NYSBA Tax Section Comments on Partnership Withholding Regs

NYSBA Tax Section Comments on Partnership Withholding Regs

New York State Bar Association Tax Section

Deborah Paul of the New York State Bar Association Tax Section has submitted a report on proposed <a href="/research/federal/usc26/1446#cqrj-0000020" resolve="/lr/resolve//cqrj#cqrj-0000020">section 1446(f)</a> regulations (<a href="/lr/resolve//29gny">REG-105476-18</a>), supplementing prior comments (<a href="/lr/resolve//29913">March 22</a>; <a href="/lr/resolve//26vgz">February 2, 2018</a>; <a href="/lr/resolve//28bll">August 10, 2018</a>) and focusing specifically on ensuring that the regs are administrable and stay within the scope of the statute. Members note that <a href="/research/federal/usc26/864#cq11-0000273" resolve="/lr/resolve//cq11#cq11-0000273">section 864(c)(8)</a> treats some gain from the transfer of a partnership interest as income effectively connected with the conduct of a trade or business within the United States. This subjects the transferor to U.S. tax filing obligations and to U.S. net federal income tax liability. <a href="/research/federal/usc26/1446#cqrj-0000020" resolve="/lr/resolve//cqrj#cqrj-0000020">Section 1446(f)</a> provides a backstop to <a href="/research/federal/usc26/864#cq11-0000273" resolve="/lr/resolve//cq11#cq11-0000273">section 864(c)(8)</a> in the form of a withholding mechanism. The tax section recommends that the scope of the general withholding obligation be limited to transfers of interests in partnerships that file, or are required to file, a Form 1065. Addressing exceptions to withholding, members suggest that the three-year exception be replaced with an exception that eliminates the obligation to withhold when the partnership has generated either no gross amounts of effectively connected income or effectively connected loss or only de minimis gross amounts of ECI or effectively connected loss, in each case allocable to the non-U.S. transferor. Members also recommend revisions to the less-than-10-percent exception and suggest that final regs allow the transferor to rely on the no-gain exception by making some assumptions about the amount of gain attributable to <a href="/research/federal/usc26/751" resolve="/lr/resolve//cp74">section 751</a> property that might be generated on the transfer. Turning to valuation issues, members recommend that final regs allow partnerships and transferors to value assets and calculate effectively connected gain by reference to the actual amount realized by the transferor to an extent. Final regs also should be clarified to allow different valuations for different transfers, as long as the valuation for a particular transfer is the arm’s-length agreed price at which the transferor and transferee execute their transaction. Members further suggest that the final regs relieve a transferee of withholding liability when it is later determined that the transfer resulted in no effectively connected gain to the transferor as a substantive matter under <a href="/research/federal/usc26/864#cq11-0000273" resolve="/lr/resolve//cq11#cq11-0000273">section 864(c)(8)</a>. Moreover, members address the application of the <a href="/research/federal/usc26/1446#cqrj-0000020" resolve="/lr/resolve//cqrj#cqrj-0000020">section 1446(f)</a> withholding rules to transfers of publicly traded partnership interests. They recommend that the final regs remove the requirement that secondary withholding liability remain with a PTP interest after the initial transferee has disposed of the interest and that the regs include specific rules or presumptions that allow a broker to forgo withholding on the basis of evidence that the withholding obligation has already been satisfied. Lastly, members address PTP distributions and the coordination between <a href="/research/federal/usc26/1446#cqrj-0000002" resolve="/lr/resolve//cqrj#cqrj-0000002">section 1446(a)</a> and <a href="/research/federal/usc26/1446#cqrj-0000020" resolve="/lr/resolve//cqrj#cqrj-0000020">section 1446(f)</a> and miscellaneous issues.

Deborah Paul of the New York State Bar Association Tax Section has submitted a report on proposed section 1446(f) regulations (REG-105476-18), supplementing prior comments and focusing specifically on ensuring that the regs are administrable and stay within the scope of the statute.

Deborah Paul of the New York State Bar Association Tax Section has submitted a report on proposed section 1446(f) regulations (REG-105476-18), supplementing prior comments (March 22; February 2, 2018; August 10, 2018) and focusing specifically on ensuring that the regs are administrable and stay within the scope of the statute. Members note that section 864(c)(8) treats some gain from the transfer of a partnership interest as income effectively connected with the conduct of a trade or business within the United States. This subjects the transferor to U.S. tax filing obligations and to U.S. net federal income tax liability. Section 1446(f) provides a backstop to section 864(c)(8) in the form of a withholding mechanism. The tax section recommends that the scope of the general withholding obligation be limited to transfers of interests in partnerships that file, or are required to file, a Form 1065. Addressing exceptions to withholding, members suggest that the three-year exception be replaced with an exception that eliminates the obligation to withhold when the partnership has generated either no gross amounts of effectively connected income or effectively connected loss or only de minimis gross amounts of ECI or effectively connected loss, in each case allocable to the non-U.S. transferor. Members also recommend revisions to the less-than-10-percent exception and suggest that final regs allow the transferor to rely on the no-gain exception by making some assumptions about the amount of gain attributable to section 751 property that might be generated on the transfer. Turning to valuation issues, members recommend that final regs allow partnerships and transferors to value assets and calculate effectively connected gain by reference to the actual amount realized by the transferor to an extent. Final regs also should be clarified to allow different valuations for different transfers, as long as the valuation for a particular transfer is the arm’s-length agreed price at which the transferor and transferee execute their transaction. Members further suggest that the final regs relieve a transferee of withholding liability when it is later determined that the transfer resulted in no effectively connected gain to the transferor as a substantive matter under section 864(c)(8). Moreover, members address the application of the section 1446(f) withholding rules to transfers of publicly traded partnership interests. They recommend that the final regs remove the requirement that secondary withholding liability remain with a PTP interest after the initial transferee has disposed of the interest and that the regs include specific rules or presumptions that allow a broker to forgo withholding on the basis of evidence that the withholding obligation has already been satisfied. Lastly, members address PTP distributions and the coordination between section 1446(a) and section 1446(f) and miscellaneous issues.

Sec. 1446 Withholding of tax on foreign partners' share of effectively connected income

Sec. 864 Definitions and special rules

United States

Corporate taxation

Nonresident taxation

Partnerships and other passthrough entities

Sourcing

Withholding

Deborah L. Paul

DOC 2019-27121

2019 TNTF 135-19

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Deborah L. Paul is a partner at Wachtell, Lipton, Rosen &amp; Katz.
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NYSBA Tax Section Comments on Partnership Withholding Regs