Unofficial Hearing Transcript: Changes Urged in Proposed Foreign Partner Withholding Regs

[2] On the panel here to my far left is Michael Cabellero, the Associate International Tax Counsel. To my left is David Sotos, the Assistant to the Branch Chief. I am Michael Frankel, the Senior Technical Reviewer.

[3] We have one person who has requested to speak on the issue, as I said, Michael Danilack of Deloitte & Touche. Generally there is a ten-minute limit on a person who wants to make comments. In this case we will waive it -- within reason, of course. Also, is there anyone else here who wants to make comments, after Mr. Danilack, who has not requested that publically?

[5] MR. DANILACK: Thank you, Michael. We're actually going to make a joint statement, and I have a client who's actually here with us, and he's going to help present. We'll take turns at the podium, if that's all right. And we promise to stay within the time you have in mind.

[6] That's a written version of our statement. [Hands copies to panel.] I've been passing out some hard copies of the written comments -- the oral comments that we'll be making this morning. I still have a couple copies left, and we're going to pretty much stick to the text. So, for those of you who are from the press, it might you a little writer's cramp this morning, as I do have a couple left. If you want them now, you can put your hand up.

[7] Good morning, I'm Mike Danilack. Good morning to all you fellows. I'm a principal with Deloitte & Touche, here in Washington. Deloitte's representing P.M.I. Norteamérica S.A. de C.V., which we'll call "Norteamérica" this morning.

[8] Sharing the podium, as I mentioned, with me this morning is Carlos Caraveo. He has been Finance Vic Norteamérica President at Norteamérica since July of 2000. Also here, Eduardo Guajardo of Norteamérica, Amin Nosrat and Roger Brown of Deloitte, to help answer questions you may have after we're done with our presentation.

[9] We're all very grateful for the opportunity to provide the comments on these issues. It's an important set of regulations. We appreciate all the work that's gone into the proposed regs. It's a very good product and we have a few things we want to talk about here, obviously, this morning.

[10] I'd like to first start by turning the podium over to Carlos Caraveo, who will provide you with some background and speak to the importance of our recommendations to the business of Norteamérica here in the United States.

[11] MR. CARAVEO: Thank you, Mike.

[12] Let me begin by offering my thanks to all of you, on behalf of Norteamérica, for the opportunity to provide you with comments on these important proposed regulations.

[13] Norteamérica is a Mexican corporation ultimately owned by Petróleos Mexicanos, Mexico's state-owned oil and gas company, which is known to many simply as "PEMEX."

[14] Norteamérica is a 50 percent partner in the Deer Park Refining Limited Partnership, which we'll refer to only as "Deer Park." Deer Park is a Delaware limited partnership, which has been doing business in the United States since 1993. The other 50 percent partner in Deer Park is Shell Oil Company, a U.S. corporation, which serves as a general partner.

[15] Deer Park was organized by Shell and Norteamérica to jointly operate the fuels refinery portion of a large refinery and petrochemical facility located in Deer Park, Texas. Shell and Norteamérica have a common interest to ensure an outlet for a specific crude which is extracted in the Gulf of Mexico.

[16] Shell supplies the refinery and Norteamérica supplies a very reliable and inexpensive source of crude. Deer Park has more than one billion U.S. dollars in assets located in the United States, employs approximately 1,000 people, and is the fifth largest refinery in the United States.

[17] Since 1993, Norteamérica has timely filed all its federal tax returns and treated its share of Deer park's income and loss as attributable to a U.S. Permanent establishment under the U.S./Mexico treaty. In addition to holding its interest in the partnership, Norteamérica conducts other business activities in the United States.

[18] Since 1993, Norteamérica has treated the income or loss generated from these direct U.S. activities as attributable to a U.S. permanent establish and has reflected that income or loss on its U.S. income tax returns.

[19] Between 1993 and 1999, Norteamérica's cumulative share of the partnership's effectively connected items amounted to an overall net operating loss of approximately $457 million. During the same period, Norteamérica also experienced an overall effectively connected NOL of $61 million from its other U.S. activities.

[20] In 2000 and 2001, however, Norteamérica distributive share of effectively connected taxable income from the partnership was for the first time positive -- approximately $40 million each year.

[21] Although Norteamérica had an NOL carryover that was more than ten times as large as the Deer Park's ECTI for 2000 and 2001. The partnership paid approximately $14 million in section 1446 tax on Norteamérica's behalf in each of the two years.

[22] When it filed its Form 1120F for taxable years 2000-01, Norteamérica claimed, and eventually received, refunds for substantially all the section 1446 tax paid by the partnership. With respect to each installment payment, Norteamérica has supplied the cash to the partnership so that the partnership could pay the taxes. This circular flow of cash was necessary, of course, because Deer Park was not allowed to consider that Norteamérica had a very substantial NOL carryover.

[23] In other words, because of the way the section 1446 rules work, approximately $14 million of Norteamérica funds were on loan with the federal government, on an interest-free basis, for approximately two years to secure a tax liability which simply did not exist.

[24] This is not just a problem of the past for Norteamérica. Like many other taxpayers, I assume, we continue to carry forward a very substantial NOL. In any year in which Deer Park operates at a profit, we will have this problem, again. In fact, in 2003, we have already had to make additional 1446 installment payments for two of the first three quarters, and we will make a December payment, as well.

[25] Once again, we will need to seek a refund when we file our 1120F some time next year.

[26] We have come to testify today because the proposed regulations will perpetuate the predicament we face under the current regime. As you well know, under the proposed regulation, a foreign partner's NOL carryover cannot be considered in computing the ECTI allocable to the partners.

[27] Fortunately, in the preamble to the proposed regulations, the government requests comments on approaches that would permit adjustment to a section 1446 obligation. We are here today to respond to that request.

[28] I'd like to turn the podium back to Mike so that he can explain to you the type of approach Norteamérica will find extremely useful, if incorporated into the final version of the regulations.

[29] Thank you so much.

[30] MR. DANILACK: Thanks, Carlos.

[31] I'll start by suggesting that we believe the government has the authority to modify the results of which Carlos speaks.

[32] Although a partner's NOL carryover isn't taken into account, under the definition of ECTI under section 1446(c), we believe the total disregard of a foreign partner's NOL carryover is not specifically mandated by either the statutory language or the legislative history of section 1446.

[33] It's clear from the legislative history when Congress enacted 1446 that their principal concern was foreign passive, if you will, investors earning ECI through a partnership and failing to meet their U.S. tax obligation. It's also clear Congress believe exceptions from the 1446 tax are appropriate, where withholding is not required to assure compliance with U.S. law.

[34] We provided you with a letter dated December 2 -- you know, a couple days ago -- describing our recommendation in some detail. Allow me to summarize it for the benefit of everyone here this morning.

[35] We believe the proposed regulations could and should be amended to allow for a partner's NOL carryover to offset 1446 tax on its distributive share of partnership ECTI, if five requirements are met.

[36] We set forth five requirements in our letter of December 2, and I'll go through those now and summarize them for you.

[37] First, a partner could be required to provide to the partnership a copy of its For 1120F or, in the case of an individual, it's 1040NR, for the immediately preceding taxable year. If the return for the immediately preceding taxable year is not yet due and has not yet been filed, the return for the preceding taxable year -- the year before that -- would be provided.

[38] The partner could be also required to provide to the partnership the partner's work papers, i.e., For 1120W, relating to the calculation of its estimated tax liability. Keeping in mind that the partner does pay estimated taxes in addition to having to pay 1446 withholding and so would provide its work papers for the calculation of its estimated tax for the preceding taxable year -- for the current year and for the preceding taxable year, if that return for the preceding year has not yet been filed.

[39] Second -- second requirement. The partner would provide to the partnership a written certification of the amount of its available NOL carryover, at least three business days before any quarterly 1446 installment is due.

[40] As you know, there is ample precedent, including within the 1446 regs themselves, to rely on the certification of a partner for reducing withholding under various provisions of the code, in addition to 1446. We've cited a lot of that precedent in our written comments.

[41] The amount of the certified available NOL carryover would be net of any ECI of the partner, which is not reflected on the return provided with the certification. So you'd get a return which showed a certain amount of NOL, and any subsequent accruals would be reflected in these work papers. Any positive ECI would be netted against the NOL.

[42] Any variance in the amount of -- the certified amount of NOL carryover for any of the first three quarters -- you're working in the current year. Any variance between the amount certified in any of the first three quarters could be trued- up, on or before the due date for the last quarterly installment for the year.

[43] The return for the immediately preceding taxable year -- if you haven't already provided it earlier -- would be required by the last quarter. Because by that time, the due date has arrived. If the last quarter true-up were not performed by the partnership in the appropriate manner, our proposed method of reducing the section 1446 tax could be deemed not available to that partnership and partner in the succeeding taxable year.

[44] Third, the third requirement, under this approach would be that the reduction of the 1446 tax, as a result of the NOL certification would not eliminate the partner's ultimate liability for either the tax or the 6601 interest -- which might otherwise accrue.

[45] So, if it's later determined that the partner's NOL was not sufficient to reduce the 1446, the government's right to pursue collection from the partnership would not be affected in any way under this recommendation. If the partnership does not want to maintain continued liability for some reason, it's feeling uncomfortable with the certification received, it would simply not elect to honor that certification, and would withhold in accordance with the regular installment.

[46] If the partnership elects to honor the certification and takes all reasonable steps to verify the necessary requirements are met, the partnership would be excused from penalties for failure to deposit the tax, if later on it's determined that withholding was appropriate.

[47] Fourth, the partnership could also be required to own U.S. assets with a value at least equal to the reduction in the 1446 tax for the year. That requirement would assure that, in all events, there would be adequate assets in the United States for collection of the tax pertaining to that.

[48] Okay, once again, Congress' intention in enacting 1446 was to prevent, we think, foreign passive investors, so to speak, from earning ECI through a partnership, and then failing to meet their U.S. tax obligations.

[49] Thus, as a fifth requirement, the regulations could require the foreign partner to own at least a ten percent interest in capital and profits in the partnership. That requirement should help to limit the use of the NOL certification we're proposing here to partners who are more than just passive investors, or several owners of a partnership interest.

[50] So that summarizes the proposal that I put forward. Are there alternatives to what we proposed? You know, in our written comments, we point out that our recommended approach is based purely on regulatory requirements. So all of what I just mentioned could be place in the regs, and essentially that system, we think, would be self-implementing. It would not depend on any special administration by the IRS other than normal audit processes.

[51] However, alternatives to this approach could be implemented at either a local or national level, if the government believes the IRS should be directly involved in the NOL certification process.

[52] For example, the government could initiate a withholding certificate or a closing agreement program by either regulation or revenue procedure. We're not here recommending such an approach should be put forward as a first choice, due to the obvious resource commitment that would involve, and we would put it second to what we put forward here today.

[53] But if the IRS and Treasury are not inclined to accept the type of proposal that we do put forward, or some variation on it, we ask that a withholding certificate or closing agreement program at least be considered.

[54] As we pointed out in our written comment, we believe the government should also consider the ancillary effects of failing to adopt an approach like the one we recommend. As Carlos described earlier, both the current and the proposed regimes could place substantial burdens -- often will place substantial burdens on a partnership's cash flow management.

[55] This would certainly include situations where the partnership's profit is attributable to COD income -- and I know that you solicited comments, specifically, on how to handle COD -- but it's far from limited to the COD situation.

[56] In the typical situation where the partnership begins to turn a profit, then its primary interest should be servicing its debt and dealing with its creditors. But, currently, 1446 take priority over that interest. Even in situations where it can be fairly easily shown there's no real tax liability at stake.

[57] We've also pointed out that the government should consider the impact of these rules on the attractiveness of the United States as an investment option for foreign owners of capital, since the section 6655 rules -- which generally apply to domestic investors -- allow for the offset of estimated taxes with an NOL carryover.

[58] Essentially, a 1446 withholding regime, as you know, is on a par with an estimated tax regime, and when you apply 6655 to a domestic taxpayer, NOLs do get taken into account.

[59] As a final and yet important remark, I'd also like to point out that we don't intend to suggest here, through our proposal, that addressing the NOL carryover predicament, which is faced by Norteamérica, is the only step that the government should take to relieve over-withholding that would be perpetuated by the proposed regulations.

[60] There are other situations that merit, perhaps, as much attention as the NOL carryover situation, including suspended losses, or in fact, current year losses or deductions. Some of those situations have been addressed by others in other public comments. It may well be that the type of approach that we are outlining for the NOL carryover situation could and should be extended to allow for partner certification, as to the existence of other tax-reducing attributes.

[61] We would support use of a certification process for those purposes, as well.

[62] So, that's all we have this morning in terms of our formal, written comments. We'd like to take any questions you may have, however,

[63] MR. FRANKEL: I guess the first thing is that you do talk about assets in the United States equal to one year's worth of 1446 liability. What about the fact that you're then saying to the IRS they have to do an audit within that one year, immediately, versus -- should it be -- four years' worth of assets?

[64] Then, also, what happens if the partner disposes of the partnership interest?

[65] MR. DANILACK: Well, as to the first question, a very good point. It's not something that I spent a lot of time thinking about, frankly.

[66] But one could envision ensuring that the total assets available are at least equal to the total reduction that one accomplishes on a 1446 tax within some reasonable period of time. You mentioned four years. That would seem to be reasonable.

[67] It might cause companies that are less capital-intensive than Norteamérica, here in the U.S., some concern; and you might look for some other type of security arrangement to cover those type situations. I'm pretty certain -- we haven't run numbers, but I'm pretty certain that with the type of business Norteamérica has in the U.S., worrying over accumulated amounts is not a problem, because of the amount of assets you have here in the U.S.

[68] But I can see legitimately other taxpayers, who are just as well entrenched in the U.S., but just not carrying as many assets, who file 1120Fs for many years saying, "Well, look, is there another way we can provide security to cover off this proposal?" So you might think of a letter of credit, at that point in time.

[69] I know that gets to be a little more cumbersome, in terms of administration, but those would be the options.

[70] MR. CABALLERO: I had one question about making this elective for the partnership. In particular, in light of the fact that the partnership has continuing liability for the tax, subject of course to waiver penalties, provided that they've made some good- faith effort to comply with whatever the requirements are.

[71] How does that -- is that going to make practical business sense? I mean, do you anticipate a lot of foreign partnerships are actually going to be able to take on that kind of liability risk?

[72] How would that work in situations, for example -- you know, withholding is forgiven, or waived in the first year. The second year there's a disposition of partnership assets. The third year, on audit it's determined that NOL doesn't exist because there was substantial effectively connected income from a really inactive partnership or something.

[73] In that kind of situation, is the partnership going to be liable for the tax? Even though it's a -- the partnership is no longer --

[74] MR. DANILACK: This ties to Michael Frankel's question, too, the second -- your second question which we didn't actually answer.

[75] The way -- I think we're talking about an elective system where the partnership would have the option of accepting a certification and -- or not. That election, on the part of the partnership would -- I'm assuming if they're thinking through the issue, correctly, and realizing that they're going -- they're not really absolving themselves of any future liability, that they'd be very thoughtful about whether or not to accept it.

[76] In situations like Norteamérica this should not be any problem, whatsoever. They've got a substantial interest in an ongoing partnership and the certification is going to be accepted. The potential exposure that the partnership faces, thereafter, you know a couple points.

[77] One, I don't think the government ought worry too much about that. Because once the election's made, then it's as between the partnership and the partner how that exposure is managed and indemnified by the partner, and that will be taken care of through, likely, the partnership agreement.

[78] Right now, under the current 1446 regime, you essentially have -- care has to be taken, as between the partner and the partnership, because the partnership is paying tax on behalf of the partner, and the partners are out there collecting the refund.

[79] You know, the capital accounts have to be managed as a result of the current dynamic, and I think all we're suggesting is that this new factor, this new approach wouldn't require too much in the way of government concern over how the parties work that out.

[80] The question which Michael asked in one way, and you've asked in another, Michael, as to whether or not a partner who sells its interest, or otherwise packs up shop and flees? That's not an easily answered question.

[81] The partnership will have made a determination that that's not going to happen. And on that basis would certify -- it would accept the certification. The partnership is not off the hook. So it's up to the partnership to make sure it's comfortable that it doesn't have a partner that's going to certify an NOL and then have that certification prove wrong on exam, and the government's going to end up coming after the partnership for collection, because the partner is not submitting.

[82] Keep in mind that one of the requirements is an 1120F filing, which we propose would be shown for the immediately preceding year. I think in the written comments we point out that if the government seeks more of a pattern of compliance that they might require, as it's done in the 1445 withholding Rev. Proc. that more than one year's return be filed. I don't really think that's necessary -- and by the way, that raises a point.

[83] Some of these requirements are -- it's a bit of a menu that we put forward. I wouldn't suggest to you that you must have exactly these five requirements. You might decide, for example, that the security requirement is necessary to make you happy; so that one can fall out. Or you might decide on the other hand, security needs to be ratcheted up and you want multiple years covered off by the amount of the assets.

[84] So there are variations on what we put forward which you might, you know, decide to adopt.

[85] But the fundamental principle is that, you have a good partner, essentially, it's shown a pattern of compliance and is invested substantially in the partnership. That is not the type of partner that Congress had in mind when it enacted the regime in the first place.

[86] So, the partnership should be happy to accept that certification and there shouldn't be any worries.

[87] MR. FRANKEL: So it's the partnership? They're the ones that would have to do the calculation to determine about AMT being applicable? How much is applicable? Branch profits tax or whatever other taxes are applicable?

[88] MR. DANILACK: Yeah, I guess there are a couple ways that can be handled. Ultimately the partner -- the partner is making certification as to an amount.

[89] Now it has supplied the partnership, as is part of the first requirement, a return reflecting NOL; and it will have provided also work papers prepared for estimated taxes, and those documents are with the partnership. So the partnership has a method for verifying that the certified amount -- and it's relying on the certification. So there is a -- the onus is placed on the partner to say, "Here's the amount."

[90] But the partnership with -- and you could put a -- you know, no one has a reason to know the standard that the certification is not accurate based on the fact that they will have received these other documents from the partner. So the partnership could accept the number, as it is, and do some due diligence.

[91] Now, in terms of AMT -- this is where you might -- you might choose, I think, one of a couple paths. You know, the NOL won't fully offset the liability, obviously, and the partnership is going to have to be aware of that and so couldn't simply take an NOL amount and say, "Okay, that's good."

[92] Unless, you decide to choose a different option, which is that -- and this one, I think, is as good. Because, again, we're dealing with a partner that has an ongoing filing responsibility, is paying estimated taxes, is complying with 6655 at the partner level. Remember this is an 1120F filer, who's as much a U.S. taxpayer as a U.S. corp in this respect.

[93] And so you could say all the partnership needs to do is take the NOL amount and reduce the 1446 withholding, and then any AMT effect of that should be built into the 6655 computation done at the partner level.

[94] So I think you have a fundamental choice on how to handle the AMT there, and I think we probably expressed the preference for allowing the partnership to pass the AMT aspect out to the partner, and essentially use the NOL in full to reduce the 1446. We'd have a preference to see it work that way.

[95] Because, again, the partnership is one layer. The partner's another layer. It's actually the partner who's the taxpayer and will, at the end of the day, have to reconcile its numbers, including the AMT calculation.

[96] MR. SOTOS: Yeah, I just have maybe one comment or question or clarification.

[97] Your third required, as you call it, menu discusses the partnership having substantial assets, rather than in terms of the partner's interests in those assets or in the partnership being substantial. I mean, so it is an umbrella partnership asset concept?

[98] MR. DANILACK: That's how we put it forward to you. Yes, the -- again, the idea is that the partnership does not somehow avoid its 1461 liability, which kicks in as a result of it being the withholding agent with respect to this tax, and therefore, as a taxpayer, it's assets are -- should be made available for collection.

[99] Now, again, we put in the ten percent interest, as a way of signaling that, "Hey, these are substantial partners involved here," and some of the other factors are, again, built into the idea that the partner's not a fleeing partner, or a small partner, or anything of that nature.

[100] The point, though, that you're getting to is, again, I think one where, even if that were the rule, you'd look to all the partners' assets -- again, that's our recommendation. If the other partner somehow has an issue with that, that ought to be worked out among the partners, because if partnership assets in which, say, a domestic U.S. partner has a share, or somehow put at stake for the 1446 liability.

[101] I suggest that is in fact what's going on now in the current regime.

[102] MR. SOTOS: Yeah, absolutely. Absolutely.

[103] MR. DANILACK: We're not proposing to modify that in any way.

[104] MR. SOTOS: My question was more oriented toward -- and I guess the answer is, your ten percent threshold is your answer to the legislative history's reference to substantial presence?

[105] MR. DANILACK: It's one answer.

[106] MR. SOTOS: Because partnership assets, in and of themselves, aren't necessarily the presence of that partner?

[107] MR. DANILACK: That's correct.

[108] So, -- it's one aspect you have to take together to address Congress' stated concern. You take together the ten percent interest, the partnership assets, and -- what's the other one -- the fact that they're filing a return on -- you know, a reliable basis. You've got a return that's been filed with the IRS.

[109] Congress quite clearly stated that they were concerned with partners who were passively investing in U.S. partnerships and failing to file and pay. And so we're talking about return filers here. So I would put those three things together and say they all address that concern.

[110] MR. SOTOS: Right, but -- also -- the first regulation approach that was kind of used as a good model was not to go too deep into requiring the partnership to determine partner- level attributes, and take those into account.

[111] MR. DANILACK: Right.

[112] MR. SOTOS: Because we're talking about information exchange that always adds complexity. We're talking about four times a year -- all of that -- with timing difficulties and information exchanges, and trying to get that info -- you know -- to the partnership, makes the calculation difficult.

[113] Certainly in your circumstance, with your client, where there's a 50 percent owner, that's not a problem. But your recommendation with a ten percent owner, while we may argue whether that's substantial in some cases or not, it seems to me if there are other activities -- obviously, there are other comments where they are limited to, "this is the sole activity of the client." That is not your case. You have other activities.

[114] MR. DANILACK: Right.

[115] MR. SOTOS: To consider the proposal, we need to take -- not necessarily your case, but go to the ten percent case -- and consider other activities, and consider the certifications that are coming in from those ten percent partners and the other activities that may be going on, and how comfortable are we -- from the partnership's perspective, how practical?

[116] It really gets back to Mike's comment, "How practical is the approach when there are other significant activities?"

[117] MR. DANILACK: Right, a couple points, David.

[118] First -- I mean, I'm with you a hundred percent. There is a lot of balancing and what we've put forward -- I think as I've said -- any one of those recommendations is scalable, in certain ways.

[119] So you could say, "Well, ten percent isn't good enough. It should be 20 or 30." We would suggest you not go above 50 -- in our own self interest. But, also -- I think you should also keep in mind that you have a backstop behind you.

[120] Because, ultimately, this is -- as we put it forward -- for the partnership to decide whether or not it wants to accept a certification, and the partnership, as well as the other partners, have a stake in ensuring that -- they're making the right judgment there.

[121] So, I mean, if you set ten percent as we put forward, and included in that might be other items. I would strongly recommend that we not, as one of the comment letters suggests, not limit the proposal to situations where you don't have other outside the partnership U.S. activity. I would strongly recommend that, for obvious reasons.

[122] But if you're somewhat concerned about the "outside-the- partnership" activities coming into play, again, through the 1120W type of submission to the partner and you -- you know, you're at ten percent, well, you might make that call. Any given partnership might decide, "Gee, that's a little too risky for us."

[123] So I think you should take a little bit of comfort from that.

[124] MR. SOTOS: I guess I have one other thing, then.

[125] Let's talk about your so-called backstop, which I think is your reference to the partnership's ultimately on the hook, if it accepts this certification, and in fact, the certification is wrong, we will hold the partnership liable for the tax.

[126] MR. DANILACK: Right.

[127] MR. SOTOS: Putting all the practicalities of that aside, currently as I look at the regulation, there are -- and I may be wrong on this -- but there are four different scenarios where you have total compliance, where there'd be no tax or penalties on the partnership. You have partial compliance where the tax would be owed by the partnership, and there would be penalties -- and I'm -- reference 6655 and other possible penalties.

[128] You have no compliance, but the tax is picked up. So there's no tax there, but 1463 tells you that penalties can still be asserted. Then you have no compliance whatsoever and the tax is not picked up and you have a tax liability and penalties.

[129] It seems to me you are equating your scenario with an assertion of the tax on the partnership, if the certification is incorrect; but no penalties. With the partial compliance, which would be akin to accepting a W-8BEN that ends up being incorrect -- if I'm correct.

[130] MR. DANILACK: I thought if you accepted a W-8BEN that turns out incorrect the partnership is okay, if they properly accepted it.

[131] MR. SOTOS: If there's reasonable reliance. And that's what you're saying. Right?

[132] MR. DANILACK: Yeah.

[133] What -- and I may not have this right, so, I apologize if I don't, but I thought that if under the proposed regs, you provided W-8BEN and the partnership reasonably relies on it, the partnership has no continuing liability whatsoever, if that W-8BEN turns out to be incorrect. They're off the hook.

[134] MR. SOTOS: Yeah, I may have misspoke. I apologize for that.

[135] MR. DANILACK: So we're not suggesting that, obviously. We're suggesting --

[136] MR. SOTOS: I guess what I'm getting at is the -- the relief of penalties seems --

[137] MR. DANILACK: It's the 6655 relief that we're talking about. We're not talking about interest.

[138] I mean, you still have a partnership liability under 1461. They're a taxpayer. There's been a tax which hasn't been paid. The 6601 interest would run on that liability. The only thing we're suggesting is that the 6655 penalty -- for addition to tax -- not kick in for the partnership because they have accepted -- reasonably relied on a certification, which turns out to be wrong, yes. But they reasonably relied upon that certification.

[139] I mean, under the existing rules, if they -- well, I guess there are the safe harbors, currently.

[140] In effect, I think, if you were to go so far as to try to figure out how to make what we're doing work, you would I think build it into the safe harbors. Right now the safe harbor that's in the proposed reg, picked up from the 8931 is -- the prior year safe harbor -- is not available in this situation, because your prior year tax needs to have been at least 50 percent of your current year -- whatever your current year turns out to be.

[141] We would think that you would maybe get in there and modify that to allow you to look at NOLs from prior years for purposes of having safe harbor apply. That would mechanically be the way you could accomplish this.

[142] So essentially -- I just want to make this clear, and you may already be there. We're not saying 1446(c) needs to be countermanded in some way. You need to build NOL calculation in ECTI. We're saying that when, as Congress directed you, you implement the 6655 regime that calls for quarterly installments, you show flexibility on those safe harbors and you say, "You don't need to withhold" -- this is all prime- value money. That's all this is. This is not shifting liability.

[143] This is to prevent Norteamérica from having to go out and maybe borrow from a bank in order to meet the liability. Or we can get it back a year from now -- you know, there's the interest costs -- and all this is doing is saying, "No," that withholding doesn't need to take place is Norteamérica reasonably establishes that they've got an NOL sufficient enough to the partnership's acceptance, to not have that withholding take place at that time.

[144] MR. FRANKEL: Thank you, Mr. Danilack, thank you, Mr. Caraveo.

[145] MR. DANILACK: Did I miss anything guys [to others accompanying speakers]?