Blog

These new proposed regulations under section 892 quietly but significantly clarify how foreign sovereigns should think about using partnerships in their U.S. investment structures. In short, an entity that is classified as a partnership for U.S. federal income tax purposes is not a “controlled entity” under the section 892 regulations, even if it is wholly owned—directly or indirectly—by a single foreign sovereign.

Background: section 892 and “controlled entities”

Section 892 provides an exemption from U.S. tax for certain income of foreign governments, but that exemption is carefully circumscribed. The regulations distinguish between the foreign sovereign itself (and its integral parts) and “controlled entities” that the sovereign owns and controls. Controlled entities can enjoy the section 892 exemption on qualifying income, but they are also the focus of the “controlled commercial entity” rules, which can cause loss of the exemption if the entity is engaged in, or controls, commercial activities.

Historically, the temporary regulations under Reg. § 1.892‑2T(a)(3) defined “controlled entity” in corporate terms and then added a flush sentence that created interpretive questions around non‑corporate entities. That language pointed toward corporations, but practitioners debated whether a wholly sovereign‑owned partnership, particularly a foreign limited partnership, might still be viewed as a controlled entity for section 892 purposes.

What the proposed regulations do

The proposed regulations remove the ambiguity by expressly stating that an entity classified as a partnership for U.S. federal income tax purposes is not a controlled entity. The definition is tightened so that “controlled entity” status is reserved for entities treated as corporations (and comparable corporate‑type entities) that are owned and controlled by a foreign sovereign. The partnership classification analysis remains the familiar one under the entity classification rules; once an entity is a partnership for tax purposes, it is outside the controlled‑entity bucket for section 892.

The preamble makes the policy point explicit: section 892’s controlled‑entity regime is intended to apply to corporate‑type vehicles, while partnerships are to be treated on an aggregate basis, with the foreign sovereign and its controlled entities viewed as directly holding their share of the underlying assets and activities. The fact that a single sovereign may own 100% of the partnership does not convert it into a controlled entity.

Relationship to commercial activity and “controlled commercial entities”

Importantly, the clarification that a partnership is not itself a controlled entity does not insulate the foreign sovereign or its controlled entities from the commercial activity rules. The analysis shifts to the partners. If a foreign sovereign holds a partnership interest through a controlled entity, that controlled entity must still consider whether its share of the partnership’s activities and assets causes it to be a controlled commercial entity. The proposed regulations are careful to preserve the existing framework under which commercial activity can flow through a partnership to taint a controlled entity, without relabeling the partnership as a controlled entity in its own right.

This approach aligns the section 892 regime with the broader international tax architecture, which generally treats partnerships as transparent or aggregate vehicles, particularly in inbound investment structures. It also avoids the odd result of identical underlying operations being treated differently solely because the investment vehicle is organized as a partnership instead of a corporation.

Practical implications for sovereign and SWF structures

For foreign governments and sovereign wealth funds, the clarification is largely favorable and confirms a structuring norm that many practitioners already followed. Using partnerships—often tiered through corporate blockers and REITs—has been a standard way to accommodate co‑investment, financing, governance rights, and local law constraints while preserving section 892 benefits where available. The proposed regulations reinforce that a partnership, even if wholly sovereign‑owned, should not itself be scrutinized as a controlled entity whose own activities could directly trigger loss of section 892 status.

That said, the comfort is not absolute. The foreign sovereign and any controlled entities that are partners must still monitor: (1) their proportionate share of partnership‑level commercial activities; (2) whether any corporate vehicles in the structure become controlled commercial entities; and (3) how income is characterized (e.g., rental versus gain, portfolio versus effectively connected). The proposal reduces entity‑level classification uncertainty at the partnership tier, but it does not relax the substantive commercial‑activity limitations or the need for careful ownership and activity mapping across the structure.

For practitioners, the key drafting consequence is that section 892 analyses and opinions can now treat partnership status as dispositive for purposes of the “controlled entity” definition, rather than having to address a lingering interpretive risk when a foreign sovereign is the sole partner. Structuring discussions can focus more cleanly on where corporate‑type entities sit, which ones are controlled entities, and how to prevent those from becoming controlled commercial entities—while using partnerships as flexible, non‑controlled pass‑through vehicles within the section 892 framework.

 Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Sources:

1.       https://www.federalregister.gov/documents/2025/12/15/2025-22775/income-of-foreign-governments-and-of-international-organizations 

2.      https://kpmg.com/us/en/taxnewsflash/news/2025/12/final-proposed-regulations-income-foreign-governments-international-organizations.html   

3.      https://www.pwc.com/us/en/services/tax/library/treasury-releases-final-and-proposed-regs-on-section-892.html 

4.      https://www.law.cornell.edu/cfr/text/26/1.892-2T

5.       https://www.ey.com/en_gl/technical/tax-alerts/us-irs-rules-that-a-foreign-limited-partnership-indirectly-owned 

6.      https://www.govinfo.gov/content/pkg/FR-2025-12-15/pdf/2025-22767.pdf 

7.       https://www.govinfo.gov/content/pkg/CFR-2011-title26-vol9/pdf/CFR-2011-title26-vol9-sec1-892-2T.pdf

8.      https://ccbjournal.com/articles/irs-proposes-regulations-under-section-892-regarding-taxation-foreign-government-enti

9.      https://www.law360.com/articles/2421473/treasury-issues-final-rules-for-taxing-foreign-gov-t-income

10.   https://www.irs.gov/individuals/international-taxpayers/foreign-governments-and-certain-other-foreign-organizations

11.    https://www.irs.gov/pub/irs-wd/202343036.pdf

12.   https://kpmg.com/us/en/home/insights/2023/12/tnf-kpmg-report-guidance-section-892-entity-classification-foreign-investment-partnerships.html

13.   https://rsmus.com/insights/tax-alerts/2025/section-899-withholding-agents-investors.html

14.   https://www.weil.com/~/media/files/pdfs/Weil_Private_Equity_Alert_Dec_2011_.pdf

15.    https://www.skadden.com/insights/publications/2023/01/new-proposed-regulations

16.   https://www.proskauertaxtalks.com/tag/proposed-regulations/

17.    https://www.proskauertaxtalks.com/2019/07/proposed-regulations-provide-clarity-for-qualified-foreign-pension-fund-exception/

18.   https://www.kslaw.com/news-and-insights/proposed-regulations-would-impact-taxation-of-investment-in-us-real-estate-by-non-us-investors

19.   https://www.gibsondunn.com/irs-and-treasury-issue-proposed-regulations-narrowing-domestically-controlled-reit-qualification-test-and-revising-section-892-exemption/

20.  https://taxnews.ey.com/news/2025-2491-breaking-tax-news-treasury-and-irs-issue-final-and-proposed-regulations-under-irc-section-892-on-taxation-of-foreign-government-income

21.   https://kpmg.com/us/en/taxnewsflash/news/2025/12/final-proposed-regulations-income-foreign-governments-international-organizations.html    

22.   https://www.federalregister.gov/documents/2025/12/15/2025-22775/income-of-foreign-governments-and-of-international-organizations  

23.   https://www.pwc.com/us/en/services/tax/library/treasury-releases-final-and-proposed-regs-on-section-892.html

24.  https://news.bloombergtax.com/daily-tax-report-international/irs-issues-proposed-final-regs-on-foreign-government-income

25.   https://www.weil.com/~/media/files/pdfs/Weil_Private_Equity_Alert_Dec_2011_.pdf

26.  https://scholar.smu.edu/cgi/viewcontent.cgi?article=3090&context=smulr

27.   https://www.morganlewis.com/pubs/2023/01/irs-issues-proposed-regulations-applicable-to-qualified-foreign-pension-funds-and-sovereign-wealth-funds

28.  https://kpmg.com/kpmg-us/content/dam/kpmg/pdf/2023/irc-section-892.pdf

29.  https://www.jdsupra.com/legalnews/proposed-regulations-would-impact-8467688/

30.  https://nysba.org/wp-content/uploads/2025/03/1257-Letter.pdf

31.   https://www.law360.com/articles/2421473/treasury-issues-final-rules-for-taxing-foreign-gov-t-income

32.   https://www.proskauertaxtalks.com/2023/01/new-proposed-regulations-would-impact-the-determination-of-domestically-controlled-reit-and-structures-for-sovereign-wealth-funds-us-real-estate-investments/

33.   https://www.irs.gov/individuals/international-taxpayers/foreign-governments-and-certain-other-foreign-organizations

34.   https://www.law.cornell.edu/cfr/text/26/1.892-2T

35.   https://www.akingump.com/a/web/5292/20-01-17-Akin-Fenn.pdf

36.   https://www.federalregister.gov/documents/2025/12/15/2025-22776/income-of-foreign-governments-and-of-international-organizations

37.   https://taxnews.ey.com/news/2025-2491-breaking-tax-news-treasury-and-irs-issue-final-and-proposed-regulations-under-irc-section-892-on-taxation-of-foreign-government-income

38.  https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2011/11/the-irs-releases-proposed-regulations-regarding-taxation-of-investments-by-foreign-governments.pdf

39.   https://www.law.cornell.edu/cfr/text/26/1.892-5T

https://www.skadden.com/insights/publications/2023/01/new-proposed-regulationshim

Read more at: Tax Times blog

The Eleventh Circuit has delivered an important reminder to taxpayers with foreign account reporting problems: you cannot use the U.S. Tax Court’s Collection Due Process procedures to fight FBAR penalties or Social Security offsets collecting those penalties. In Stephen Jenner et al. v. Commissioner of Internal Revenue, No. 25-10014 (11th Cir.), the court affirmed the Tax Court’s dismissal of a CDP petition brought by a Florida couple who tried to challenge the collection of their willful FBAR penalties through Treasury’s offset of their Social Security benefits.

Stephen and Judy Jenner had previously been hit with significant willful FBAR penalties under Title 31 for failing to report foreign accounts. Those penalties were then collected through the Treasury Offset Program, which diverted a portion of their monthly Social Security benefits. Treating this like any other IRS collection action, the Jenners submitted paperwork seeking a Collection Due Process (CDP) hearing and then petitioned the Tax Court when they did not receive the relief they wanted. Their theory was straightforward: if the government is taking their benefits to collect a federal liability, they should get the same CDP protections available for federal tax debts.

Both the Tax Court and the Eleventh Circuit rejected that position. The key distinction is that FBAR penalties are imposed under Title 31 of the U.S. Code, not the Internal Revenue Code. CDP jurisdiction under sections 6320 and 6330 applies only to “unpaid tax” and related additions and assessable penalties under Title 26. In other words, the CDP regime is a tax mechanism, not a universal shield against every kind of federal debt collection. Because the Jenners’ liability was a Title 31 FBAR penalty, there was no qualifying CDP “determination” and the Tax Court had no jurisdiction to review their case.

For taxpayers and practitioners, the message is clear: 

Tax Court Is Not A Viable Forum To Litigate FBAR Penalty Collections, Even When The Government Uses Familiar Tools Like Offsets Against Social Security Benefits.

Challenges to FBAR assessments and collection must instead proceed through other avenues, such as refund litigation in federal district court or the Court of Federal Claims, or by defending against government-initiated suits to reduce penalties to judgment. Advisors representing clients with FBAR exposure should plan strategy with this jurisdictional line firmly in mind and avoid giving clients false comfort that a CDP petition will stop or undo FBAR-driven offsets.

This decision also underscores the growing structural divide between traditional tax controversies and the parallel world of Bank Secrecy Act enforcement. While IRS employees play a central role in FBAR examinations and assessments, the remedies, procedures, and forums are not interchangeable with those that apply to income tax, employment tax, or other Title 26 liabilities. 

For high-net-worth individuals and cross‑border clients, that means any FBAR problem needs litigation and settlement strategy from day one and one that accounts for the limited role of the Tax Court and the real risk that collection can proceed through administrative offsets with fewer procedural guardrails than many taxpayers expect.

 Do You Have Undeclared Offshore Income?

Sources

   1.       https://law.justia.com/cases/federal/appellate-courts/ca11/25-10014/25-10014-2025-12-08.html      

2.      https://www.law360.com/articles/2419350/11th-circ-affirms-tax-court-wrong-venue-for-fbar-challenge    

3.      https://my.kiplinger.com/members/links/ktl/241107/Jenner_v_Commissioner.pdf         

4.      https://ustaxcourt.gov/files/documents/163_TC_141-150.pdf    

5.       https://law.justia.com/cases/federal/appellate-courts/ca11/2025/

6.      https://www.journalofaccountancy.com/issues/2020/jul/tax-court-denial-travel-deductions/

7.       https://editions.journalofaccountancy.com/article/Tax+Matters/4925877/839905/article.html

8.      https://us11thcircuitcourtofappealsopinions.justia.com/category/tax-law/

9.      https://www.facebook.com/groups/573295111141320/posts/1373278684476288/

10.   https://law.justia.com/cases/federal/appellate-courts/ca11/

11.    https://www.daslifesciences.com/_files/ugd/24a291_c5870b46509a45f08a999afe29189b2d.pdf?index=true

12.   https://unicourt.com/courts/federal/us-courts-of-appeals-3?upid=2519735296&init_S=csup_next

13.  https://www.academia.edu/144098373/BORDER_MARKETPLACES_AS_INFRASTRUCTURES_OF_MOBILITY_VISA_REGIMES_AND_EVERYDAY_TRANS_LOCALITY_IN_TEXAS

14.   https://casetext.com/case/jenner-v-commr-of-internal-revenue-6

15.    https://ru.scribd.com/document/791913136/VisionIAS-Research-and-Analysis-December-2024-Science-and-Technology-10-Years-UPSC-PYQ-Trend-Analysis

16.   https://www.law360.com/tax-authority/cases/677c57f583edd5a35154727e

17.    https://www.ca11.uscourts.gov/sites/default/files/oral_arguments/cal6(Rev.1)_0.pdf

18.   https://www.ca11.uscourts.gov/unpublished-opinions-log

19.   https://www.gtlaw.com/-/media/files/insights/alerts/alerts-prior-to-march-27-2017/024906gt-alertsupreme-court-allows-taxpayers-to-question-irs-agents-regardi.pdf

20.  https://ustaxcourt.gov/files/documents/appellate_report_january_2025.pdf

Read more at: Tax Times blog

We previously posted "Some Nonresidents with U.S. Assets Must File Estate Tax Returns" where we discussed that deceased nonresidents who were not American citizens are subject to U.S. estate taxation with respect to their U.S.-situated assets.

 

Many foreigners owning property or assets in the United States are in violation of 706-NA filing requirements because of a number of misunderstandings. The basic rule is pretty clear-if a foreign decedent has assets in the United States with a gross value in excess of $60,000, the estate is supposed to file a tax return with the Internal Revenue Service. 

Many people think of numerous reasons not to file. The main one relates to mortgages or liens against the US property. Assume that a property in Florida is worth $150,000 and there is a $100,000 mortgage held by Bank of X. The owner of the property dies. Is a 706-NA required? Yes-you are not permitted to net the mortgage against the fair market value of the property. The only way you can do this is if the person who owns the property is a German domiciliary in which case the value can be netted on the tax return. This is a peculiarity of the German- United States estate tax convention. Cyst The deceased German domiciliary must still file the tax return because the gross value of the property, the criteria for filing a tax return, is still met. 

 

Other people look to tax treaties to avoid filing the tax returns even when the assets exceed $60,000. What most people do not realize is that in order to take advantage of a tax treaty, one needs to file a federal estate tax return and include a form 8833 with the return explaining the application of the treaty to this particular estate. If you fail to file the 706-NA, you would still technically owe tax on any US situs asset with a gross value in excess of $60,000.

 

Let's make it very simple for everyone- if you represent a foreign client with assets in the United States  with a gross value exceeding $60,000, you are required to file a federal estate tax.

Without the filing of the tax return, you are unable to take advantage of deductions, credits, and treaties benefits which might aid you in reducing the gross federal tax to a point of zero. Additionally, I might add, your client's estate is not in compliance with federal estate tax laws if no 706-NA is filed

 

Have a US Estate Tax Problem?

 

Estate Tax Problems Require

an Experienced Estate Tax Attorney

  

Contact the Tax Lawyers at

Marini & Associates, P.A.

 

 for a FREE Tax Consultation Contact US at

www.TaxAid.com or www.OVDPLaw.com

or Toll Free at 888-8TaxAid (888 882-9243).

Robert S. Blumenfeld  - 

 Estate Tax Counsel

Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.

Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.

While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.

 

Read more at: Tax Times blog

Beginning with 2025 tax returns filed during the upcoming season, the IRS will automatically grant first-time penalty abatement (FTA) relief to taxpayers who meet existing eligibility requirements—meaning taxpayers no longer have to submit a formal request or call to ask for relief if they qualify.

What Automatic FTA Means

·         Qualified taxpayers (those who haven’t had similar penalties in the last three years and are otherwise tax-compliant) will have failure-to-file, failure-to-pay, and failure-to-deposit penalties automatically removed if they’re assessed on tax year 2025 or later returns.

·         Previously, practitioners or taxpayers needed to actively request this relief by contacting the IRS or filing Form 843, which will now be unnecessary for eligible cases.

Eligibility Highlights

·         Taxpayer must have filed required returns and paid or arranged to pay taxes for the year in question.

·         No similar penalties must have been assessed during the prior three years (except those abated for non-FTA reasons).

·         Applies only for certain penalty types: failure-to-file, failure-to-pay, and failure-to-deposit—not for accuracy-related or fraud penalties.

Practitioner and Compliance Impact

·         The new system will reduce administrative workload for tax professionals and speed up relief for affected taxpayers.

·         However, practitioners must ensure clients do not have prior ineligible penalties, since the IRS will use an automated evaluation—any prior penalty for the same tax type may automatically disqualify the taxpayer from abatement for the new year.

 Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Sources

1.       https://www.reddit.com/r/taxpros/comments/1p18mjl/irs_to_automatically_apply_first_time_abatement/     

2.      https://news.bloombergtax.com/daily-tax-report/irs-to-provide-automatic-penalty-relief-next-filing-season 

3.      https://turbotax.intuit.com/tax-tips/tax-relief/irs-tax-penalty-abatement-and-relief/c0xDLC8Qm   

4.      https://longislandtaxresolution.com/irs-first-time-penalty-abatement/   

5.       https://www.taxhardshipcenter.com/blog/first-time-forgiveness-irs-qualify-apply/

6.      https://www.irs.gov/forms-pubs/about-form-843

7.       https://www.nerdwallet.com/taxes/learn/irs-penalty-first-time-abatement  

8.      https://scltaxlaw.com/irs-penalty-abatement-complete-guide/

9.      https://www.irs.gov/payments/administrative-penalty-relief

10.   https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill

11.    https://www.jdsupra.com/legalnews/a-big-beautiful-break-irs-gives-8447857/

12.   https://www.irs.gov/newsroom/irs-announces-tax-relief-for-victims-of-milton-various-deadlines-postponed-to-may-1-2025-in-all-of-florida

13.   https://www.irs.gov/payments/penalty-relief-for-reasonable-cause

14.   https://www.thetaxadviser.com/issues/2024/jul/irs-penalties-abatements-and-other-relief/

15.    https://www.irs.gov/payments/penalty-relief

16.   https://www.reddit.com/r/taxpros/comments/1p18mjl/irs_to_automatically_apply_first_time_abatement/   

17.    https://news.bloombergtax.com/daily-tax-report/irs-to-provide-automatic-penalty-relief-next-filing-season 

18.   https://turbotax.intuit.com/tax-tips/tax-relief/irs-tax-penalty-abatement-and-relief/c0xDLC8Qm   

19.   https://longislandtaxresolution.com/irs-first-time-penalty-abatement/  

20.  https://www.nerdwallet.com/taxes/learn/irs-penalty-first-time-abatement 

21.   https://scltaxlaw.com/irs-penalty-abatement-complete-guide/

22.   https://www.reddit.com/r/taxpros/comments/1p18mjl/irs_to_automatically_apply_first_time_abatement/

23.   https://turbotax.intuit.com/tax-tips/tax-relief/irs-tax-penalty-abatement-and-relief/c0xDLC8Qm

24.  https://news.bloombergtax.com/daily-tax-report/irs-to-provide-automatic-penalty-relief-next-filing-season

25.   https://www.irs.gov/payments/administrative-penalty-relief

26.  https://www.blueandco.com/covid-irs-penalty-relief/

27.   https://www.irs.gov/payments/penalty-relief

28.  https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill

29.  https://gordonlaw.com/learn/irs-announces-automatic-penalty-relief/

30.  https://www.jacksonhewitt.com/tax-help/tax-tips-topics/penalties/five-reasons-irs-penalty-relief/

31.   https://www.nerdwallet.com/taxes/learn/irs-penalty-first-time-abatement

32.  https://www.jdsupra.com/legalnews/a-big-beautiful-break-irs-gives-8447857/

Read more at: Tax Times blog