Instructions for IRS Form 8865 "Return of U.S. Persons With Respect to Certain Foreign Partnerships"

This document contains official instructions for IRS Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships - a tax form released and collected by the Internal Revenue Service (IRS), a subdivision of the U.S. Department of the Treasury. An up-to-date fillable IRS Form 8865 is available for download through this link.

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2020
Department of the Treasury
Internal Revenue Service
Instructions for Form 8865
Return of U.S. Persons With Respect to Certain Foreign Partnerships
What’s New
information, statements, and
Section references are to the Internal
Revenue Code unless otherwise noted.
schedules required for each category
Codes for Schedule K-1. Complete
of filer. If you qualify under more than
Contents
Page
descriptions of codes for
one category for a particular foreign
Schedule K-1 are provided at
List of
General Instructions . . . . . . . . . . . . .
1
partnership, you must submit all the
Codes Used in Schedule K-1 (Form
Specific Instructions . . . . . . . . . . . . .
6
items required for each category
8865).
Schedule A. Constructive
under which you qualify.
Ownership of Partnership
Interest . . . . . . . . . . . . . . . . . .
9
General Instructions
Example. If you qualify as a
Schedule A-1. Certain Partners of
Category 2 and a Category 3 filer, you
Only the general instructions for
Foreign Partnership . . . . . . . . . .
9
must submit all the schedules
Schedules B, K, K-1, M-1, and M-2
Schedule A-2. Foreign Partners of
required of Category 2 filers (page 1
are included later in these
Section 721(c) Partnership . . . . .
9
of Form 8865, Schedules A, A-2, N,
instructions. If you are required to
Schedule A-3. Affiliation
Schedule . . . . . . . . . . . . . . . .
10
and K-1) plus any additional
complete these schedules for Form
Schedule B. Income
schedules that Category 3 filers are
8865, use the specific instructions for
Statement—Trade or
required to submit (Schedules A-1
the corresponding schedules of Form
Business Income
. . . . . . . . . .
10
and O).
1065, U.S. Return of Partnership
Schedule D. Capital Gains and
Income.
Losses . . . . . . . . . . . . . . . . .
10
Complete a separate Form 8865
Schedule G. Statement of
and the applicable schedules for each
Application of the Gain
foreign partnership.
IF you are
THEN use the
Deferral Method Under
completing Form
instructions for
Section 721(c) . . . . . . . . . . . .
10
File the 2020 Form 8865 with your
8865...
Form 1065...
Schedule H. Acceleration Events
income tax return for your tax year
and Exceptions Reporting
Schedule B
Form 1065, page 1
beginning in 2020.
Relating to Gain Deferral
(income and
Method Under Section
deductions).
If a Form 8832, Entity Classification
721(c) . . . . . . . . . . . . . . . . . .
12
Election, was filed for this entity for the
Schedules K and K-1. Partners'
Schedules K and K-1 Schedules K and K-1.
current tax year, see When To File
Distributive Share Items . . . . . .
14
Schedule L
Schedule L.
and Where To File in the instructions
Schedule L. Balance Sheets per
Books . . . . . . . . . . . . . . . . . .
16
Schedule M-1
Schedule M-1.
for Form 8832 to determine if you are
Schedule M. Balance Sheets for
required to attach a copy of the Form
Schedule M-2
Schedule M-2.
Interest Allocation . . . . . . . . . .
16
8832 to the tax return to which the
Schedule M-1. Reconciliation of
Form 8865 is being attached.
Income (Loss) per Books With
Income (Loss) per Return . . . . .
16
Note. If you are reporting capital
If a domestic section 721(c)
Schedule M-2. Analysis of
gains and losses, use Schedule D
partnership is formed on or after
Partners' Capital Accounts . . . .
16
(Form 1065). See the Instructions for
January 18, 2017, and the gain
Schedule N. Transactions
deferral method is applied, then a
Schedule D (Form 1065).
Between Controlled Foreign
U.S. transferor must file Form 8865
Partnership and Partners or
Purpose of Form
Other Related Entities . . . . . . .
16
with respect to that partnership. See
Use Form 8865 to report the
Schedule O. Transfer of Property
Regulations section 1.721(c)-6(b)(4).
to a Foreign Partnership . . . . . .
17
information required under section
See
Section 721(c)
partnership,
Gain
Schedule P. Acquisitions,
6038 (reporting with respect to
deferral
method, and
U.S.
transferor,
Dispositions, and Changes of
controlled foreign partnerships),
later.
Interests in a Foreign
section 6038B (reporting of transfers
Partnership . . . . . . . . . . . . . .
18
A U.S. transferor that is required to
to foreign partnerships), or section
List of Codes . . . . . . . . . . . . . . . .
20
provide information with respect to a
6046A (reporting of acquisitions,
Index . . . . . . . . . . . . . . . . . . . . .
27
partnership under Regulations
dispositions, and changes in foreign
Future Developments
sections 1.721(c)-6(b)(2)(iv) and
partnership interests).
1.721(c)-6(b)(3)(xi) must file a
For the latest information about
Who Must File
separate Form 8865 (along with all
developments related to Form 8865,
necessary schedules and
A U.S. person qualifying under one or
its schedules, and its instructions,
more of the Categories of Filers (see
attachments) for each partnership
such as legislation enacted after they
treated as a U.S. transferor under
below) must complete and file Form
were published, go to
IRS.gov/
8865. These instructions and the
Regulations sections 1.721(c)-3(d)
Form8865.
and 1.721(c)-6(c)(2). See
U.S.
Filing Requirements for Categories of
Filers
chart, later, explain the
transferor, later.
Dec 18, 2020
Cat. No. 26053N
2020
Department of the Treasury
Internal Revenue Service
Instructions for Form 8865
Return of U.S. Persons With Respect to Certain Foreign Partnerships
What’s New
information, statements, and
Section references are to the Internal
Revenue Code unless otherwise noted.
schedules required for each category
Codes for Schedule K-1. Complete
of filer. If you qualify under more than
Contents
Page
descriptions of codes for
one category for a particular foreign
Schedule K-1 are provided at
List of
General Instructions . . . . . . . . . . . . .
1
partnership, you must submit all the
Codes Used in Schedule K-1 (Form
Specific Instructions . . . . . . . . . . . . .
6
items required for each category
8865).
Schedule A. Constructive
under which you qualify.
Ownership of Partnership
Interest . . . . . . . . . . . . . . . . . .
9
General Instructions
Example. If you qualify as a
Schedule A-1. Certain Partners of
Category 2 and a Category 3 filer, you
Only the general instructions for
Foreign Partnership . . . . . . . . . .
9
must submit all the schedules
Schedules B, K, K-1, M-1, and M-2
Schedule A-2. Foreign Partners of
required of Category 2 filers (page 1
are included later in these
Section 721(c) Partnership . . . . .
9
of Form 8865, Schedules A, A-2, N,
instructions. If you are required to
Schedule A-3. Affiliation
Schedule . . . . . . . . . . . . . . . .
10
and K-1) plus any additional
complete these schedules for Form
Schedule B. Income
schedules that Category 3 filers are
8865, use the specific instructions for
Statement—Trade or
required to submit (Schedules A-1
the corresponding schedules of Form
Business Income
. . . . . . . . . .
10
and O).
1065, U.S. Return of Partnership
Schedule D. Capital Gains and
Income.
Losses . . . . . . . . . . . . . . . . .
10
Complete a separate Form 8865
Schedule G. Statement of
and the applicable schedules for each
Application of the Gain
foreign partnership.
IF you are
THEN use the
Deferral Method Under
completing Form
instructions for
Section 721(c) . . . . . . . . . . . .
10
File the 2020 Form 8865 with your
8865...
Form 1065...
Schedule H. Acceleration Events
income tax return for your tax year
and Exceptions Reporting
Schedule B
Form 1065, page 1
beginning in 2020.
Relating to Gain Deferral
(income and
Method Under Section
deductions).
If a Form 8832, Entity Classification
721(c) . . . . . . . . . . . . . . . . . .
12
Election, was filed for this entity for the
Schedules K and K-1. Partners'
Schedules K and K-1 Schedules K and K-1.
current tax year, see When To File
Distributive Share Items . . . . . .
14
Schedule L
Schedule L.
and Where To File in the instructions
Schedule L. Balance Sheets per
Books . . . . . . . . . . . . . . . . . .
16
Schedule M-1
Schedule M-1.
for Form 8832 to determine if you are
Schedule M. Balance Sheets for
required to attach a copy of the Form
Schedule M-2
Schedule M-2.
Interest Allocation . . . . . . . . . .
16
8832 to the tax return to which the
Schedule M-1. Reconciliation of
Form 8865 is being attached.
Income (Loss) per Books With
Income (Loss) per Return . . . . .
16
Note. If you are reporting capital
If a domestic section 721(c)
Schedule M-2. Analysis of
gains and losses, use Schedule D
partnership is formed on or after
Partners' Capital Accounts . . . .
16
(Form 1065). See the Instructions for
January 18, 2017, and the gain
Schedule N. Transactions
deferral method is applied, then a
Schedule D (Form 1065).
Between Controlled Foreign
U.S. transferor must file Form 8865
Partnership and Partners or
Purpose of Form
Other Related Entities . . . . . . .
16
with respect to that partnership. See
Use Form 8865 to report the
Schedule O. Transfer of Property
Regulations section 1.721(c)-6(b)(4).
to a Foreign Partnership . . . . . .
17
information required under section
See
Section 721(c)
partnership,
Gain
Schedule P. Acquisitions,
6038 (reporting with respect to
deferral
method, and
U.S.
transferor,
Dispositions, and Changes of
controlled foreign partnerships),
later.
Interests in a Foreign
section 6038B (reporting of transfers
Partnership . . . . . . . . . . . . . .
18
A U.S. transferor that is required to
to foreign partnerships), or section
List of Codes . . . . . . . . . . . . . . . .
20
provide information with respect to a
6046A (reporting of acquisitions,
Index . . . . . . . . . . . . . . . . . . . . .
27
partnership under Regulations
dispositions, and changes in foreign
Future Developments
sections 1.721(c)-6(b)(2)(iv) and
partnership interests).
1.721(c)-6(b)(3)(xi) must file a
For the latest information about
Who Must File
separate Form 8865 (along with all
developments related to Form 8865,
necessary schedules and
A U.S. person qualifying under one or
its schedules, and its instructions,
more of the Categories of Filers (see
attachments) for each partnership
such as legislation enacted after they
treated as a U.S. transferor under
below) must complete and file Form
were published, go to
IRS.gov/
8865. These instructions and the
Regulations sections 1.721(c)-3(d)
Form8865.
and 1.721(c)-6(c)(2). See
U.S.
Filing Requirements for Categories of
Filers
chart, later, explain the
transferor, later.
Dec 18, 2020
Cat. No. 26053N
Categories of Filers
the tax year of the foreign partnership
If a domestic partnership
owned a 10% or greater interest in the
contributes property to a foreign
Category 1 filer. A Category 1 filer is
partnership while the partnership was
partnership, the domestic
a U.S. person who controlled the
controlled by U.S. persons each
partnership's partners are considered
foreign partnership at any time during
owning at least a 10% interest.
to have transferred a proportionate
the partnership's tax year. Control of a
However, if the foreign partnership
share of the contributed property to
partnership is ownership of more than
had a Category 1 filer at any time
the foreign partnership. However, if
a 50% interest in the partnership. See
during that tax year, no person will be
the domestic partnership files Form
the definition of 50% interest, later.
considered a Category 2 filer. See the
8865 and properly reports all the
There may be more than one
definition of a
10%
interest, later.
required information with respect to
Category 1 filer for a partnership for a
the contribution, its partners will not
Category 3 filer. A Category 3 filer is
particular partnership tax year. See
be required to report the transfer.
a U.S. person who contributed
U.S. person
and
Foreign
partnership,
property during that person's tax year
A Category 3 filer includes a U.S.
later.
to a foreign partnership in exchange
transferor who (i) contributes section
A Category 1 filer also includes a
for an interest in the partnership (a
721(c) property to a section 721(c)
U.S. transferor who must report
section 721 transfer), if that person
partnership, and (ii) has reporting
certain information with respect to a
either:
requirements pursuant to Regulations
section 721(c) partnership for the tax
section 1.721(c)-6(b)(2). The
1. Owned directly or constructively
year of contribution and subsequent
Category 3 filer fulfills this reporting
at least a 10% interest in the foreign
years, pursuant to Regulations
requirement by filing Schedule G, in
partnership immediately after the
section 1.721(c)-6. A Category 1 filer
addition to Schedule O, and, in certain
contribution, or
fulfills this reporting requirement by
circumstances, Schedule H. See
filing Schedule G and, in certain
2. The value of the property
Section 721(c)
property, later.
circumstances, Schedule H. See
contributed (when added to the value
Category 3 also includes a U.S.
Section 721(c) partnership
and
U.S.
of any other property contributed to
person that previously transferred
transferor, later.
the partnership by such person, or
appreciated property to the
any related person, during the
Category 2 filer. A Category 2 filer is
partnership and was required to report
12-month period ending on the date of
a U.S. person who at any time during
that transfer under section 6038B, if
transfer) exceeds $100,000.
Filing Requirements for Categories of Filers
Category of Filers
Filing Requirements
1
2
3
4
Identifying information—page 1 of Form 8865
Schedule A—Constructive Ownership of Partnership Interest
Schedule A-1—Certain Partners of Foreign Partnership
Schedule A-3—Affiliation Schedule
Schedule B—Income Statement—Trade or Business Income
Schedule G—Statement of Application of the Gain Deferral Method Under Section 721
Schedule H—Acceleration Events and Exceptions Reporting Relating to Gain Deferral Method
Under Section 721(c)
Schedule K—Partners' Distributive Share Items
Schedule L—Balance Sheets per Books
Schedule M—Balance Sheets for Interest Allocation
Schedule M-1—Reconciliation of Income (Loss) per Books With Income (Loss) per Return
Schedule M-2—Analysis of Partners' Capital Accounts
Schedule N—Transactions Between Controlled Foreign Partnership and Partners or Other
Related Entities
Schedule D—Schedule D (Form 1065), Capital Gains and Losses
Schedule K-1—Partner's Share of Income, Deductions, Credits, etc. (direct partners only)
Schedule O—Transfer of Property to a Foreign Partnership
Schedule P—Acquisitions, Dispositions, and Changes of Interests in a Foreign Partnership
-2-
Instructions for Form 8865 (2020)
the foreign partnership disposed of
A disposition of a section 721(c)
separate statement listing this
such property while the U.S. person
partnership interest may be an
information to the single Form 8865.
remained a direct or indirect partner in
acceleration event for purposes of
A Category 1 filer not filing Form
the partnership.
applying the gain deferral method.
8865 must attach a statement entitled
The U.S. transferor may be required
“Controlled Foreign Partnership
Category 4 filer. A Category 4 filer is
to recognize gain in an amount equal
Reporting” to that person's income tax
a U.S. person that had a reportable
to the remaining built-in gain on the
return.
event under section 6046A during that
section 721(c) property previously
person's tax year. There are three
The statement must include the
contributed to the section 721(c)
categories of reportable events under
following information.
partnership. See Regulations section
section 6046A: acquisitions,
A statement that the person
1.721(c)-4. For acceleration events
dispositions, and changes in
qualified as a Category 1 filer, but is
exceptions, see Regulations section
proportional interests.
not submitting Form 8865 under the
1.721(c)-5. See the specific
multiple Category 1 filers exception.
Acquisitions. A U.S. person that
instructions for
Schedule
H, later.
The name, address, and identifying
acquires a foreign partnership interest
Changes in proportional
number (if any) of the foreign
has a reportable event if:
interests. A U.S. person has a
partnership of which the person
The person didn’t own a 10% or
reportable event if compared to the
qualified as a Category 1 filer.
greater direct interest in the
person's direct proportional interest
A statement that the filing
partnership and as a result of the
the last time the person had a
requirement has been or will be
acquisition, the person owns a 10% or
reportable event, the person's direct
satisfied.
greater direct interest in the
proportional interest has increased or
The name and address of the
partnership (for example, from 9% to
decreased by at least the equivalent
person filing Form 8865 for this
10%). For purposes of this rule, an
of a 10% interest in the partnership.
partnership.
acquisition includes an increase in a
The Internal Revenue Service
person's direct proportional interest
Special rule for a partnership
Center where the Form 8865 must be
(see
Changes in proportional
interest owned on December 31,
filed (or indicate “electronic filing” if
interests, later); or
1999. If the U.S. person owned at
the Form 8865 has been or will be
Compared to the person's direct
least a 10% direct interest in the
filed electronically).
interest when the person last had a
foreign partnership on December
reportable event, after the acquisition
A U.S. person who qualifies
31,1999, then comparisons should be
the person's direct interest has
for this exception to the
made to the person's direct interest on
!
increased by at least a 10% interest
Category 1 filing requirement
December 31,1999. Once the person
CAUTION
(for example, from 11% to 21%).
would still have to file a separate Form
has a reportable event after
An acquisition of a section 721(c)
8865 if that person is also subject to
December 31,1999, future
partnership interest may be an
the filing requirements of Category 3
comparisons should be made by
acceleration event exception under
or 4. This separate Form 8865 would
reference to the last reportable event.
the gain deferral method. See
include all the information required for
Exceptions to Filing
Regulations section 1.721(c)-5. In this
a Category 3 filer, a Category 4 filer,
case, the acquirer may become a
or a U.S. transferor who must report
Multiple Category 1 filers. If during
successor U.S. transferor and may
certain information with respect to a
the tax year of the partnership more
have a reporting requirement under
section 721(c) partnership for the year
than one U.S. person qualifies as a
Regulations section 1.721(c)-6. See
of contribution and subsequent years,
Category 1 filer, only one of these
the specific instructions for
pursuant to Regulations section
Category 1 partners is required to file
Schedule
H, later.
1.721(c)-6, in addition to the
Form 8865. A U.S. person with a
“Controlled Foreign Partnership
controlling interest in the losses or
Dispositions. A U.S. person that
Reporting” statement.
deductions of the partnership isn’t
disposes of a foreign partnership
permitted to be the filer of Form 8865
interest has a reportable event if:
Constructive owners. See
if another U.S. person has a
The person owned a 10% or
Constructive
ownership, later. A
controlling interest in capital or profits;
greater direct interest in the
Category 1 or 2 filer that doesn’t own
only the latter may file the return. The
partnership before the disposition and
a direct interest in the partnership and
U.S. person that files the Form 8865
as a result of the disposition the
that is required to file this form solely
must complete item F on page 1.
person owns less than a 10% direct
because of constructive ownership
The single Form 8865 to be filed
interest (for example, from 10% to
from a U.S. person(s) isn’t required to
must contain all of the information that
8%). For purposes of this rule, a
file Form 8865 if:
would be required if each Category 1
disposition includes a decrease in a
1. Form 8865 is filed by the U.S.
filer filed a separate Form 8865.
person's direct proportional interest;
person(s) through which the indirect
Specifically, separate Schedules N
or
partner constructively owns an
and K-1 must be attached to the Form
Compared to the person's direct
interest in the foreign partnership,
8865 for each Category 1 filer. Also,
interest when the person last had a
items B, C, and D on page 1 and
2. The U.S. person through which
reportable event, after the disposition
Schedule A on page 2 of Form 8865
the indirect partner constructively
the person's direct interest has
must be completed for each Category
owns an interest in the foreign
decreased by at least a 10% interest
1 filer not filing the form. Attach a
partnership is also a constructive
(for example, from 21% to 11%).
Instructions for Form 8865 (2020)
-3-
owner and meets all the requirements
in that partnership, you aren’t required
Schedules K-1 for Partner A and all
of this constructive ownership filing
to report this transaction under both
other U.S. persons owning 10% or
exception, or
Category 3 and 4 filing requirements.
greater direct interests in FPS).
If you properly report the contribution
Partner A must complete the following
3. Form 8865 is filed for the
of property under the Category 3
items and schedules on Form 8865.
foreign partnership by another
rules, you aren’t required to report it
The first and second pages.
Category 1 filer under the multiple
as a Category 4 filer. However, the
Schedule A.
Category 1 filers exception.
acquisition will count as a reportable
Schedule A-1.
To qualify for the constructive
event to determine if a later change in
Schedule A-2.
ownership filing exception, the indirect
your partnership interest qualifies as a
Schedule A-3.
partner must file with its income tax
reportable event under Category 4.
Schedule G.
return a statement entitled “Controlled
Schedule H.
Example. Partner A doesn’t own
Foreign Partnership Reporting.”
Schedule M.
an interest in FPS, a foreign
Schedule N.
This statement must contain the
partnership. Partner A transfers
following information.
property to FPS in exchange for a
Example. Partner A is a Category
1. A statement that the indirect
15% direct interest. Partner A qualifies
2 filer with respect to FPS, a foreign
partner was required to file Form
as a Category 3 filer because he
partnership. If FPS completes and
8865, but isn’t doing so under the
transferred property to a foreign
files a Form 1065 for its 2020 tax year,
constructive owners exception.
partnership and owned at least a 10%
Partner A may file with Form 8865 the
interest in FPS immediately after the
Schedule K-1 (Form 1065) that it
2. The names and addresses of
contribution. Partner A is also a
receives from the partnership instead
the U.S. persons whose interests the
Category 4 filer because he didn’t own
of Schedule K-1 (Form 8865). Partner
indirect partner constructively owns.
a 10% or greater direct interest in FPS
A must complete the following items
3. The name and address of the
and as a result of the acquisition now
and schedules on Form 8865.
foreign partnership for which the
owns a 10% or greater direct interest
The first and second pages.
indirect partner would have had to
in FPS. If Partner A properly reports
Schedule A.
have filed Form 8865 but for this
the contribution on Form 8865 as a
Schedule A-2.
exception.
Category 3 filer, Partner A isn’t
Schedule N.
4. If the indirect partner is a
required to report his acquisition of the
When and Where To File
domestic corporation, a statement
15% interest in FPS as a Category 4
setting forth all the information that the
Attach Form 8865 to your income tax
filer.
indirect partner would have had to
return (or, if applicable, partnership or
Relief for Category 1 and 2
provide in response to questions G8a
exempt organization return) and file
Filers When the Foreign
and G8b on Form 8865. See
Item
both by the due date (including
H10. Separate Units
Note, later, for
Partnership Files Form 1065
extensions) for that return. If you don’t
more information.
have to file an income tax return, you
If a foreign partnership files Form
must file Form 8865 separately with
1065 for its tax year, Category 1 and 2
Members of an affiliated group of
the IRS at the time and place you
filers may use a copy of the
corporations filing a consolidated
would be required to file an income
completed Form 1065 schedules in
return. If one or more members of an
tax return (or, if applicable, a
place of the equivalent schedules of
affiliated group of corporations filing a
partnership or exempt organization
Form 8865.
consolidated return qualify as
return). See below for penalties that
Category 1 or 2 filers for a particular
If you file Form 8865 with an
may apply if you don’t file Form 8865
foreign partnership, the common
electronically filed income tax return,
on time.
parent corporation may file one Form
see the electronic filing publications
Definitions
8865 on behalf of all of the members
identified in the instructions for your
of the group required to report. Except
income tax return for more
Partnership. A partnership is the
for group members who also qualify
information.
relationship between two or more
under the constructive owners
persons who join to carry on a trade or
See the first paragraph under
exception, the Form 8865 must
business, with each person
General
Instructions, earlier, for the
contain all the information that would
contributing money, property, labor, or
Form 1065 schedules that are
have been required to be submitted if
skill and each expecting to share in
equivalent to the Form 8865
each group member filed its own
the profits and losses of the business
schedules.
Form 8865.
whether or not a formal partnership
Example. Partner A is a Category
agreement is made.
Exception for certain trusts. Trusts
1 filer with respect to FPS, a foreign
relating to state and local government
The term “partnership” includes a
partnership during the 2020 tax year.
employee retirement plans aren’t
limited partnership, syndicate, group,
FPS completes and files a Form 1065
required to file Form 8865.
pool, joint venture, or other
for its 2020 tax year. Instead of
unincorporated organization, through
Exception for certain Category 4
completing Schedules B, K, L, M-1,
or by which any business, financial
filers. If you qualify as a Category 3
M-2, and K-1 of Form 8865, Partner A
operation, or venture is carried on,
and 4 filer because you contributed
may attach to its Form 8865 page 1 of
that isn’t, within the meaning of the
property to a foreign partnership in
Form 1065 and Form 1065 Schedules
regulations under section 7701, a
exchange for a 10% or greater interest
K, L, M-1, M-2, and K-1 (including the
-4-
Instructions for Form 8865 (2020)
corporation, trust, estate, or sole
combined voting power, or more than
Gain deferral method. The gain
proprietorship.
50% of the total value of shares of all
deferral method is the method
classes of stock of the corporation.
A joint undertaking merely to share
described in Regulations section
For rules concerning indirect
expenses isn’t a partnership. Mere
1.721(c)-3(b) applied to avoid the
ownership and attribution, see
co-ownership of property that is
immediate recognition of gain upon a
Regulations section 1.6038-2(c).
maintained and leased or rented isn’t
contribution of section 721(c) property
a partnership. However, if the
to a section 721(c) partnership under
Change in a proportional interest.
co-owners provide services to the
Regulations section 1.721(c)-2(b).
A partner's proportional interest in a
tenants, a partnership exists.
foreign partnership can change as a
50% interest. A 50% interest in a
result of changes in other partners'
Foreign partnership. A foreign
partnership is an interest equal to:
interests, for example, when another
partnership is a partnership that isn’t
50% of the capital,
partner withdraws from the
created or organized in the United
50% of the profits, or
partnership. A partner's proportional
States or under the law of the United
50% of the deductions or losses.
interest can also change, for example,
States or of any state or the District of
For purposes of determining a 50%
by operation of the partnership
Columbia. If a domestic section
interest, the constructive ownership
agreement (for example, if the
721(c) partnership is formed on or
rules described below apply.
partnership agreement provides that a
after January 18, 2017, and the gain
10% interest. A 10% interest in a
partner's interest in profits will change
deferral method is applied, then the
partnership is an interest equal to:
on a set date or when the partnership
section 721(c) partnership is treated
10% of the capital,
has earned a specified amount of
as a foreign partnership for purposes
10% of the profits, or
profits, then the partner's proportional
of Form 8865 and these instructions.
10% of the deductions or losses.
interest changes when the set date or
See Regulations section 1.721(c)-6(b)
For purposes of determining a 10%
specified amount of profits is
(4).
interest, the constructive ownership
reached).
Section 721(c) partnership. A
rules described below apply.
Penalties
partnership (domestic or foreign) is a
Constructive ownership. For
section 721(c) partnership if there is a
Failure to timely submit all infor-
purposes of determining an interest in
contribution of section 721(c) property
mation required of Category 1 and
a partnership, the constructive
to the partnership and, after the
2 filers.
ownership rules of section 267(c)
contribution (and all transactions
A $10,000 penalty is imposed for
(excluding section 267(c)(3)) apply,
related to the contribution), (A) a
each tax year of each foreign
taking into account that such rules
related foreign person with respect to
partnership for failure to furnish the
refer to corporations and not to
the U.S. transferor is a direct or
required information within the time
partnerships. Generally, an interest
indirect partner in the partnership, and
prescribed. If the information isn’t filed
owned directly or indirectly by or for a
(B) the U.S. transferor and related
within 90 days after the IRS has
corporation, partnership, estate, or
persons own 80% or more of the
mailed a notice of the failure to the
trust shall be considered as being
interests in partnership capital, profits,
U.S. person, an additional $10,000
owned proportionately by its owners,
deductions, or losses. See
penalty (per foreign partnership) is
partners, or beneficiaries.
Regulations section 1.721(c)-1(b)(14).
charged for each 30-day period, or
Also, an individual is considered to
fraction thereof, during which the
U.S. transferor. A U.S. transferor is
own an interest owned directly or
failure continues after the 90-day
a U.S. person other than a domestic
indirectly by or for his or her family.
period has expired. The additional
partnership. See Regulations section
The family of an individual includes
penalty is limited to a maximum of
1.721(c)-1(b)(18).
only that individual's spouse, brothers,
$50,000 for each failure.
sisters, ancestors, and lineal
Section 721(c) property. Section
Any person who fails to furnish all of
descendants. An interest will be
721(c) property is property (other than
the information required within the
attributed from a nonresident alien
excluded property) with built-in gain
time prescribed will be subject to a
individual under the family attribution
that is contributed to a partnership by
reduction of 10% of the foreign taxes
rules only if the person to whom the
a U.S. transferor, including pursuant
available for credit under sections
interest is attributed owns a direct or
to a contribution described in
901, 902 (for dividends paid in
indirect interest in the foreign
Regulations section 1.721(c)-2(d)
pre-2018 tax years of foreign
partnership under section 267(c)(1) or
(partnership look-through rule). See
corporations), and 960. If the failure
(5).
Regulations section 1.721(c)-1(b)(15).
continues 90 days or more after the
U.S. person. A U.S. person is a
Gain deferral contribution. A gain
date the IRS mails notice of the
citizen or resident of the United
deferral contribution is a contribution
failure, an additional 5% reduction is
States, a domestic partnership, a
of section 721(c) property to a section
made for each 3-month period, or
domestic corporation, and any estate
721(c) partnership with respect to
fraction thereof, during which the
or trust that isn’t foreign. See section
which the recognition of gain is
failure continues after the 90-day
7701(a)(30).
deferred under the gain deferral
period has expired. See section 6038
method. See Regulations section
(and the underlying regulations) for
Control of a corporation. For
1.721(c)-1(b)(7).
the maximum reduction, the exception
purposes of Schedule N, control of a
due to reasonable cause, and for
corporation is ownership of stock
possessing more than 50% of the total
Instructions for Form 8865 (2020)
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