WISIALOWSKI URGES NO WITHHOLDING FOR PARTNERSHIP DISTRIBUTIONS OF INCOME OF EXEMPT FOREIGN GOVERNMENTS.

Wisialowski notes that although temporary regulation sections 1.892-7T and 1.1441-8T specifically exempt income and distributions satisfying the requirements of section 892 from the withholding requirements of sections 1441 and 1442, no similar provision is provided with respect to section 1446. As a result, according to Wisialowski, withholding will be required under section 1446 on distributions made to a foreign government that is a partner in a partnership in certain circumstances.

Section 892(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code") provides that the income of foreign governments received from investments in the United States in stock, bonds or other domestic securities owned by such foreign governments shall not be included in gross income and shall be exempt from U.S. income taxation if such income is not received directly or indirectly from commercial activities or received from or by controlled commercial entity. Temporary Treasury Regulation Section 1.892-4T(c)(ii) provides that effecting transactions in stocks, securities or commodities for a foreign government's own account does not constitute a commercial activity regardless of whether such activities constitute a U.S. trade or business for purposes of Code Section 864.

Treasury Regulation Section 1.864-2(c)(2)(i) generally provides that the term "engaged in a trade or business within the United States" does not include the effecting of transactions in the United States in stocks or securities for the taxpayer's own account, regardless of the volume of the transactions effected during the taxable year. Similarly, Treasury Regulation Section 1.864- 2(c)(2)(ii) provides that a foreign investor shall not be considered to be engaged in a trade or business within the United States solely because such foreign investor is a member of a partnership which effects transactions in the United States in stocks and securities for the partnership's own account. However, Treasury Regulation Section 1.864-2(c)(2)(ii) does not apply to "a partnership (other than a partnership in which, at any time during the last half of its taxable year, more than 50 percent of either the capital interest or profits interest is owned, directly or indirectly, by five or fewer partners who are individuals) the principal business of which is trading in stocks or securities for its own account, if the principal office of such partnership is in the United States at any time during the year."

Although Temporary Treasury Regulation Sections 1.892-7T and 1.1441-8T specifically exempt income and distributions satisfying the requirements of Code Section 892 from the withholding requirements of Code Sections 1441 and 1442, no similar provision is provided with respect to Code Section 1446. As a result, withholding will be required under Code Section 1446 on distributions made to a foreign government which is a partner in a partnership if the partnership effects transactions in the stocks, bonds and other securities of U.S. corporations and (i) the principal business of the partnership is trading in such stocks, bonds, and securities for its own account, (ii) 50 percent or less of either the capital interest or profits interest of the partnership is owned by five or fewer individuals, and (iii) the principal office of the partnership is in the United States at any time during the year, even though the income of such partnership may be exempt from taxation under Code Section 892.

Consequently, in order to achieve consistency between Code Section 1446 and the other provisions dealing with foreign investment in the United States, the Treasury Regulations should provide that no withholding is required under Code Section 1446 in the case of income exempt from taxation under Code Section 892.

Very truly yours,