The Families First Act generally required employers of fewer than 500 employees to provide paid sick leave and expanded family and medical leave, up to specified limits, to employees unable to work or telework due to certain circumstances related to COVID-19, through December 31, 2020. Generally, employers that were required to pay qualified sick leave wages and qualified family leave wages by the Families First Act (collectively, Qualified Leave Wages), as well as qualified health plan expenses allocable to Qualified Leave Wages (Qualified Health Plan Expenses) under the Families First Act are entitled to refundable tax credits administered by the IRS.

The Tax Relief Act did not extend the requirement to provide the Qualified Leave Wages and Qualified Health Plan Expenses, but did extend the refundable tax credits for Qualified Leave Wages and Qualified Health Plan Expenses, with modifications, paid for periods of leave after December 31, 2020, and before April 1, 2021, that would have been required to have been paid if the requirement to provide such leave had been extended.

Specifically, sections 7001 and 7003 of the Families First Act, as amended by the Tax Relief Act, provide refundable tax credits against an employer’s share of the social security portion of FICA tax, and so much of the Railroad Retirement Tax Act Tier 1 rate as is attributable to an employer’s share of the social security portion of FICA tax, for each calendar quarter in an amount equal to the Qualified Leave Wages paid by the employer plus Qualified Health Plan Expenses with respect to that calendar quarter, with respect to periods of leave beginning on April 1, 2020, and ending on March 31, 2021. For purposes of this notice, an employer’s share of the social security portion of FICA tax and so much of the Railroad Retirement Tax Act Tier 1 rate as is attributable to an employer’s share of the social security portion of FICA tax, as applicable, are referred to as Creditable Employer Social Security Taxes. The credits under section 7001 and 7003 are increased by the amount of the employer’s share of Medicare tax (or the portion of the Railroad Retirement Tax Act Tier 1 rate as is attributable to the employer’s share of Medicare tax) imposed on Qualified Leave Wages. See section 7005(b)(1) of the Families First Act. For purposes of this notice, the increase in the credit under section 7005(b)(1) is treated as a credit under section 7001 or section 7003.

The ARP added sections 3131 and 3132 to the Code, under which eligible employers can claim refundable tax credits for qualified sick leave wages and qualified family leave wages, respectively, with respect to periods of leave beginning on April 1, 2021, and ending on September 30, 2021 (also referred to as Qualified Leave Wages for the remainder of this notice). The refundable tax credits under sections 3131 and 3132 of the Code apply against an employer’s share of the Medicare portion of FICA tax, and so much of the Railroad Retirement Tax Act Tier 1 rate as is attributable to the employer’s share of Medicare tax, which for purposes of this notice, are referred to as Creditable Employer Medicare Taxes. The refundable tax credits are increased by the health plan expenses (also referred to as Qualified Health Plan Expenses for the remainder of this notice) and certain collectively bargained contributions paid by an eligible employer that are properly allocable to the related Qualified Leave Wages (Qualified Collectively Bargained Contributions), and both the employer’s share of the social security and Medicare portions of FICA tax (and the employer’s share of the Railroad Retirement Tax Act Tier 1 rate) imposed on the Qualified Leave Wages. See I.R.C. §§3131(d), 3131(e), 3132(d), 3133(e), and 3133. For purposes of this notice, the increase in the credit under section 3133 is treated as a credit under section 3131 or 3132 of the Code.

The refundable tax credits under section 7001 and 7003 of the Families First Act and sections 3131 and 3132 of the Code are reported on the employer’s return for reporting its liability for FICA tax or RRTA tax, as applicable, which for most employers subject to FICA tax is the quarterly Form 941. An employer may claim an advance payment of the refundable tax credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19, in accordance with the instructions to the form.

Section 2301 of the CARES Act, as originally enacted, provided for an employee retention credit for eligible employers that pay qualified wages, including certain health plan expenses, to some or all employees after March 12, 2020, and before January 1, 2021. Eligible employers were allowed to claim a refundable tax credit under the CARES Act for fifty percent of qualified wages paid, limited to $10,000 per employee over all calendar quarters combined in 2020 (Qualified Retention Wages).

Section 206 of the Relief Act amended section 2301 of the CARES Act to modify the employee retention credit for qualified wages paid after March 12, 2020, and before January 1, 2021, primarily relating to who may claim the credit. Section 207 of the Relief Act further amended section 2301 of the CARES Act to modify and extend the application of the employee retention credit for qualified wages paid after December 31, 2020, and before July 1, 2021. Under section 2301 of the CARES Act, as amended by section 207 of the Relief Act, eligible employers can claim a refundable tax credit for seventy percent of qualified wages paid, limited to $10,000 per employee per calendar quarter in 2021 for the first and second calendar quarters of 2021 (also referred to as Qualified Retention Wages for the remainder of this notice).

Section 9651 of the ARP enacted section 3134 of the Code, which provides a substantially similar employee retention credit for qualified wages paid after June 30, 2021, and before January 1, 2022. Under section 3134 of the Code, eligible employers can claim a refundable tax credit for seventy percent of qualified wages paid, limited to $10,000 per employee per calendar quarter in 2021 for the third and fourth calendar quarters of 2021 (also referred to as Qualified Retention Wages for the remainder of this notice).

The refundable tax credit under section 2301 of the CARES Act applies against Creditable Employer Social Security Taxes for each calendar quarter. The refundable tax credit under section 3134 of the Code applies against Creditable Employer Medicare Taxes for each calendar quarter. The refundable tax credits under section 2301 of the CARES Act, as amended, and section 3134 of the Code are reported on the employer’s return for reporting its liability for FICA tax or RRTA tax, as applicable, which for most employers subject to FICA tax is the quarterly Form 941. For calendar quarters in 2021, eligible small employers may claim an advance payment of the refundable tax credits for Qualified Retention Wages under section 2301 of the CARES Act and section 3134 of the Code by filing Form 7200 in accordance with the instructions to the form.

Section 9501(b) of the ARP added section 6432 of the Code² which provides a refundable tax credit for premiums payable for COBRA continuation coverage under section 9501(a)(1). The credit is calculated with respect to premiums not paid by assistance eligible individuals for such coverage by reason of section 9501(a)(1) during the period beginning April 1, 2021, and ending September 30, 2021.

The refundable tax credit applies against Creditable Employer Medicare Taxes for each calendar quarter. The refundable tax credit is reported on the employer’s return for reporting its liability for FICA tax or RRTA tax, as applicable, which for most employers subject to FICA tax is the quarterly Form 941. An employer may claim an advance payment of the refundable tax credit by filing Form 7200 in accordance with the instructions to the form.

Section 6656 of the Code imposes a penalty for any failure to deposit amounts as required by the Code or regulations on the date prescribed therefor, unless such failure is due to reasonable cause and not due to willful neglect. A failure to deposit taxes as required under section 6302 of the Code would generally subject an employer to the section 6656 penalty.

Sections 7001(i) and 7003(i) of the Families First Act (as added by section 3606(a) and (c) of the CARES Act) and section 2301(k) of the CARES Act instruct the Secretary of the Treasury or her delegate (Secretary) to waive the penalty under section 6656 of the Code for failure to deposit the Creditable Employer Social Security Taxes in anticipation of the allowance of the refundable tax credits allowed under the Families First Act and the CARES Act, respectively. Sections 3131(i), 3132(i), 3134(k) and 6432(c)(2)(C) of the Code instruct the Secretary to waive the penalty under section 6656 of the Code for failure to deposit Creditable Employer Medicare Taxes in anticipation of the allowance of the refundable tax credits allowed under sections 3131, 3132, 3134 and 6432 of the Code, respectively. Furthermore, sections 7001(f) and 7003(f) of the Families First Act and sections 3131(g)(3) and 3132(g)(3) of the Code specifically authorize guidance providing for penalty relief for failure to deposit amounts in anticipation of the allowance of the credits provided by the Families First Act and sections 3131 and 3132 of the Code, respectively. Section 3 of this notice provides relief from the penalty under section 6656 pursuant to the Families First Act, the CARES Act, and sections 3131(i), 3132(i), 3134(k), and 6432(c)(2)(C) of the Code.

An employer will not be subject to a penalty under section 6656 for failing to deposit Employment Taxes in a calendar quarter if—

(1) The employer paid Qualified Leave Wages, Qualified Health Plan Expenses, or Qualified Collectively Bargained Contributions with respect to the period beginning on April 1, 2021, and ending on September 30, 2021, to its employees in the calendar quarter prior to the time of the required deposit,

(2) The amount of Employment Taxes that the employer does not timely deposit is less than or equal to the amount of the employer’s anticipated credits under sections 7001 and 7003 of the Families First Act or sections 3131 and 3132 of the Code for the calendar quarter as of the time of the required deposit, and

(3) The employer did not seek payment of an advance credit by filing Form 7200 with respect to the anticipated credits it relied upon to reduce its deposits.

Thus, an employer may reduce without a penalty under section 6656 of the Code the amount of a deposit of Employment Taxes by the amount of the paid sick or family leave credit anticipated for the calendar quarter prior to the required deposit, as long as the employer does not also seek an advance credit with regard to the same amount.

For purposes of this section 3.a of this notice, the total amount of any reduction in any required deposit may not exceed the total amount of the employer’s anticipated credit under section 7001 or 7003 of the Families First Act or section 3131 or 3132 of the Code as of the time of the required deposit, minus any amount of such anticipated credits that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain the relief provided by this notice or (2) to seek payment of an advance credit.

An eligible employer will not be subject to a penalty under section 6656 for failing to deposit Employment Taxes in a calendar quarter if—

(1) The employer paid Qualified Retention Wages with respect to the period beginning January 1, 2021 and ending December 31, 2021, to its employees in the calendar quarter prior to the time of the required deposit,

(2) The amount of Employment Taxes that the employer does not timely deposit, reduced by the amount of Employment Taxes not deposited in anticipation of the credits claimed under sections 7001 and 7003 of the Families First Act or sections 3131 and 3132 of the Code (as described in section 3.a of this notice), is less than or equal to the amount of the employer’s anticipated credits under section 2301 of the CARES Act or section 3134 of the Code for the calendar quarter as of the time of the required deposit, and

(3) The employer did not seek payment of an advance credit by filing Form 7200, with respect to the anticipated credits it relied upon to reduce its deposits.

Thus, after a reduction, if any, of a deposit of Employment Taxes by the amount of the anticipated paid sick or family leave credits, an employer may further reduce, without a penalty under section 6656 of the Code, the amount of the deposit of Employment Taxes by the amount of the employer’s employee retention credit anticipated for the calendar quarter prior to the required deposit, as long as the employer does not also seek an advance credit with regard to the same amount.

For purposes of this section 3.b of this notice, the total amount of any reduction in any required deposit may not exceed the total amount of the employer’s anticipated credit under section 2301 of the CARES Act or section 3134 of the Code as of the time of the required deposit, minus any amount of such anticipated credit that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain the relief provided by this notice or (2) to seek payment of an advance credit.

An employer will not be subject to a penalty under section 6656 for failing to deposit Employment Taxes in a calendar quarter if—

(1) The employer is a “person to whom premiums are payable” under section 6432(b) of the Code,

(2) The amount of Employment Taxes that the employer does not timely deposit, reduced by the amount of Employment Taxes not deposited in anticipation of the credits claimed under sections 7001 and 7003 of the Families First Act or sections 3131 and 3132 of the Code (as described in section 3.a of this notice), and the credits claimed under section 2301 of the CARES Act or section 3134 of the Code (as described in section 3.b of this notice), is less than or equal to the amount of the employer’s anticipated credits under section 6432 of the Code for the calendar quarter as of the time of the required deposit, and

(3) The employer did not seek payment of an advance credit by filing Form 7200 with respect to the anticipated credits it relied upon to reduce its deposits.

Thus, after a reduction, if any, of a deposit of Employment Taxes by the amount of the anticipated paid sick or family leave credits and the anticipated employee retention credit, an employer may further reduce without a penalty under section 6656 of the Code the amount of the deposit of Employment Taxes by the amount of the employer’s COBRA continuation coverage premium assistance credit anticipated for the calendar quarter prior to the required deposit, as long as the employer does not also seek an advance credit with regard to the same amount.

For purposes of this section 3.c of this notice, the total amount of any reduction in any required deposit may not exceed the total amount of the employer’s anticipated credit under section 6432 of the Code in the calendar quarter as of the time of the required deposit, minus any amount of such anticipated credit that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain the relief provided by this notice or (2) to seek payment of an advance credit.

Section 430 specifies the minimum funding requirements that apply to single-employer plans (except for CSEC plans under §414(y)) pursuant to §412. Section 430(h)(2) specifies the interest rates that must be used to determine a plan’s target normal cost and funding target. Under this provision, present value is generally determined using three 24-month average interest rates (“segment rates”), each of which applies to cash flows during specified periods. To the extent provided under §430(h)(2)(C)(iv), these segment rates are adjusted by the applicable percentage of the 25-year average segment rates for the period ending September 30 of the year preceding the calendar year in which the plan year begins.¹ However, an election may be made under §430(h)(2)(D)(ii) to use the monthly yield curve in place of the segment rates.

Notice 2007-81, 2007-44 I.R.B. 899, provides guidelines for determining the monthly corporate bond yield curve, and the 24-month average corporate bond segment rates used to compute the target normal cost and the funding target. Consistent with the methodology specified in Notice 2007-81, the monthly corporate bond yield curve derived from March 2021 data is in Table 2021-3 at the end of this notice. The spot first, second, and third segment rates for the month of March 2021 are, respectively, 0.69, 2.92, and 3.69.

The 24-month average segment rates determined under §430(h)(2)(C)(i) through (iii) must be adjusted pursuant to §430(h)(2)(C)(iv) to be within the applicable minimum and maximum percentages of the corresponding 25-year average segment rates.

The 25-year average segment rates for plan years beginning in 2020 and 2021 were published Notice 2019-51, 2019-41 I.R.B. 866, and Notice 2020-72, 2020-40 I.R.B. 789, respectively.

The three 24-month average corporate bond segment rates applicable for March 2021 without adjustment for the 25-year average segment rate limits are as follows:

Section 9706(a) of ARP changes the 25-year average segment rates and the applicable minimum and maximum percentages used under § 430(h)(3)(C)(iv) of the Code to adjust the 24-month average segment rates. Prior to this change, the applicable minimum and maximum percentages were 90% and 110% for a plan year beginning in 2020, and 85% and 115% for a plan year beginning in 2021, respectively. After this change, the applicable minimum and maximum percentages are 95% and 105% for a plan year beginning in 2020 or 2021. In addition, pursuant to this change, any 25-year average segment rate that is less than 5% is deemed to be 5%.²

Pursuant to § 9706(c)(1) of ARP, these changes apply with respect to plan years beginning on or after January 1, 2020. However, § 9706(c)(2) of ARP provides that a plan sponsor may elect not to have these changes apply to any plan year beginning before January 1, 2022.³

The adjusted 24-month average segment rates reflecting §430(h)(2)(C)(iv) of the Code as amended by §9706(a) of ARP for January 2020 through March 2021, applicable for plan years beginning in 2020 and 2021, are set forth in the Appendix.

The adjusted 24-month average segment rates set forth in the chart below reflect § 430(h)(2)(C)(iv) of the Code as amended by § 9706(a) of ARP. These adjusted 24-month average segment rates apply only for plan years for which an election under § 9706(c)(2) of ARP is not in effect. For a plan year for which such an election does not apply, the 24-month averages applicable for April 2021, adjusted to be within the applicable minimum and maximum percentages of the corresponding 25-year average segment rates in accordance with § 430(h)(2)(C)(iv) of the Code, are as follows:

 

The adjusted 24-month average segment rates set forth in the chart below do not reflect the changes to §430(h)(2)(C)(iv) of the Code made by §9706(a) of ARP. These adjusted 24-month average segment rates apply only for plan years for which an election under §9706(c)(2) of ARP is in effect. For a plan year for which such an election applies, the 24-month averages applicable for April 2021, adjusted to be within the applicable minimum and maximum percentages of the corresponding 25-year average segment rates in accordance with § 430(h)(2)(C)(iv) of the Code, are as follows:

Section 431 specifies the minimum funding requirements that apply to multiemployer plans pursuant to §412. Section 431(c)(6)(B) specifies a minimum amount for the full-funding limitation described in §431(c)(6)(A), based on the plan’s current liability. Section 431(c)(6)(E)(ii)(I) provides that the interest rate used to calculate current liability for this purpose must be no more than 5 percent above and no more than 10 percent below the weighted average of the rates of interest on 30-year Treasury securities during the four-year period ending on the last day before the beginning of the plan year. Notice 88-73, 1988-2 C.B. 383, provides guidelines for determining the weighted average interest rate. The rate of interest on 30-year Treasury securities for March 2021 is 2.34 percent. The Service determined this rate as the average of the daily determinations of yield on the 30-year Treasury bond maturing in February 2051. For plan years beginning in April 2021, the weighted average of the rates of interest on 30-year Treasury securities and the permissible range of rates used to calculate current liability are as follows:

In general, the applicable interest rates under §417(e)(3)(D) are segment rates computed without regard to a 24-month average. Notice 2007-81 provides guidelines for determining the minimum present value segment rates. Pursuant to that notice, the minimum present value segment rates determined for March 2021 are as follows:

The principal author of this notice is Tom Morgan of the Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the IRS participated in the development of this guidance. For further information regarding this notice, contact Mr. Morgan at 202-317-6700 or Paul Stern at 202-317-8702 (not toll-free numbers).

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 Register (84 FR 18652) on May 1, 2019, containing additional proposed regulations under section 1400Z-2 (May 2019 proposed regulations). The May 2019 proposed regulations also updated portions of the October 2018 proposed regulations. On January 13, 2020, final regulations (TD 9889) under section 1400Z-2 were published in the Federal Register (85 FR 1866, as corrected at 85 FR 19082), effective for taxable years beginning after March 13, 2020 (section 1400Z-2 regulations).

Under the section 1400Z-2 regulations, a taxpayer qualifies for deferral under section 1400Z-2(a) only if the taxpayer is an eligible taxpayer. Section 1.1400Z2(a)-1(a)(1). An eligible taxpayer is defined as a person that is required to report the recognition of gains during the taxable year under Federal income tax accounting principles. Section 1.1400Z2(a)-1(b)(13). If an eligible taxpayer that is a partnership does not elect to defer gain, a partner of such partnership may elect to defer its distributive share of the gain. Section 1.1400Z2(a)-1(c)(8).

The section 1400Z-2 regulations provide that only gains that are eligible gains may be deferred. Section 1.1400Z2(a)-1(b)(11). In general, an eligible gain is gain that (i) is treated as a capital gain or is a qualified 1231 gain, (ii) would be recognized for Federal income tax purposes and subject to tax under subtitle A of the Code before January 1, 2027, if section 1400Z-2(a)(1) did not apply to defer the gain, and (iii) does not arise from a sale or exchange of property with certain related persons. Id. Thus, for example, a nonresident alien individual or foreign corporation generally may make a deferral election with respect to an item of capital gain that is effectively connected with a U.S. trade or business, because this gain otherwise is subject to Federal income tax. When a partnership chooses to make a deferral election, the section 1400Z-2 regulations provide an exception to the general requirement that gain be subject to Federal income tax in order to constitute eligible gain, subject to an anti-abuse rule. Section 1.1400Z2(a)-1(b)(11)(ix)(B).

Foreign persons are generally subject to U.S. income tax on amounts that are effectively connected with the conduct of a trade or business within the United States (ECI). A foreign person that directly or indirectly is engaged in a trade or business in the United States must file a U.S. income tax return and pay any tax due.

To ensure the collection of tax, in certain circumstances, the Code imposes withholding requirements on payments or allocations of ECI to foreign persons. See sections 1445, 1446(a), and 1446(f). The amount of withholding under these provisions is intended to serve as a 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.

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.

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.

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.

Income taxes, Reporting and recordkeeping requirements.

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)-2.

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.

(c) Security-required gain.

(1) Definition.

(2) Covered transfer.

(d) Eligibility certificate.

(1) In general.

(2) Application materials.

(3) Application.

(4) Deferral agreement.

(5) U.S. agent agreement.

(6) Security.

(7) Permitted deferral amount.

(e) Example.

(f) Applicability date.

§ 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.

* * * * *

(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 within the United States is, at any time during the look-back period, equal to or greater than 25 percent of the value of all of the assets of the partnership (the asset test). In making the calculation under the asset test described in this paragraph (b)(3)(iii)—

(A) The value of each asset is determined on the last day of the taxable year before the year in which the look-back period begins or, for any asset acquired after this date, on the date of acquisition (including upon formation of the partnership);

(B) The value of each asset is measured according to its gross fair market value; and

(C) The partnership must include the value of the proportionate share of any assets held by a partnership in which the first-mentioned partnership is a direct or indirect partner, but the first-mentioned partnership must not include the value of a direct or indirect interest in another partnership.

(c) Security-required gain—(1) Definition. The term security-required gain means—

(i) The gain from a covered transfer described in paragraphs (c)(2)(i)(A) or (B) of this section;

(ii) The gain from a covered transfer described in paragraph (c)(2)(i)(C) of this section that is included in computing effectively connected taxable income, as determined under § 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);

(C) A disposition by a specified partnership of property, other than an interest in another partnership or a U.S. real property interest, or a distribution to a specified partnership, if any gain that arises is includible in computing ECTI; or

(D) A disposition by a partnership of property, or a distribution to such a partnership, if any gain that arises is includible (by any partnership) in determining the allocable share of a security-required person’s ECTI (treating a security-required person that is a domestic specified partnership as a foreign person for this purpose).

(ii) Exceptions to withholding. A disposition or distribution described in paragraph (c)(2)(i)(A) or (B) of this section is not a covered transfer if an exception under § 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 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).

(C) The security-required person provides security to the IRS in the amount required for the security-required gain for which the security-required person seeks to defer gain under section 1400Z–2(a). The security may be replaced during the term of the deferral agreement, to the extent provided in forms or instructions or in publications or guidance published in the Internal Revenue Bulletin (see § §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 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);

(C) For a covered transfer described in paragraph (c)(2)(i)(C) of this section, the security-required gain multiplied by the highest rate of tax applicable to the gain, taking into account the type of property and the specified partnership’s holding period, and treating the specified partnership as an individual for this purpose; or

(D) For a covered transfer described in paragraph (c)(2)(i)(D) of this section, the security-required gain multiplied by the highest rate of tax applicable to the gain, taking into account the type of property, the holding period and classification of the security-required person (treating a security-required person that is a partnership or trust as an individual for this purpose).

(iii) Example. SRP, an individual who is a security-required person, disposes of U.S. real property that SRP has held for more than one year and that has a basis of $80x in a covered transfer subject to withholding under section 1445(a). The amount realized is $200x, and the amount of the security-required gain is $120x of long-term capital gain ($200x amount realized less $80x basis). Because the covered transfer is described in paragraph (c)(2)(i)(A) of this section, the maximum security amount is $24x (the lesser of $30x (the amount realized of $200x multiplied by the rate specified in section 1445(a), (in 2021, 15%)) and $24x (the security-required gain of $120x multiplied by the highest rate of tax applicable to the gain taking into account the type of property, holding period and the classification of the security-required person (in 2021, 20%))). SRP applies for and receives an eligibility certificate in accordance with paragraph (d)(1). SRP provides security in the amount of $15x. Because SRP has provided security in an amount less than the maximum security amount, the eligibility certificate will be issued for less than the total amount of security-required gain. The permitted deferral amount shown on the eligibility certificate is the total amount of security-required gain ($120x) multiplied by the ratio of the amount of security provided by SRP ($15x) over the maximum security amount ($24x). Therefore, SRP will obtain an eligibility certificate for a permitted deferral amount of $75x ($120x multiplied by 62.5%).

(e) Example. The example in this paragraph (e) illustrates the rules in this section and § 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—G₁, G₂, and G₃—for, respectively, $750,000 on September 1, $2 million on October 1, and $2 million on December 20. All three gains were eligible gains within the meaning of § 1.1400Z2(a)-1(b)(11) and the transactions that gave rise to the gains were subject to withholding under section 1445 or 1446.

(ii) Ownership test. On September 1, Year 2, P satisfied the ownership test in paragraph (b)(3)(i) of this section because on that date partners O₁ through O₇ were United States persons, and partners O₈ through O₁₀ were foreign individuals. On October 1, Year 2, P did not satisfy the ownership test in paragraph (b)(3)(i) of this section because as of that date partners O₉ and O₁₀ had been replaced by O₁₁ and 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 O₁₁ and O₁₂ had been replaced by O₁₃ and O₁₄, which were both foreign corporations.

(iii) Closely-held test. At all times during Years 1 through 2, P satisfied the closely-held test in paragraph (b)(3)(ii) of this section because P was owned by 10 partners.

(iv) Asset test. At all times during Years 1 through 3, P did not satisfy the asset test in paragraph (b)(3)(iii) of this section because P had total assets in excess of $100 million, of which less than $25 million was United States real property interests or assets used in the conduct of a trade or business within the United States.

(v) Investment in a QOF and election to defer. On January 15 of Year 3, P invested $4.75 million in a QOF, and on P’s timely filed Federal income tax return for Year 2, P indicated that it was electing to defer all three gains under § 1.1400Z2(a)-1(a). These three elections are proper unless they are barred by § 1.1400Z2(a)-1(a)(3).

(2) Analysis—(i) G₁. P satisfies the ownership test as of the date of the transfer. P also satisfies the closely-held test during the look-back period for G₁, but does not satisfy the asset test during the look-back period for G₁. P does not satisfy the gain test in paragraph (b)(3)(iii) of this section because the amount of the G₁ gain is less than $1 million. As a result, P is not a specified partnership with respect to G₁. Accordingly, P is not a security-required person with respect to G₁, and, thus, P does not need an eligibility certificate with respect to G₁ in order to make a proper deferral election with respect to G₁.

(ii) G₂. Unlike G₁, G₂ ($2 million) is large enough to satisfy the gain test in paragraph (b)(3)(iii) of this section ($1 million or more). P also satisfies the closely-held test during the look-back period for G₂. However, P does not satisfy the ownership test as of the date of transfer. Accordingly, P is not a specified partnership with respect to G₂ and, thus, P is not a security-required person with respect to G₂. P does not need an eligibility certificate with respect to G₂ in order to make a proper deferral election with respect to G_2.

(iii) G₃. P satisfies the ownership test as of the date of the transfer. P also satisfies the closely-held test during the look-back period for G₃. Also, G₃ is large enough to satisfy the gain test. Accordingly, P is a security-required person with respect to G₃, and G₃ is a security-required gain. Consequently, P may not elect to defer G₃ unless, not later than the date on which P files its Federal income tax return for Year 2, P has received an eligibility certificate with respect to G₃. Even if P has received such an eligibility certificate, P may not elect to defer a larger amount of G₃ than the permitted deferral amount shown on the eligibility certificate.

(f) Applicability date. This section applies to any covered transfer that occurs after [DATE OF PUBLICATION OF FINAL RULE].

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).

* * * * *

(c) * * *

(1) * * *

(iv) A QOF in which an eligible taxpayer holds a qualifying investment loses its status as a QOF; or

(v) An event of default occurs under a deferral agreement (described in § 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.

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(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).

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(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.

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(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].

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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.

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(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—

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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:

§ 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. * * *

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(c) * * *

(1) * * * Under paragraph (c)(1)(iv) of this section, a partnership may take into account eligibility certificates submitted by a foreign partner with respect to security-required gains.

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(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).

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(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).

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(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.

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(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].

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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.

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(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.

(c) * * *

(5) Gain deferred under section 1400Z-2(a). A transferee may rely on a certification from a transferor that includes a copy of an eligibility certificate (as described in § 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.

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(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 occurs after [DATE OF PUBLICATION OF FINAL RULE].

Sunita Lough,

Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on April 12, 2021, 4:15 p.m., and published in the issue of the Federal Register for April 14, 2021, 86 F.R. 19585)

¹ 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)).

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