Oct 13, 2020

Treasury and the IRS Finalize Regulations on Withholding on the Disposition of a Partnership Interest by a Foreign Partner

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TREASURY AND THE IRS FINALIZE REGULATIONS ON WITHHOLDING ON THE DISPOSITION OF A PARTNERSHIP INTEREST BY A FOREIGN PARTNER 

On October 7, 2020, the U.S. Department of Treasury (“Treasury”) and the Internal Revenue Service (IRS) finalized regulations (T.D. 9926) (the “Final Regulations”) with respect to the withholding tax imposed under section 1446(f) of the Internal Revenue Code (the “Code”) on the sale, exchange or redemption of a partnership interest held by a foreign person, making important changes to regulations that were proposed on May 13, 2019 (the “Proposed Regulations”). Generally, upon a foreign person’s disposition of a partnership interest, the transferee is required to withhold a tax of 10-percent of the amount realized on the disposition. The Final Regulations generally retain the basic approach and structure of the Proposed Regulations, with notable exceptions as discussed below. The Final Regulations follow the Proposed Regulations in generally providing separate sets of rules that apply to transfers of interests in a publicly traded partnership (a PTP) that are publicly traded on an established securities market or are readily tradable on a secondary market (or the substantial equivalent thereof) (such interests, “PTP interests”) and transfers of other partnership interests (“non-PTP interests”).

The Final Regulations generally are applicable to transfers that occur 60 or more days after the publication of the Final Regulations in the Federal Register. However, the provisions of the Final Regulations relating to transfers of PTP interests and distributions by PTPs apply on and after January 1, 2022, with the result that, under IRS Notice 2018-08, withholding under section 1446(f) on transfers of PTP interests and PTP distributions will not be required until 2022. Withholding by non-PTPs on distributions to transferees that failed to withhold under section 1446(f) likewise applies only to transfers occurring on or after January 1, 2022. The reporting requirements under the Final Regulations with respect to transfers of non-PTP interests apply to transfers occurring, and returns filed, on or after the date of publication of the Final Regulations in the Federal Register. In the meantime, taxpayers may rely on IRS Notice 2018-29 (discussed briefly below) with respect to transfers of non-PTP interests occurring before, or less than 60 days after, the publication of the Final Regulations in the Federal Register.

Introduction

Section 1446(f), which was added to the Code by the Tax Cuts and Jobs Act (TCJA), requires a transferee to withhold on amounts it pays for the transfer of a partnership interest by a foreign person, in order to ensure collection of tax with respect to the portion of such foreign partner’s gain from the transfer that is treated as effectively connected with the conduct of a U.S. trade or business under section 864(c)(8) (“effectively connected gain”). Section 864(c)(8), also added by the TCJA, provides that a portion of the gain or loss of a foreign person from the sale or exchange of an interest in a partnership will be treated as effectively connected gain or loss if the partnership is considered to be engaged in a U.S. trade or business. Generally, the character of the foreign partner’s gain (or loss) is effectively connected gain (or loss) to the extent that the foreign partner would recognize effectively connected gain (or loss) if the assets of the partnership were sold for fair market value in a taxable transaction and the partnership’s gains and losses from such hypothetical sale were allocated to its partners in the same manner as the partners’ distributive shares of the non-separately stated taxable income or loss of the partnership.

The Final Regulations provide rules for determining when withholding under section 1446(f) is required and for how a transferor (or the partnership) can certify, in certain cases, that the transferee is not required to withhold.

The Final Regulations also include information reporting rules requiring (i) a foreign transferor (including, for this purpose, a domestic partnership transferor that has one or more foreign direct or indirect partners) to notify the partnership of the partnership interest transfer within 30 days if the partnership is considered to be engaged in a U.S. trade or business (a “specified partnership”) and (ii) a specified partnership to provide information to a foreign transferor so the transferor can determine its effectively connected gain or loss under section 864(c)(8); however, these information reporting requirements do not apply to PTP interests.

The Final Regulations have somewhat narrowed the withholding requirement by adding additional exceptions to those provided by the Proposed Regulations. The Proposed Regulations generally required that a transferee withhold on the transfer of any partnership interest unless an exception applied, and the Final Regulations retain this general approach. Comments received by Treasury on the Proposed Regulations observed that this approach would result in a withholding obligation on any transfer of a partnership interest, even when the partnership had no connection to the United States, absent a formal certification by the partnership or the transferor being delivered to the transferee at the time of the transfer. In response to these comments, the Final Regulations provide that any person required to withhold under section 1446(f) is not liable for a failure to withhold, or any interest, penalties, or additions to tax, if such person establishes to the satisfaction of the IRS Commissioner that the transferor realized no effectively connected gain under section 864(c)(8) on the transfer. In addition, the government added an exception to withholding if the partnership certifies that it is not considered to be engaged in a U.S. trade or business.[1] Under this exception, if any partnership certifies that it has not been engaged (directly or indirectly) in a U.S. trade or business in its current taxable year, a transfer of an interest in the partnership will not be subject to section 1446(f) withholding regardless of whether (or how much) effectively connected gain would be realized in a sale of the United States real property interests held by the partnership.

In other respects, however, the Final Regulations retain and clarify the broad scope of the withholding obligation under section 1446(f). The Final Regulations follow the Proposed Regulations in treating as a “transferee” of a partnership interest any partnership that makes a distribution. The Final Regulations also clarify that a deemed sale or exchange of a partnership interest under section 707(a)(2)(B) (a “disguised sale”) is a “transfer” to which the section 1446(f) regulations apply and that the contributing partner treated as acquiring a partnership interest in such a disguised sale is a transferee for section 1446(f) purposes.

Withholding on the Transfer of a Non-PTP Interest

Generally. The transferee of a non-PTP interest is required to withhold an amount equal to 10-percent of the transferor’s amount realized, unless an exception to withholding applies or an adjustment to the amount to be withheld is established. The Final Regulations provide that a transferee’s withholding tax liability is not satisfied if the partnership knows or has reason to know that a certification relied on by the transferee to reduce or eliminate withholding is incorrect or unreliable. As a result, a transferee is essentially held strictly liable for any underwithholding, which is inconsistent with the approaches taken in other withholding regimes, such as those provided under sections 1441 through 1443 and section 1445.

As noted above, taxpayers may rely on IRS Notice 2018-29 with respect to transfers of non-PTP interests occurring before, or less than 60 days after, the publication of the Final Regulations in the Federal Register. IRS Notice 2018-29 sets forth interim procedures for establishing an exception from withholding that in some respects are less stringent than the Final Regulations; for example, a transfer of non-PTP interests is exempt from section 1446(f) withholding under Notice 2018-29 if the partnership certifies that, if the partnership had sold all of its assets at their fair market value, the amount of gain that would have been effectively connected gain would be less than 25-percent of the total gain.

Exceptions. In addition to the general exception (mentioned above) that applies when the transferee establishes to the satisfaction of the IRS Commissioner that the transferor realized no effectively connected gain under section 864(c)(8), the Final Regulations provide seven exceptions to withholding. Such exceptions may be established by the delivery of a certification of the transferor or the partnership or, in a case where the partnership is the transferee, by the books and records of the partnership.

Under the Final Regulations, a transferee of a non-PTP interest (other than a partnership that is a transferee because it is making a distribution) is not required to withhold under section 1446(f) if:

  • the transferor certifies its non-foreign status, including by providing a Form W-9;
  • the transferor certifies that the transfer would not result in the realization of any gain or income as of the “determination date”[2];
  • under the 10-percent effectively connected gain exception, the partnership certifies that if it sold all of its assets at fair market value on the determination date, either (A) it would have no effectively connected gain (or the net amount of its effectively connected gain would be less than 10-percent of the total net gain), or (B) the transferor’s distributive share of net effectively connected gain resulting from the hypothetical sale would be less than 10-percent of the transferor’s distributive share of the total net gain;
  • the partnership certifies that it was not considered to be engaged in a U.S. trade or business at any time during the taxable year of the partnership through the date of transfer;
  • under the “ECI Exception,” the transferor certifies that (A) it was a partner in the partnership for the transferor’s most recent taxable year for which the transferor has received a Schedule K-1 from the partnership and for the transferor’s two taxable years immediately preceding such year, (B) the gross amount of the partnership’s income effectively connected with a U.S. trade or business (“ECI”) allocated to the transferor and any persons related[3] to the transferor was less than $1 million for each of such three preceding years, (C) its distributive share of partnership gross ECI was, for each of such three preceding years, less than 10-percent of its total distributive share of partnership gross income, (D) for each of such three preceding years, its distributive share of partnership gross ECI (or losses allocated and apportioned to ECI) has been (or will be) timely reported on a federal income tax return of the transferor and any tax due with respect to such amounts have been (or will be) timely paid, and (E) it had a distributive share of gross income from the partnership in each of such three preceding years;
  • the transferor certifies that, by reason of the operation of a nonrecognition provision of the Code, it will not recognize any gain it may realize with respect to the transfer; or
  • the transferor certifies that it is not subject to tax on any gain from the transfer pursuant to an applicable income tax treaty.

A non-PTP making a distribution to a partner generally may rely on any applicable exception described above, with certain additional considerations:

  • To determine that the distribution would not result in any realized gain to such partner as of the determination date, a distributing partnership generally may rely on its books and records or on a certification from the distributee partner.
  • A distributing partnership must also obtain a representation from the distributee partner stating that the distributee partner satisfies the reporting and tax payment requirements with respect to the partnership’s ECI for the look-back period, but generally may rely on its books and records to determine that other requirements of the ECI Exception have been satisfied.

The Final Regulations expand the 10-percent effectively connected gain exception by providing that the exception applies when less than 10-percent the transferor’s share of the net gain from a liquidation of the partnership’s assets would be effectively connected gain even if 10-percent or more of the partnership’s gain would be effectively connected gain.

The Final Regulations also add an exception (described above) which applies if the partnership certifies that it has not been engaged in a U.S. trade or business during the current taxable year. As a result, a partnership that ceased to conduct a U.S. trade or business in a prior year but would recognize gain in a sale of its assets on the date of the transfer that would, under section 864(c)(7), be effectively connected gain to the extent allocated to foreign partners, can enable its foreign partners to avoid withholding under the Final Regulations by providing the “no U.S. trade or business” certification. Furthermore, under this new exception, no withholding is required under section 1446(f) with respect to a transfer of an interest in a non-PTP that owns U.S. real property interests that are not used in the conduct of a trade or business within the United States (such as shares of a United States real property holding corporation), if the partnership certifies that it is not considered to be engaged in a U.S. trade or business.

The government considered whether to provide additional exceptions that had been requested by commenters. Specifically, comments suggested an exception for certain transactions that commonly occur in the fund context that could be characterized in whole or in part as disguised sales of partnership interests. For example, in a closing of a private equity fund after the initial closing (a “subsequent closing”), new partners may be viewed as purchasing, in a disguised sale, a portion of the interests held by some or all of the existing partners to the extent such existing partners receive distributions in connection with the subsequent closing, including distributions that merely compensate them for the time-value of the portion of their early commitments or contributions that had been returned. The government did not adopt this suggestion, stating that any transaction in which a foreign person is treated as transferring a partnership interest for U.S. federal tax purposes should be subject to section 1446(f) withholding unless an exception applies. Comments also requested that withholding foreign partnerships and trusts be allowed to assume responsibility for withholding under section 1446(f) with respect to transfers in which they are the transferors, and that an exception relieve transferees of a partnership interest from a withholding foreign partnership or trust that has assumed such responsibility from the obligation to withhold. The government did not adopt this suggestion, stating that allowing withholding foreign partnerships and withholding foreign trusts to assume responsibility for section 1446(f) withholding would add complexity and require extensive coordination with existing provisions.

With regard to transfers of partnership interests involving earnout provisions, in which the transferor may be entitled to future payments, the government clarified in the Preamble that if an exception to withholding applies at the time of the transfer, the exception will also apply to future payments made to the transferor that are treated as part of the amount realized from the transfer.

Determination of Withholding Amount. When one of the exceptions described above does not apply, the transferee of a non-PTP generally is required to withhold 10-percent of the amount realized by the transferor, including any reduction in the transferor’s share of partnership liabilities. However, the Final Regulations follow the Proposed Regulations in providing that, in certain cases, the withholding tax will be reduced.

  • When the transferor is a foreign non-PTP, the amount realized is reduced for section 1446(f) purposes by the portion of the amount realized that is allocable to (i) U.S. partners in the transferor, and (ii) under the Final Regulations, non-U.S. partners that would be exempt from tax on the underlying effectively connected gain under an applicable U.S. income tax treaty.
  • The Final Regulations allow a transferee to rely on a certification from a transferor regarding the transferor’s maximum tax liability if the certification provides all required information. Like the Proposed Regulations, the Final Regulations require the maximum tax liability of a foreign partnership transferor to be calculated on the assumption that all of its partners are nonresident alien individuals. The Final Regulations extend the application of this procedure to foreign trust transferors and require that each foreign trust be treated as a nonresident alien individual for purposes of calculating the maximum tax liability.

Withholding on Partnership Distributions to a Non-Compliant Transferee

Section 1446(f)(4) provides that if a transferee (non-compliant transferee) fails to withhold tax required to be withheld under section 1446(f) from the transferor, the partnership must deduct and withhold from distributions to the transferee a tax equal to the amount the transferee failed to withhold (plus interest). While an unrelated transferee of a partnership interest from a non-compliant transferee is not subject to any such withholding by the partnership, the Final Regulations retain the rule in the Proposed Regulations that if (i) the transferred interest is transferred to a person related to the transferee or the transferor and (ii) the partnership had actual knowledge of the subsequent transferee’s relationship to the relevant party, the partnership must withhold on distributions made to the subsequent transferee. The Final Regulations clarify that a related subsequent transferee is treated as liable under section 1461 for the tax the original transferee failed to withhold. If the subsequent transferee were not liable for the tax, it could obtain a credit or refund for the withholding tax paid by the partnership and emerge unscathed. By clarifying that related subsequent transferees have a substantive liability which is satisfied by partnership withholding, the Final Regulations ensure that a related subsequent transferee actually bears the tax.

Under the Proposed Regulations, it was not entirely clear what liability a transferee would have if it did not withhold in good faith reliance on a transferor certification that the partnership knew, or had reason to know, was incorrect. The Proposed Regulations provided that a partnership was permitted to rely on the transferee’s certification of compliance with section 1446(f) with respect to the transfer unless the partnership knew, or had reason to know, that the certification was incorrect or unreliable. The Proposed Regulations, therefore, required the partnership to review any such certification, including any underlying certification from a transferor. The Preamble notes that a commenter questioned why a partnership should be required to withhold from a transferee that has fully complied with its withholding obligations under section 1446(f)(1) by properly relying on a certification from the transferor to reduce or eliminate withholding. The Final Regulations adopt the approach of the Proposed Regulations, and the Preamble clarifies that the transferee’s ability to rely on a transferor’s claim for an exception or adjustment to withholding is effectively conditioned on acceptance of the claim by the partnership. A transferee that is concerned about the possibility that the partnership will not accept the claim should withhold 10-percent of the amount realized on the transfer and, depending on the outcome of its consultation with the partnership, either repay the withheld amount to the transferor or deposit it with the IRS.

The Final Regulations modify the Proposed Regulations to allow the transferee to obtain a refund of overwithholding for amounts withheld by the partnership under section 1446(f)(4). The partnership will not be permitted to claim a refund on behalf of the transferee.

With respect to PTPs, the Final Regulations modify the Proposed Regulations by removing the requirement that a PTP withhold on a transferee if the transferee (or its broker) relied upon a false “qualified notice.”[4] The Preamble explains that, as a policy matter, the partnership should bear the consequences resulting from its false representations on such a notice rather than any public interest-holders. The Final Regulations, therefore, exempt PTPs from withholding from distributions to transferees of PTP interests and add provisions imposing liability under section 1461 on the partnership for the transferee’s underwithholding.

Withholding on the Transfer of a PTP Interest

Generally. A transferee of a PTP interest itself generally is not required to withhold under section 1446(f) where the transfer is effected through one or more brokers. Instead, the Final Regulations provide that, unless an exception applies, the broker effecting such a transfer is required to withhold under section 1446(f) if it makes a payment to another broker that it is required to treat as a foreign person or to a foreign transferor that is its customer. Specifically, a broker paying the purchase price for a PTP interest to another broker generally must withhold under section 1446(f) unless it obtains documentation establishing that the payee broker is either a qualified intermediary (QI) that assumes primary withholding responsibility for the payment or is a U.S. branch of a foreign person agreeing to be treated as a U.S. person with respect to the payment.

The Final Regulations clarify several aspects of the scope of a broker’s withholding obligation under section 1446(f), including the following:

  • While retaining the Proposed Regulations’ definition of “broker” (which includes a clearing organization), the Final Regulations exempt U.S. clearing organizations from withholding under section 1446(f) on any amount realized on trades of PTP interests cleared or settled by the clearing organization. A U.S. clearing organization generally is required, however, to report any non-netted sales for each direct clearing member on Form 1042-S. The Preamble explained that this reporting requirement is intended to ensure that withholding on sales of PTP interests is satisfied by the member brokers and that there are no nonqualified intermediary direct clearing members participating in the net settlement system with respect to PTP interests.
  • With respect to payments made to a QI that does not assume primary withholding responsibility under section 1446(f), the Final Regulations permit a broker to determine the amount to withhold based on aggregate information provided by the QI about its account holders that are transferring PTP interests. The aggregate information provided by the QI should quantify the amount the QI is receiving for the pool of foreign transferors subject to 10-percent withholding, the pool of foreign transferors that qualify for an exception from withholding, and the pool of U.S. transferors. This procedure is intended to avoid overwithholding on payments to such QIs.
  • The Proposed Regulations required a broker receiving an amount from another broker in effecting the transfer of a PTP interest to withhold unless it had knowledge that the withholding obligation had been satisfied by the other broker. In a helpful pivot from the Proposed Regulations, the Final Regulations provide that a broker may treat the section 1446(f) withholding as having been satisfied by the other broker unless it knows or has reason to know otherwise (similar to the rules for section 1441 withholding).
  • The date of withholding on transfers of PTP interests is the settlement date, rather than the transfer date, consistent with the rule that determine when backup withholding under section 3406 is required on certain payments reportable by brokers under section 6045.

Exceptions. The Proposed Regulations provided five exceptions to a broker’s withholding obligation under section 1446(f) with respect to PTP interests: (1) reliance on the transferor’s certification of non-foreign status, including reliance on a Form W-9, (2) reliance on a qualified notice from the PTP stating that, had the PTP sold all of its assets at fair market value, either the amount of effectively connected gain would be less than 10-percent of the total gain, or no gain would have been effectively connected (the “10-percent Exception”), (3) with respect to a distribution from a PTP, reliance on a PTP’s designation in a qualified notice that such distribution that does not exceed the net income of the PTP since the record date of the PTP’s last distribution (the “Distribution Exception”), (4) where the transfer is subject to backup withholding under section 3406, and (5) reliance on the transferor’s certification that the transferor is not subject to tax on any gain from the transfer pursuant to an applicable income tax treaty.

The Final Regulations made the following key changes to these exceptions:

  • Clarified and expanded certain aspects of the 10-percent Exception:
    • Retained the 92-day rule: Under the Proposed Regulations, a broker could rely on a qualified notice posted by a PTP stating that the 10-percent Exception applies as long as the notice was posted within the 92-day period ending on the date of the transfer. Treasury considered a request to extend the reliance period to 183 days after posting, but ultimately retained the 92-day rule on the basis that PTPs generally are able to determine the value of their assets quarterly, and because limiting reliance to the 92-day period “ensure[s] that the broker is using the most recent information available.”
    • Expanded the 10-percent Exception to apply to a PTP that certifies in a qualified notice that it has not been considered to be engaged in a U.S. trade or business during its current taxable year.
  • Removed the Distribution Exception altogether, in light of the new procedure in the Final Regulations for determining the amount realized for section 1446(f) purposes on a distribution from a PTP (discussed below).
  • Added a new exception in the case of a transferor that certifies on a Form W-8ECI that it is a dealer in securities (as defined in section 475(c)(1)) and that any gain from its transfer of a PTP interest is effectively connected gain without regard to section 864(c)(8).

Determination of Withholding Amount. Under the Proposed Regulations, a broker generally determined the amount realized based on the gross proceeds paid on the transfer, subject to modification of the amount realized in the case of foreign partnership transferors with U.S. partners. The Final Regulations adopt the rule in the Proposed Regulations that allows the amount subject to withholding on a transfer by a foreign partnership to be reduced to the extent the amount realized is allocable to U.S. partners. The foreign partnership transferor must provide a Form W-8IMY accompanied by (i) a withholding statement setting forth the percentage of gain from the transfer allocable to each direct or indirect partner and (ii) certifications of non-foreign status for each U.S. partner. The Final Regulations also allow the amount withheld to be reduced because one or more foreign partners in the transferor partnership is eligible for treaty benefits.

Reporting. The government intends to make certain reporting related clarifications to the instructions to Form 1042-S, on which brokers are required to report the amount realized from a transfer of a PTP interest, including:

  • Permitting the use of aggregate reporting (i.e., reporting on a single Form 1042-S all transfers of PTP interests with respect to a customer for a calendar year).
  • Clarifying that a foreign partnership transferor of a PTP interest with respect to which tax was withheld under section 1446(f) may obtain a credit against its liability under section 1446(a) by attaching Form 1042-S to its applicable tax return.

Amendments to Existing Regulations on PTP Distributions

PTPs have long been subject to special withholding rules under section 1446(a), which generally requires a partnership to pay a withholding tax on its foreign partners’ distributive shares of its ECI.[5] These rules require PTPs to satisfy their obligations under section 1446(a) by withholding tax from their distributions to foreign partners, rather than paying a tax in installments on the ECI allocated to foreign partners regardless of whether distributions are made, as non-PTPs must do. An ordering rule under the existing section 1446 regulations specifies how PTPs identify the portion of any distribution to which section 1446(a) withholding applies. PTPs report the breakdown of distributions under this ordering rule by issuing a qualified notice.

In contrast to section 1446(a), section 1446(f) withholding is intended to ensure the collection of tax on the built-in gain of the partnership’s ECI-producing assets under section 864(c)(8). Section 1446(f) withholding will generally apply to any distribution of money in excess of a foreign partner’s basis. Under the Proposed Regulations, if a distribution by a PTP was treated as a deemed sale or exchange under section 731(a)(1), the entire amount of the distribution was treated as the amount realized for purposes of calculating the section 1446(f) withholding tax. The Proposed Regulations included an elective coordination rule applicable to PTP distributions subject to both section 1446(a) and section 1446(f) withholding, under which only section 1446(a) withholding would apply if the PTP designates the entire amount of the distribution as a qualified current income distribution on its qualified notice. For this purpose, the Proposed Regulations defined a qualified current income distribution as one that does not exceed the net income that the PTP earned since the record date of the PTP’s last distribution. This exception was intended to eliminate section 1446(f) withholding in situations where the partner ordinarily would not recognize gain from the distribution due to the increase in the partner’s outside basis for partnership income allocable to the partner. The Preamble notes that comments to the Proposed Regulations identified scenarios where this exception could fail to achieve the intended purpose.

Under the Final Regulations, the qualified current income distribution exception is replaced with a procedure for adjusting the foreign partner’s amount realized to equal the portion of the distribution (if any) in excess of “cumulative net income.” For this purpose, cumulative net income is the net income earned by the PTP since its formation that has not been previously distributed by the PTP. Unless another exception to section 1446(f) withholding happens to apply to the excess portion, a tax equal to 10-percent of the excess portion must be withheld. Existing procedures under section 1446(a) will continue to apply to the portion of the distribution that does not exceed cumulative net income.[6] From a reporting standpoint, the PTP must identify on its qualified notice the portion of the distribution that is in excess of cumulative net income. If a broker properly withholds based on the qualified notice, the broker is not liable for any underwithholding on any portion of the distribution that is in excess of cumulative net income. Rather, the PTP that issued the qualified notice is solely liable (under section 1461) for the underwithheld tax resulting from the broker’s reliance on the qualified notice.[7]

Conclusion

While the Final Regulations make some changes that are taxpayer-favorable, section 1446(f) withholding will continue to require substantial time and attention in connection with all partnership interest transfers, including by the private equity industry and by PTPs and brokers that effect PTP interest transfers. For example, Treasury’s decision not to provide any exception for disguised sales of non-PTP interests means that investors in a subsequent closing of a fund classified as a partnership for U.S. federal tax purposes generally will be required to obtain a certification from the fund to establish an exception from withholding and fund managers will be responsible (and funds liable) for withholding if the investor does not satisfy its withholding obligation. The government’s decision not to exempt intermediaries other than custodial brokers and the clearing organization from the requirement to withhold means that the clearing broker generally must withhold on PTP interest transfers, which may require significant changes in the procedures followed by such brokers in effecting such transfers and necessitate the building of costly systems before 2022 in order to implement such withholding.

Please contact any member of the Shearman & Sterling LLP tax team for further information.

Footnotes

[1]  The preamble to the Final Regulations (the “Preamble”) confirms that, for purposes of section 1446(f), effectively connected gain includes gain from the sale or exchange of a United States real property interest. 

[2] The provider of a certification may choose the determination date, provided that the determination date must be one of the following: (a) the date of the transfer, (b) any date no more than 60 days before the date of the transfer, or (c) the later of (i) the first day of the partnership’s taxable year in which the transfer occurs or (ii) the date of the partnership’s most recent capital account revaluation event.

[3]  A “related person” means a person or entity who is treated as related to another person or entity under Section 707(b) or 267(b).

[4] A “qualified notice” means a notice posted by a PTP in the manner required by Treas. Reg. §1.1446-4(b)(4) that states the amount of a distribution that is attributable to each of five types of income (described in Treas. Reg. §1.1446-4(f)(3)(i) through (v)) and may also include information relating to the 10-percent exception to withholding under section 1446(f) and information relating to an adjustment to the amount realized for withholding under section 1446(f).

[5]  Rev. Proc. 89-31 (setting forth withholding rules for PTPs); T.D. 9200 (substituting new guidance under Treas. Reg. § 1.1446-4 for Rev. Proc. 89-31).

[6] See Treas. Reg. § 1.1446-4(f)(3), as modified by T.D. 9926.

[7] See Treas. Reg. § 1.1446-4(f)(3), as modified by T.D. 9926 (indicating that a PTP’s qualified notice may also include the information described in Treas. Reg. § 1446(f)-4(c)(2)(iii) relating to an adjustment to the amount realized for withholding under Section 1446(f)(1)).

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