ABA Tax Section Comments on Partnership Withholding, Reporting

ABA Tax Section Comments on Partnership Withholding, Reporting

American Bar Association Section of Taxation

Eric Solomon of the American Bar Association Section of Taxation has submitted comments on proposed regulations (<a href="/lr/resolve//29gny">REG-105476-18</a>) on withholding and information reporting for some dispositions of interests in partnerships engaged in the conduct of a trade or business within the United States. The proposed regs generally require each transferee of a partnership interest to withhold 10 percent of the amount realized by the transferor on the transfer of the interest, with two exceptions. First, the transferee generally is not required to withhold if it receives, and relies on, any of six types of certification from the transferor or the partnership. Second, a partnership that is the transferee because it made a distribution to the transferor also is generally not required to withhold if it relies on its books and records to determine that (1) the transferor would realize no gain on the distribution, (2) on a hypothetical sale of all of the partnership’s assets for fair market value, less than 10 percent of the net gain would be effectively connected income, or (3) in each of the three preceding years, the transferor was a partner in the partnership and less than 10 percent of the transferor’s total distributive share of net income was effectively connected taxable income. Section members request confirmation that, regardless of whether either of the two exceptions is utilized, a transferee will not be considered to have failed to withhold under <a href="/research/federal/usc26/1446#cqrj-0000020" resolve="/lr/resolve//cqrj#cqrj-0000020">section 1446(f)</a> if the transferee (or the partnership) can demonstrate any of four characteristics outlined in the tax section members’ report. Alternatively, members recommend that the final regs provide an exception for any transfer of an interest in a partnership if the transfer of the interest in a fully taxable disposition could not give rise to <a href="/research/federal/usc26/864#cq11-0000273" resolve="/lr/resolve//cq11#cq11-0000273">section 864(c)(8)</a> effectively connected income. Lastly, members recommend that the final regs provide that secondary withholding under <a href="/research/federal/usc26/1446#cqrj-0000045" resolve="/lr/resolve//cqrj#cqrj-0000045">section 1446(f)(4)</a> is neither required nor permitted if distributions are made to “fully compliant transferees,” which members define as a transferee that acted properly in relying on a certification from the transferor and, thus, has fully complied with the transferee’s obligations under <a href="/research/federal/usc26/1446#cqrj-0000021" resolve="/lr/resolve//cqrj#cqrj-0000021">section 1446(f)(1)</a>.

Eric Solomon of the American Bar Association Section of Taxation has submitted comments on proposed regulations (REG-105476-18) on withholding and information reporting for some dispositions of interests in partnerships engaged in the conduct of a trade or business within the United States.

Eric Solomon of the American Bar Association Section of Taxation has submitted comments on proposed regulations (REG-105476-18) on withholding and information reporting for some dispositions of interests in partnerships engaged in the conduct of a trade or business within the United States. The proposed regs generally require each transferee of a partnership interest to withhold 10 percent of the amount realized by the transferor on the transfer of the interest, with two exceptions. First, the transferee generally is not required to withhold if it receives, and relies on, any of six types of certification from the transferor or the partnership. Second, a partnership that is the transferee because it made a distribution to the transferor also is generally not required to withhold if it relies on its books and records to determine that (1) the transferor would realize no gain on the distribution, (2) on a hypothetical sale of all of the partnership’s assets for fair market value, less than 10 percent of the net gain would be effectively connected income, or (3) in each of the three preceding years, the transferor was a partner in the partnership and less than 10 percent of the transferor’s total distributive share of net income was effectively connected taxable income. Section members request confirmation that, regardless of whether either of the two exceptions is utilized, a transferee will not be considered to have failed to withhold under section 1446(f) if the transferee (or the partnership) can demonstrate any of four characteristics outlined in the tax section members’ report. Alternatively, members recommend that the final regs provide an exception for any transfer of an interest in a partnership if the transfer of the interest in a fully taxable disposition could not give rise to section 864(c)(8) effectively connected income. Lastly, members recommend that the final regs provide that secondary withholding under section 1446(f)(4) is neither required nor permitted if distributions are made to “fully compliant transferees,” which members define as a transferee that acted properly in relying on a certification from the transferor and, thus, has fully complied with the transferee’s obligations under section 1446(f)(1).

Sec. 864 Definitions and special rules

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

United States

Information reporting

Partnerships and other passthrough entities

Sourcing

Withholding

Eric Solomon

DOC 2019-26760

2019 TNTF 133-13

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Eric Solomon is a partner in the tax practice at Steptoe &amp; Johnson LLP.
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ABA Tax Section Comments on Partnership Withholding, Reporting