IRS Issues Pre-Released Version of Final Regs on Withholding, Reporting for Partnership Interests

IRS Issues Pre-Released Version of Final Regs on Withholding, Reporting for Partnership Interests

Internal Revenue Service

The IRS has issued a pre-released version of final regulations (T.D. 9926) that provide guidance related to the withholding of tax and information reporting regarding some dispositions of interests in partnerships engaged in a trade or business within the United States. The final regs retain the basic approach and structure, with some revisions, of proposed regulations (<a href="/lr/resolve//29gny">REG-105476-18</a>) issued in May 2019. The final version of the regs will be posted on the Federal Register website at a later date and will incorporate any changes made during the government’s review process. Regarding reporting requirements for foreign transferors and partnerships with foreign transferors, the final regs provide that a specified partnership must include in the statement provided to the notifying transferor information regarding whether the transferor’s deemed sale effectively connected gain or loss was determined under the material change in circumstances rule provided in reg. section 1.864(c)(8)-1(c)(2)(ii)(E). The final regs also revise the definition of specified partnership to remove unnecessary language on publicly traded partnerships. Regarding the scope of the withholding obligation under section 1446(f), the final regs retain the general proposed rule that requires withholding on the transfer of a partnership interest unless an exception or adjustment to withholding applies. The final regs therefore require that the transferee presume that a transfer is subject to withholding unless it obtains a certification from the transferor establishing otherwise (or, if the partnership is the transferee because it makes a distribution, by relying on information in its books and records to make that determination). A transferee that obtains and properly relies on this certification (or, when the partnership is the transferee, its books and records) will generally not be subject to any withholding tax liability even if the transfer results in tax on gain under section 864(c)(8). In response to comments, the final regs add a rule providing that any person required to withhold under section 1446(f) is not liable for failure to withhold, or any interest, penalties, or additions to tax, if it establishes to the satisfaction of the IRS that the transferor had no gain under section 864(c)(8) subject to tax on the transfer. Also in response to comments, the final regs modify some of the proposed exceptions to withholding by a transferee under section 1446(f)(1). Those exceptions include the non-foreign status exception, the no-realized-gain exception, the 10 percent effectively connected gain exception, the 10 percent effectively connected income exception, and claims for treaty benefits. The applicability of those exceptions is determined in one of three ways: self-certification by the transferor, certification by the partnership, or reliance on the books and records of the partnership (for cases in which a partnership is a transferee because it makes a distribution). The final regs retain the proposed requirement that the transferee provide a certification of withholding to the partnership within 10 days after the transfer and deposit any withheld tax with the IRS within 20 days of the transfer. Therefore, a transferee may choose to 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 regs add a rule to limit the instances of withholding under section 1446(f)(4) on specified transferees and to reduce the compliance burden on those transferees. Regarding withholding on the transfer of a PTP interest by a foreign person, the final regs describe some requirements specific to qualified intermediaries to preview several intended revisions to the QI agreement that relate to reg. section 1.1446(f)-4. The final regs provide that a broker that is a U.S. clearing organization is not required to withhold on an amount realized on trades of PTP interests that are netted and that have a U.S. clearing organization as the central counterparty. The final regs allow a broker to rely on documentation that it already possesses from the payee broker (rather than requiring new documentation for each transaction when the same payee broker is used). The final regs provide a further allowance for a broker to rely on documentation required for transfers of PTP interests that is collected by a clearing organization. Moreover, the final regs describe some requirements that apply to QIs receiving distributions made by PTPs.

T.D. 9926, which was posted on the Federal Register website on November 27, 2020, is the <a href="/lr/resolve/official-version/2d81z" title="official version">official version</a> of the final regs.

The IRS has issued a pre-released version of final regulations (T.D. 9926) that provide guidance related to the withholding of tax and information reporting regarding some dispositions of interests in partnerships engaged in a trade or business within the United States.

The IRS has issued a pre-released version of final regulations (T.D. 9926) that provide guidance related to the withholding of tax and information reporting regarding some dispositions of interests in partnerships engaged in a trade or business within the United States. The final regs retain the basic approach and structure, with some revisions, of proposed regulations (REG-105476-18) issued in May 2019. The final version of the regs will be posted on the Federal Register website at a later date and will incorporate any changes made during the government’s review process. Regarding reporting requirements for foreign transferors and partnerships with foreign transferors, the final regs provide that a specified partnership must include in the statement provided to the notifying transferor information regarding whether the transferor’s deemed sale effectively connected gain or loss was determined under the material change in circumstances rule provided in reg. section 1.864(c)(8)-1(c)(2)(ii)(E). The final regs also revise the definition of specified partnership to remove unnecessary language on publicly traded partnerships. Regarding the scope of the withholding obligation under section 1446(f), the final regs retain the general proposed rule that requires withholding on the transfer of a partnership interest unless an exception or adjustment to withholding applies. The final regs therefore require that the transferee presume that a transfer is subject to withholding unless it obtains a certification from the transferor establishing otherwise (or, if the partnership is the transferee because it makes a distribution, by relying on information in its books and records to make that determination). A transferee that obtains and properly relies on this certification (or, when the partnership is the transferee, its books and records) will generally not be subject to any withholding tax liability even if the transfer results in tax on gain under section 864(c)(8). In response to comments, the final regs add a rule providing that any person required to withhold under section 1446(f) is not liable for failure to withhold, or any interest, penalties, or additions to tax, if it establishes to the satisfaction of the IRS that the transferor had no gain under section 864(c)(8) subject to tax on the transfer. Also in response to comments, the final regs modify some of the proposed exceptions to withholding by a transferee under section 1446(f)(1). Those exceptions include the non-foreign status exception, the no-realized-gain exception, the 10 percent effectively connected gain exception, the 10 percent effectively connected income exception, and claims for treaty benefits. The applicability of those exceptions is determined in one of three ways: self-certification by the transferor, certification by the partnership, or reliance on the books and records of the partnership (for cases in which a partnership is a transferee because it makes a distribution). The final regs retain the proposed requirement that the transferee provide a certification of withholding to the partnership within 10 days after the transfer and deposit any withheld tax with the IRS within 20 days of the transfer. Therefore, a transferee may choose to 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 regs add a rule to limit the instances of withholding under section 1446(f)(4) on specified transferees and to reduce the compliance burden on those transferees. Regarding withholding on the transfer of a PTP interest by a foreign person, the final regs describe some requirements specific to qualified intermediaries to preview several intended revisions to the QI agreement that relate to reg. section 1.1446(f)-4. The final regs provide that a broker that is a U.S. clearing organization is not required to withhold on an amount realized on trades of PTP interests that are netted and that have a U.S. clearing organization as the central counterparty. The final regs allow a broker to rely on documentation that it already possesses from the payee broker (rather than requiring new documentation for each transaction when the same payee broker is used). The final regs provide a further allowance for a broker to rely on documentation required for transfers of PTP interests that is collected by a clearing organization. Moreover, the final regs describe some requirements that apply to QIs receiving distributions made by PTPs.

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

Search Connectors

Retrieving Documents With a Tax Analysts’ Citation:

Field Restricted Searching:

IRS Issues Pre-Released Version of Final Regs on Withholding, Reporting for Partnership Interests