Withholding on Partnership Interest Transfers by Foreign Persons Addressed


The Treasury Department and the IRS have announced their intention to issue regulations, rules, and procedures on how to qualify for exemptions from withholding, or reductions in the amount of withholding, on transfers of non-publicly traded partnership interests under Code Sec. 1446(f). The Treasury and IRS also have issued interim guidance that taxpayers may rely on until regulations are issued.

Background
New Code Sec. 1446(f) was added by the Tax Cuts and Jobs Act ( P.L. 115-97). It requires a transferee to withhold 10 percent of the amount realized on the disposition of a partnership interest by a nonresident alien individual or a foreign corporation when any portion of the gain would be treated as effectively connected with the conduct of a U.S. trade or business under new Code Sec. 864(c)(8). In general, Code Sec. 864(c)(8) applies to sales, exchanges, or other dispositions occurring on or after November 27, 2017, but withholding under Code Sec. 1446(f) applies to sales, exchanges, and dispositions after December 31, 2017.

Withholding is not required if the transferor furnishes an affidavit to the transferee stating, among other things, that the transferor is not a foreign person. Further, the amount withheld may be reduced, at the transferor’s or transferee’s request, if the IRS determines that the reduced amount will not jeopardize income tax collection on the gain realized. If the transferee fails to withhold the correct amount, the partnership must deduct and withhold from distributions to the transferee partner an amount equal to the amount the transferee failed to withhold.

Previous guidance has temporarily suspended withholding on dispositions of certain publicly traded partnership interests until regulations or other guidance have been issued ( Notice 2018-8, I.R.B. 2018-7, 352). The previous guidance did not extend to dispositions of non-publicly traded partnership interests.

Interim Guidance
The interim guidance is designed to allow for effective and orderly implementation of the Code Sec. 1446(f) withholding rules for dispositions of non-publicly traded partnership interests until regulations, other guidance, or forms and instructions have been issued. Under the interim guidance:

Transferees that are required to withhold under Code Sec. 1446(f) must use the forms and procedures relating to withholding on dispositions of U.S. real property interests under Code Sec. 1445 and its regulations.

The transferor may furnish the certification described in Reg. §1.1445-2(b) (as modified) to satisfy the Code Sec. 1446(f) requirements for an affidavit of non-foreign status.

If a transferee receives a certification that the disposition will not result in gain, then it is generally not required to withhold under Code Sec. 1446(f).

If a transferor certifies that, for each of the past three years, its effectively connected taxable income from the partnership was less than 25 percent of the transferor’s total income from the partnership, the transferee is not required to withhold. If the transferee cannot obtain this certification, it is not required to withhold if it receives a certification from the partnership that the partnership’s effectively connected gain under Code Sec. 864(c)(8) would be less than 25 percent of the total gain on the deemed sale of all its assets.

No withholding is required under Code Sec. 1446(f) in a transaction in which no gain is recognized.

A transferee may generally rely on a transferor’s most recently issued Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., to determine the transferor’s share of partnership liabilities included in the amount realized for Code Sec. 1446(f) withholding purposes. Alternatively, the transferee may generally rely on a certification from the partnership providing the amount of the transferor’s share of partnership liabilities.

In certain cases, the total withholding amount is generally limited to the total amount of cash and property to be transferred.

Code Sec. 1446(f) applies in certain cases when a distribution of money (including marketable securities) results in gain under Code Sec. 731. The partnership may generally rely on its books and records, or on a certification received from the distributee partner, to determine whether the distribution exceeds the partner’s basis.

The rule that the partnership must withhold from distributions to the transferee partner if the transferee fails to withhold the correct amount on the disposition of the partnership interest does not apply until regulations or other guidance have been issued.

The interim guidance does not affect the transferor’s tax liability under Code Sec. 864(c)(8). The guidance also does not apply to transfers of a publicly traded partnership, and does not affect the withholding suspension announced in Notice 2018-8.

Comments Requested
Comments on the rules to be issued must be submitted by June 1, 2018. Written comments should be mailed to: Internal Revenue Service CC:PA:LPD:PR ( Notice 2018-29) Room 5203 P.O. Box 7604 Ben Franklin Station Washington, DC 20044. Include “Notice 2018-29” on the cover page. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: Internal Revenue Service Courier’s Desk 1111 Constitution Ave., N.W. Washington, DC 20224 Attn: CC:PA:LPD:PR ( Notice 2018-29). Alternatively, taxpayers may submit comments electronically to Notice.comments@irscounsel.treas.gov. Include “Notice 2018-29” in the subject line of any electronic submission.