)) that occurs after [DATE OF

PUBLICATION OF FINAL RULE].

■Par. 4. Section 1.1400Z2(a)–2 is added

to read as follows:

§ 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 § 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

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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

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.

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 § 1.1446–

2 (ECTI), disregarding § 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);

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 § 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 § 1.1445–2(b),

§ 1.1446(f)–2(b)(2), or §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

§§ 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 §§ 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 §§ 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

§§ 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

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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 § 1.1445–1(g)(5); for a

covered transfer described in paragraph

(c)(2)(i)(B) of this section, the amount

determined under § 1.1446(f)–2(c)(2)(i)

(or the amount determined using the

alternative procedures under

§ 1.1446(f)–2(c)(2)(ii), disregarding any

requirement to provide a certification)

or § 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 §§ 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

§§ 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 § 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 § 1.1400Z2(a)–1(d)(2).

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

§§ 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 § 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

§ 1.1400Z2(a)–1(d)(2) or establishing to

the satisfaction of the Commissioner

that an inclusion event described in

§ 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 § 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

§§ 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 §§ 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

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the Internal Revenue Bulletin (see

§§ 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 §§ 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);

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 § 1.1400Z2(a)–1(a)(3).

(1) Facts. Partnership P is an eligible

taxpayer within the meaning of

§ 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—G

, G

, and G

—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 § 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 O

through O

were United States

persons, and partners O

through O

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 O

and O

had been

replaced by O

and O

12,

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 O

and O

had been replaced by

and O

, 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 § 1.1400Z2(a)–1(a). These

three elections are proper unless they are

barred by § 1.1400Z2(a)–1(a)(3).

(2) Analysis—(i) G

. 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 G

, but does not

satisfy the asset test during the look-back

period for G

. P does not satisfy the gain test

in paragraph (b)(3)(iii) of this section because

the amount of the G

gain is less than $1

million. As a result, P is not a specified

partnership with respect to G

. Accordingly,

P is not a security-required person with

respect to G

, and, thus, P does not need an

eligibility certificate with respect to G

order to make a proper deferral election with

respect to G

(ii) G

. Unlike G

, G

($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 G

. However, P does

not satisfy the ownership test as of the date

of transfer. Accordingly, P is not a specified

partnership with respect to G

and, thus, P

is not a security-required person with respect

to G

. P does not need an eligibility

certificate with respect to G

in order to make

a proper deferral election with respect to G

(iii) G

. 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 G

. Also, G

is large enough to satisfy the

gain test. Accordingly, P is a security-

required person with respect to G

, and G

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a security-required gain. Consequently, P

may not elect to defer G

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 G

Even if P has received such an eligibility

certificate, P may not elect to defer a larger

amount of G

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].

■Par. 5. Section 1.1400Z2(b)–1 is

amended by:

■1. Revising paragraph (c)(1)(iv).

■2. Adding paragraph (c)(1)(v).

■3. Revising paragraph (j)(1).

■4. Adding paragraph (j)(3).

The revisions and additions read as

follows:

§ 1.1400Z2(b)–1 Inclusion of gains that

have been deferred under section 1400Z–

2(a).

* * * * *

(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

§ 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 § 1.1400Z2(a)–

2(d)(4)) entered into after [DATE OF

PUBLICATION OF FINAL RULE].

■Par. 6. Section 1.1400Z2(d)–1 is

amended by:

■1. Revising paragraphs (d)(3)(v)(D)

and (e)(1).

■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).

■3. Adding a subject heading for newly

redesignated paragraph (e)(2).

■4. Adding new paragraph (e)(2)(ii).

The revisions and additions read as

follows:

§ 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].

■Par. 7. Section 1.1445–3 is amended

by adding paragraph (e)(5) to read as

follows:

§ 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

§ 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 § 1.1400Z2(a)–2(c)(2) that

occurs after [DATE OF PUBLICATION

OF FINAL RULE].

* * * * *

■Par. 8. Section 1.1446–3 is amended

by revising paragraph (b)(2)(i)(B)(1)

introductory text to read as follows:

§ 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

§ 1.1446–6(c)(1)(i), (ii) or (iv) and the

amount of state and local taxes

permitted to be considered under

§ 1.1446–6(c)(1)(iii). For this purpose, a

partnership shall first consider under

§ 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—

* * * * *

■Par. 9. Section 1.1446–6 is amended

by:

■1. Revising paragraph (a)(1).

■2. Revising the first sentence of

paragraph (a)(2).

■3. Adding a sentence at the end of

paragraph (c)(1).

■4. Adding paragraph (c)(1)(iv).

■5. Adding a sentence at the end of

paragraph (c)(2)(i).

■6. Revising the seventh sentence of

paragraph (d)(3)(i).

■7. Adding a sentence at the end of

paragraph (f).

The revisions and additions read as

follows:

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§ 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 § 1.1400Z2(a)–2(d) in

computing its 1446 tax obligation under

§ 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 § 1.1446–

6(c)(1)(i) and (ii) from such partner for

each partnership taxable year or an

eligibility certificate described in

§ 1.1400Z2(a)–2(d) for each security-

required gain (as defined in

§ 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 § 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 § 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. * * *

* * * * *

(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

§ 1.1400Z2(a)–1(a)(3) may provide a

copy of an eligibility certificate, as

defined in § 1.1400Z2(a)–2(d)(1), for

each of the partner’s security-required

gains, as defined in § 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 § 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 § 1.1400Z2(a)–2(c)(2))

occurring after [DATE OF

PUBLICATION OF FINAL RULE].

* * * * *

■Par. 10. Section 1.1446–7 is amended

by adding a sentence at the end of the

section to read as follows:

§ 1.1446–7 Effective/Applicability date.

* * * The references in § 1.1446–

3(b)(2)(i)(B)(1) to § 1.1446–6(c)(1)(iv)

apply to partnership taxable years

ending after [DATE OF PUBLICATION

OF FINAL RULE].

■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:

§ 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

§ 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.

(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

§ 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 § 1.1400Z2(a)–2(c)(2)) that

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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

DEPARTMENT OF HOMELAND

SECURITY

Coast Guard

33 CFR Part 165

[Docket Number USCG–2021–0077]

RIN 1625–AA11

Regulated Navigation Area; Biscayne

Bay Causeway Island Slip, Miami

Beach, FL

AGENCY

: Coast Guard, DHS.

ACTION

: Notice of proposed rulemaking.

SUMMARY

: The Coast Guard is proposing

to establish a Regulated Navigation Area

over certain navigable waters of the

Biscayne Bay Causeway Island Slip,

immediately west of the Coast Guard

Base Miami Beach, Miami Beach, FL.

This action is necessary to provide for

the safety of life and federal property on

this navigable water. This proposed

rulemaking would require all persons

and vessels to transit the Regulated

Navigation Area at a speed that creates

minimum wake, seven miles per hour or

less, to safeguard damage to Coast Guard

assets, disrupting operations, and/or

injuring Coast Guard personnel.

Additionally, this proposed rulemaking

would prohibit vessels from passing

other vessels making way within the

regulated area. We invite your

comments on this proposed rulemaking.

DATES

: Comments and related material

must be received by the Coast Guard on

or before May 14, 2021.

ADDRESSES

: You may submit comments

identified by docket number USCG–

2021–0077 using the Federal

eRulemaking Portal at https://

www.regulations.gov. See the ‘‘Public

Participation and Request for

Comments’’ portion of the

SUPPLEMENTARY INFORMATION

section for

further instructions on submitting

comments.

FOR FURTHER INFORMATION CONTACT

: If

you have questions about this proposed

rulemaking, call or email LT Samuel

Rodriguez, Sector Miami Waterways

Management Division, Coast Guard at

305–535–4317 or by email

Samuel.Rodriguez-Gonzalez@uscg.mil.

SUPPLEMENTARY INFORMATION

I. Table of Abbreviations

CFR Code of Federal Regulations

DHS Department of Homeland Security

FR Federal Register

NPRM Notice of proposed rulemaking

§ Section

U.S.C. United States Code

II. Background, Purpose, and Legal

Basis

In October 2020, the Fisher Island

Ferry Communities Association

relocated its ferry terminal to the

Biscayne Bay Causeway Island Slip

(Slip), west of the Coast Guard Base

Miami Beach, Miami Beach, FL. The

Slip is the primary terminal for the

movement of residents, workers, and

goods from Terminal Island to Fisher

Island. Prior to October 2020, maritime

traffic in the Biscayne Bay Causeway

Island Basin (Basin) was limited in

scope to occasional private yachts and

Coast Guard assets. The addition of ferry

traffic at the Slip has resulted in a

substantial increase in maritime traffic

in the Basin. The Basin has a length of

approximately 380 yards and a width of

approximately 97 yards. The increase in

traffic, particularly of the Fisher Island

Ferry, presents a hazard to Coast Guard

assets operating in the Basin as the

ferries occasionally pass within the

Basin, dangerously close to Coast Guard

assets. Additionally, and particularly

when passing within the Basin, the

ferries create a disrupting, and at times

dangerous wake, adversely affecting

Coast Guard routine operations and

personnel. The passing maneuvers and

resultant wake also create hazardous

conditions during certain cutter

operations, such as onloading and

offloading of ammunition or refueling.

The Coast Guard’s Seventh District

Commander has determined the

increased ferry traffic, passing

maneuvers, and resultant wake presents

a safety and operational concern to

Coast Guard personnel and assets

moored in the Biscayne Bay Causeway

Island Basin.

The purpose of this regulation is to

ensure navigational safety, protection of

Coast Guard assets and personnel, and

to facilitate safe execution of Coast

Guard statutory missions. The Coast

Guard is proposing this rulemaking

under authority in 46 U.S.C. 70034.

III. Discussion of Proposed Rule

The Coast Guard’s Seventh District

Commander is proposing to establish a

permanent Regulated Navigation Area

that would require all persons and

vessels to transit the regulated area at a

speed that creates minimum wake,

seven miles per hour or less, to

safeguard damage to Coast Guard assets,

disrupting operations, and/or injuring

Coast Guard personnel. Additionally,

this proposed rulemaking would

prohibit vessels from passing other

vessels making way within the regulated

area. This Regulated Navigation Area

covers all navigable waters within the

Biscayne Bay Causeway Island Slip,

immediately west of the Coast Guard

Base Miami Beach, Miami Beach, FL.

IV. Regulatory Analyses

We developed this proposed rule after

considering numerous statutes and

Executive orders related to rulemaking.

Below we summarize our analyses

based on a number of these statutes and

Executive orders, and we discuss First

Amendment rights of protestors.

A. Regulatory Planning and Review

Executive Orders 12866 and 13563

direct agencies to assess the costs and

benefits of available regulatory

alternatives and, if regulation is

necessary, to select regulatory

approaches that maximize net benefits.

This NPRM has not been designated a

‘‘significant regulatory action,’’ under

Executive Order 12866. Accordingly,

the NPRM has not been reviewed by the

Office of Management and Budget

(OMB).

This regulatory action determination

is based on the size, and location of the

Regulated Navigation area. The

Regulated Navigation Area will only

affect vessels entering, and passing

within, the Biscayne Bay Causeway

Island Slip in Miami Beach, Miami

Beach, FL. Vessels will continue to

operate within the Biscayne Bay

Causeway Island Slip with the only

restriction being the requirement to

operate at speeds below seven miles per

hour and avoid passing other vessels

making way within the regulated area.

Moreover, upon activating the Regulated

Navigation Area, the Coast Guard will

notify the local maritime community

through various means including, Local

Notice to Mariners and Broadcast Notice

to Mariners issued on VHF–FM marine

radio channel 16.

B. Impact on Small Entities

The Regulatory Flexibility Act of

1980, 5 U.S.C. 601–612, as amended,

requires Federal agencies to consider

the potential impact of regulations on

small entities during rulemaking. The

term ‘‘small entities’’ comprises small

businesses, not-for-profit organizations

that are independently owned and

operated and are not dominant in their

fields, and governmental jurisdictions

with populations of less than 50,000.

The Coast Guard certifies under 5 U.S.C.

605(b) that this proposed rule would not

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

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