# Prop. Treas. Reg. § 1.1400Z2(a)-2: Certain foreign persons and foreign-owned partnerships required to provide security. Proposed regulation, not in force. REG-115420-18, 86 FR 19585, published 2021-04-14 . Interprets 26 U.S.C. § 1400Z-2. 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: Par. 4. Section 1.1400Z2(a)-2 is added to read as follows: (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. (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—G 1 , G 2 , and G 3 —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 1 through O 7 were United States persons, and partners O 8 through O 10 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 9 and O 10 had been replaced by O 11 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 11 and O 12 had been replaced by O 13 and O 14 , 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 G 1 , but does not satisfy the asset test during the look-back period for G 1 . P does not satisfy the gain test in paragraph (b)(3)(iii) of this section because the amount of the G 1 gain is less than $1 million. As a result, P is not a specified partnership with respect to G 1 . Accordingly, P is not a security-required person with respect to G 1 , and, thus, P does not need an eligibility certificate with respect to G 1 in order to make a proper deferral election with respect to G 1 . (ii) G2 . Unlike G 1 , G 2 ($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 2 . 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 2 and, thus, P is not a security-required person with respect to G 2 . P does not need an eligibility certificate with respect to G 2 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 G 3 . Also, G 3 is large enough to satisfy the gain test. Accordingly, P is a security-required person with respect to G 3 , and G 3 is a security-required gain. Consequently, P may not elect to defer G 3 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 3 . Even if P has received such an eligibility certificate, P may not elect to defer a larger amount of G 3 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].