Title 26—Internal Revenue--Volume 1
PART 1—INCOME TAXES
§ 1.1446-5   Tiered partnership structures.
(a) In general. The rules of this section shall apply in cases where a partnership (lower-tier partnership) that has effectively connected taxable income (ECTI), has a partner that is a partnership (upper-tier partnership). Except as provided in paragraph (e) of this section, if an upper-tier domestic partnership directly owns an interest in a lower-tier partnership, the lower-tier partnership is not required to pay the section 1446 withholding tax (1446 tax) with respect to the upper-tier partnership's allocable share of net income, regardless of whether the upper-tier domestic partnership's partners are foreign. Paragraph (b) of this section prescribes the reporting requirements for upper-tier and lower-tier partnerships subject to section 1446. Paragraph (c) of this section prescribes rules requiring a lower-tier partnership to look through an upper-tier foreign partnership to a partner of such upper-tier partnership to the extent it has sufficient documentation to determine the status of such partner and determine such partner's indirect share of the lower-tier partnership's effectively connected taxable income (ECTI). Paragraph (d) of this section prescribes rules applicable to a publicly traded partnership in a tiered partnership structure. Paragraph (e) of this section prescribes rules permitting a domestic upper-tier partnership to elect to apply the look through rules of paragraph (c) of this section. Paragraph (f) of this section sets forth examples illustrating the rules of this section.
(b) Reporting requirements —(1) In general. Notwithstanding paragraph (c) of this section, to the extent that an upper-tier partnership that is a foreign partnership is a partner in a lower-tier partnership, and the lower-tier partnership has paid 1446 tax (including installment payments of such tax) with respect to ECTI allocable to the upper-tier partnership, the lower-tier partnership shall comply with §§ 1.1446-1 through 1.1446-3 and provide the upper-tier partnership notice of such payments and a copy of the statements and forms filed with respect to the upper-tier partnership's interest in the lower-tier partnership (e.g., Form 8805, “Foreign Partner's Information Statement of Section 1446 Withholding Tax”). The upper-tier partnership may treat the 1446 tax (or any installment of such tax) paid by the lower-tier partnership on its behalf as a credit against its liability to pay 1446 tax (or any installment of such tax), as if the upper-tier partnership actually paid over the amounts at the time that the amounts were paid by the lower-tier partnership. See § 1.1462-1(b) and § 1.1446-3(d). To the extent required in § 1.1446-3(d)(1)(iii), the upper-tier partnership will file Form 8804, “Annual Return for Partnership Withholding Tax (Section 1446),” and Form 8805, “Foreign Partner's Information Statement of Section 1446 Withholding Tax,” for each of its foreign partners with respect to its 1446 tax obligation. To the extent the upper-tier partnership does not claim a refund of the 1446 tax it paid (or is considered to have paid), the upper-tier partnership will pass the credit for the 1446 tax paid to its partners on the Forms 8805 it issues. See § 1.1446-3(d). The rules of this paragraph (b) shall apply to an upper-tier and lower-tier partnership to the extent that an election has been made and consented to under paragraph (e) of this section.
(2) Publicly traded partnerships. In the case of an upper-tier foreign partnership that is a publicly traded partnership, the rules of § 1.1446-4(c) shall apply. See also paragraph (d) of this section.
(c) Look through rules for foreign upper-tier partnerships. For purposes of computing the 1446 tax obligation of a lower-tier partnership, if an upper-tier foreign partnership owns an interest in the lower-tier partnership, the upper-tier partnership's allocable share of ECTI from the lower-tier partnership shall be treated as allocable to a partner of the upper-tier partnership, to the extent of such partner's indirect share of such ECTI (as if such partner were a direct partner in the lower-tier partnership), if—
(1) The upper-tier foreign partnership furnishes the lower-tier partnership a valid Form W-8IMY, “Certificate of Foreign Intermediary, Flow Through Entity, or Certain U.S. Branches for United States Tax Withholding,” indicating that it is a look-through foreign partnership for purposes of section 1446; and
(2) The lower-tier partnership can reliably associate (within the meaning of § 1.1441-1(b)(2)(vii)) effectively connected partnership items allocable to the upper-tier partnership (and indirectly to such partner) with a Form W-8 (e.g., Form W-8BEN), Form W-9, “Request for Taxpayer Identification Number and Certification,” or other form acceptable under § 1.1446-1, establishing the status of such partner provided by the upper-tier partnership. The lower-tier partnership required to pay 1446 tax must be able to provide the information necessary for the IRS to determine the chain of ownership, allocation of effectively connected items at each partnership level, as well as to the ultimate beneficial owner of the effectively connected items, and whether the amount of 1446 tax paid was appropriate. This information should permit each partnership in the tiered structure and the IRS to reliably associate any effectively connected items allocable to such upper-tier partnership, as well as to the ultimate beneficial owner of the effectively connected items. The principles of § 1.1441-1(b)(2)(vii) shall apply to determine whether a lower-tier partnership can reliably associate effectively connected partnership items allocable to the upper-tier partnership with a partner of the upper-tier partnership. To the extent the lower-tier partnership receives a valid Form W-8IMY from the upper-tier partnership but cannot reliably associate a portion of the upper-tier partnership's allocable share of effectively connected partnership items with a partner of such upper-tier partnership, then the lower-tier partnership shall pay 1446 tax on such portion at the higher of the applicable percentages in section 1446(b). See § 1.1446-3(a)(2) for the treatment of any income or gain potentially subject to a preferential rate. If a lower-tier partnership has not received a valid Form W-8IMY from the upper-tier partnership, the lower-tier partnership shall withhold on the upper-tier partnership's entire allocable share of ECTI at the higher of the applicable percentages in section 1446(b). The look through regime set forth in this paragraph (c) is for purposes of computing the lower-tier partnership's 1446 tax obligation only and does not alter the persons considered to be partners in the lower-tier partnership for partnership reporting purposes (e.g., issuing Form 8805, Schedule K-1).
(d) Publicly traded partnerships —(1) Upper-tier publicly traded partnership. The rules set forth in paragraph (c) shall not apply to look through an upper-tier partnership whose interests are publicly traded (as defined in § 1.1446-4(b)(1)).
(2) Lower-tier publicly traded partnership. The look through rules of paragraph (c) of this section shall apply, if the requirements of that paragraph are met, to a lower-tier partnership that is a publicly traded partnership within the meaning of § 1.1446-4(b)(1) only if the upper-tier partnership is not described in paragraph (d)(1) of this section. For example, a lower-tier publicly traded partnership (or nominee) shall look through an upper-tier foreign partnership (or domestic partnership to the extent an election is made and consented to under paragraph (e) of this section) when computing its 1446 tax liability, provided the upper-tier partnership is not a publicly traded partnership and the appropriate documentation needed to satisfy the standards set forth in § 1.1441-1(b)(2)(vii) and paragraph (c) of this section have been furnished.
(e) Election by a domestic upper-tier partnership to apply look through rules —(1) In general. Subject to the rules of this paragraph (e), a domestic partnership that is a partner in a lower-tier partnership may elect to apply the rules of this section 1.1446-5 and have the lower-tier partnership look through such upper-tier partnership to the partners of such domestic partnership for purposes of computing the lower-tier partnership's 1446 tax liability. A domestic partnership shall make this election by attaching to the Form W-9 submitted to the lower-tier partnership, a written statement and information (described in paragraph (e)(2) of this section) that identifies the upper-tier partnership as a domestic partnership and that states that such partnership is making the election under this paragraph (e). This paragraph (e)(1) shall not apply to a publicly traded partnership described in § 1.1446-4(b)(1). See paragraph (d)(1) of this section.
(2) Information required for valid election statement. In addition to the requirements of paragraphs (e)(1) and (3) of this section, the election statement submitted under this paragraph (e)(2) is not valid and cannot be accepted by the lower-tier partnership pursuant to paragraph (e)(3) of this section unless the upper-tier partnership attaches valid documentation pursuant to § 1.1446-1 (e.g., Form W-8BEN) with respect to one or more of its foreign partners. The information and documentation submitted with the election must comply with the rules of this section to permit the lower-tier partnership to reliably associate (within the meaning of § 1.1441-1(b)(2)(vii)) at least a portion of the upper-tier partnership's allocable share of ECTI with one or more foreign partners of the upper-tier partnership. The election statement must identify the upper-tier partnership by name, address, and TIN, and specify the percentage interest the domestic partnership holds in the lower-tier partnership. The statement may also include such information the upper-tier partnership deems necessary to enable the lower-tier partnership to apply the provisions of this section. If at any time the upper-tier partnership determines that the information or documentation previously provided to the lower-tier partnership is no longer correct, the upper-tier partnership shall update such information and documentation. Except as provided in paragraph (e)(3) of this section, an election that is effective under this paragraph (e) shall apply for subsequent taxable years until such upper-tier partnership revokes the election in writing. A revocation under this section shall be effective for any installment due date arising more than 15 days subsequent to the date that the lower-tier partnership receives such revocation.
(3) Consent of lower-tier partnership. An election made under this paragraph (e) is not effective until the lower-tier partnership consents in writing to the upper-tier partnership that it agrees to apply the provisions of this section. A lower-tier partnership may not consent to an election submitted under this paragraph (e) for any installment date or Form 8804 filing date arising within 15 days of the lower-tier partnership's receipt of such election. The lower-tier partnership's written consent must specify the extent to which it will look through the upper-tier partnership in computing its 1446 tax (or any installment of such tax). To the extent that the lower-tier partnership does not consent to an election to apply the look through provisions of paragraph (c) of this section, the lower-tier partnership shall consider such portion of the upper-tier partnership's allocable share of ECTI as allocable to a domestic person for purposes of computing its 1446 tax obligation. A lower-tier partnership that has consented to an election under this paragraph (e) may revoke or modify its consent, in writing, at any time.
(f) Examples. The following examples illustrate the provisions of this section. In considering the examples, disregard the potential application of § 1.l446-3(b)(2)(v)(F) (relating to the de minimis exception to paying 1446 tax). The examples are as follows:
(ii) LTP must pay 1446 tax on the $60 allocable to its direct partner NRA using the applicable percentage for non-corporate partners (the highest rate in section 1).
(iii) With respect to the effectively connected partnership items that LTP can reliably associate with NRA through PRS (70 percent of PRS's 40 percent allocable share ($40), or $28), LTP will pay 1446 tax on NRA's allocable share of LTP's ECTI (as determined by looking through PRS) using the applicable percentage for non-corporate partners (the highest rate in section 1).
(iv) With respect to the effectively connected partnership items that LTP can reliably associate with FC through PRS (30 percent of PRS's 40 percent allocable share ($40), or $12), LTP will pay 1446 tax on FC's allocable share of LTP's ECTI (as determined by looking through PRS) using the applicable percentage for corporate partners (the highest rate in section 11).
(v) LTP's payment of the 1446 tax is treated as a distribution to NRA and PRS, its direct partners, that those partners may credit against their respective tax obligations. PRS will report its 1446 tax obligation with respect to its direct foreign partners, NRA and FC, on the Form 8804 and Forms 8805 that it files with the Internal Revenue Service pursuant to paragraph (b) of this section and will credit the amount withheld by LTP on its Form 8804. This credit will satisfy PRS's 1446 tax liability as reported on the Form 8804 it files because PRS's only income is from LTP, and LTP paid 1446 tax with respect to all of PRS's allocable share in LTP by looking through to PRS's partners NRA and FC. Further, PRS will pass along the credit for the 1446 tax withheld by LTP to its partners, NRA and FC on the Form 8805 issued to each partner. The credit passed to each partner on Form 8805 will be treated as a distribution to the respective partners under section 1446(d).
(ii) Assume a change of facts where C provides a form W-8 (e.g., Form W-8BEN) to PRS, and PRS in turn, furnishes that form to LTP along with its Form W-8IMY, and information regarding how effectively connected items are allocated to C and D. Based upon the additional facts, LTP can reliably associate one-half of PRS's allocable share of ECTI with documentation related with C. Therefore, under paragraph (c)(2) of this section, LTP will look through PRS to C when computing its 1446 tax to the extent of C's indirect share and will not look through with respect to the remainder of PRS's allocable share (D's indirect share).
§ 1.1446-6   Special rules to reduce a partnership's 1446 tax with respect to a foreign partner's allocable share of effectively connected taxable income.
(a) In general —(1) Purpose and scope. This section provides rules regarding when a partnership required to pay withholding tax under section 1446 (1446 tax), or an installment of 1446 tax, may consider certain partner-level deductions and losses in computing its 1446 tax obligation under § 1.1446-3, or otherwise not pay a de minimis amount of 1446 tax due with respect to a nonresident alien individual partner. A partnership determines the applicability of the rules of this section on a partner-by-partner basis for each installment period and when completing its Form 8804, “Annual Return for Partnership Withholding Tax (Section 1446),” and paying 1446 tax for the partnership taxable year. Except with respect to certain state and local taxes paid by the partnership on behalf of the partner, to apply the rules of this section with respect to a foreign partner, the partnership must receive a certificate from such partner for each partnership taxable year. Paragraph (b) of this section identifies the foreign partners to which this section applies. Paragraph (c) of this section identifies the deductions and losses that a foreign partner may certify to the partnership as well as the state and local taxes paid by the partnership on behalf of the foreign partner that can be taken into account without a certification, and establishes an exception that permits a partnership to not pay a de minimis amount of 1446 tax with respect to a nonresident alien partner. Paragraph (c) of this section also sets forth the requirements for a valid certificate. Paragraphs (a)(2) and (d) of this section establish when a partnership may rely on and consider a foreign partner's certificate in computing its 1446 tax, and the effects of relying on such a certificate. Paragraph (d) of this section also describes the effects of a partnership relying on a certificate (including an updated certificate) and the reporting requirements of a partnership with respect to a certificate. Paragraph (e) of this section sets forth examples that illustrate the rules of this section. Paragraph (f) of this section provides the Effective/Applicability date. Paragraph (g) of this section provides a transition rule.
(2) Reasonable reliance on a certificate. Subject to § 1.1446-2 and the rules of this section, a partnership receiving a certificate (including an updated certificate or status update under paragraph (c)(2)(ii)(B) of this section) of deductions and losses from a partner provided in accordance with the provisions of this section may reasonably rely on such certificate (to the extent of the certified deductions and losses or other representations set forth in the certificate) until such time that it has actual knowledge or reason to know that the certificate is defective or that the time for receiving an updated certificate or status update from the partner under paragraph (c)(2)(ii)(B) of this section has expired. For this purpose, a partnership shall be considered to have actual knowledge or reason to know that a certificate is defective upon receipt of written notification from the IRS under paragraph (c)(3) or (c)(5) of this section.
(b) Foreign partner to whom this section applies —(1) In general. Except as otherwise provided in paragraph (b)(3) of this section, a foreign partner to whom this section applies is a foreign partner that meets the requirements of this paragraph (b)(1).
(i) The partner has provided valid documentation to the partnership to which a certificate is submitted under this section in accordance with § 1.1446-1.
(ii) If the partner's current taxable year is the first taxable year in which the partner submits a certificate to any partnership, the partner has filed (or will file) a qualifying U.S. income tax return for each of its three taxable years ending before the end of the partnership's taxable year for which the partner is submitting a certificate (regardless of whether it was a partner in that partnership during each of these years). A qualifying U.S. income tax return for a taxable year that is prior to the first taxable year the partner submits a certificate to any partnership is a U.S. income tax return filed within the time specified in paragraph (b)(2)(iii) of this section.
(iii) If the current taxable year of the partner is not the first taxable year in which the partner submits a certificate to any partnership, the partner met the requirements in paragraph (b)(1)(ii) of this section for the first taxable year in which it submitted a certificate to any partnership and has filed (or will file) a qualifying U.S. income tax return for its first taxable year in which it submitted a certificate to any partnership and each subsequent taxable year ending before the beginning of the current taxable year (regardless of whether it was a partner in any partnership during each of those years). A qualifying U.S. income tax return for a taxable year that is prior to the taxable year the partner submits a certificate to any partnership is a U.S. income tax return filed within the time specified in paragraph (b)(2)(iii) of this section.
(iv) The partner files a qualifying U.S. income tax return (within the meaning of paragraph (b)(2)(iii) of this section) for its taxable year in which a certificate is provided to any partnership.
(2) Definitions —(i) U.S. income tax return. A U.S. income tax return means a Form 1040NR, “U.S. Nonresident Alien Income Tax Return,” in the case of a nonresident alien individual and a Form 1120F, “U.S. Income Tax Return of a Foreign Corporation,” in the case of a foreign corporation.
(ii) Timely-filed. Only for purposes of this section, a U.S. income tax return shall be considered timely-filed if the return is filed on or before the due date set forth in section 6072(c), plus any extension of time to file such return granted under section 6081.
(iii) Qualifying U.S. income tax return. A U.S. income tax return shall constitute a qualifying U.S. income tax return if the return reports income or gain that is effectively connected with a U.S. trade or business or deductions or losses properly allocated and apportioned to such activities and if the return is described in paragraph (b)(2)(iii)(A), (B), or (C) of this section. A protective return described in § 1.874-1(b)(6) or § 1.882-4(a)(3)(vi) is not a qualifying U.S. income tax return for purposes of this section.
(A) A U.S. income tax return for a partner's preceding taxable year in which it did not submit a certificate to any partnership (but not including a taxable year following the first taxable year in which the partner submitted a certificate to any partnership), with a due date as set forth in section 6072(c), not including any extensions of time to file, which falls before the beginning of the current partnership taxable year for which the certificate is provided is described in this paragraph (b)(2)(iii)(A) if the return is filed and all amounts due with respect to such return (including interest, penalties, and additions to tax, if any) are paid on or before the earlier of—
( 1 ) The date that is one year after the due date set forth in section 6072(c) for such return, not including any extensions of time to file; or
( 2 ) The date on which the certificate for the current partnership taxable year is submitted to the partnership.
(B) A U.S. income tax return for a partner's preceding taxable year in which it did not submit a certificate to any partnership (but not including a taxable year following the first taxable year in which the partner submitted a certificate to any partnership), with a due date as set forth in section 6072(c), not including any extensions of time to file, which falls within the current partnership taxable year for which the certificate is provided is described in this paragraph (b)(2)(iii)(B) if the return is timely-filed and all amounts due with respect to such return are timely paid.
(C) A U.S. income tax return for a taxable year in which the partner submits a certificate to any partnership and for a taxable year following the first taxable year in which the partner submits a certificate to any partnership is described in this paragraph (b)(2)(iii)(C) if the return is timely-filed and all amounts due with such return are timely paid with respect to such return.
(3) Special rules —(i) In the case of a partnership (upper-tier partnership) that is a partner in another partnership (lower-tier partnership)—
(A) The rules of this section may apply to reduce or eliminate the 1446 tax (or any installment of such tax) of the lower-tier partnership with respect to a foreign partner of the upper-tier partnership only to the extent the provisions of § 1.1446-5 apply to look through the upper-tier partnership to the foreign partner of such upper-tier partnership and the certificate described in paragraph (c) of this section is provided by such foreign partner to the upper-tier partnership and, in turn, provided to the lower-tier partnership with other appropriate documentation (see § 1.1446-5(c) and (e));
(B) An upper-tier partnership that submits a certificate of deductions and losses or a de minimis certificate to a lower-tier partnership may not submit that certificate to another lower-tier partnership;
(C) An upper-tier partnership that relies on a certificate submitted to it by a foreign partner under this section for computing its 1446 tax due on effectively connected taxable income (ECTI) allocable to that partner (other than ECTI allocable to it from a lower-tier partnership) may not submit that certificate to any lower-tier partnership; and
(D) In addition to any other information required by this section, a lower-tier partnership must submit with a Form 8813, “Partnership Withholding Tax Payment Voucher (Section 1446),” and Form 8805, “Foreign Partner's Information Statement of Section 1446 Withholding Tax,” for which it relies on a certificate from an upper-tier partnership to reduce the 1446 tax due with respect to a foreign partner of the upper-tier partnership, sufficient information so that the IRS may reliably associate the ECTI and the certificate of deductions and losses with the partner in the upper-tier partnership submitting the certificate, including the name, taxpayer identification number (TIN) and allocation of effectively connected items at each partnership tier, as well as to the ultimate upper-tier partner submitting the certificate.
(ii) This section shall not apply to a partner that is a foreign estate or its beneficiaries.
(iii) This section shall not apply to a partner that is a trust or to its beneficiaries, except to the extent that such trust is owned by a grantor or other person under subpart E of subchapter J of the Internal Revenue Code, the documentation requirements of § 1.1446-1 have been met by the grantor or other owner of such trust, and the certificate described in paragraph (c) of this section is provided by the grantor or other owner of such trust to the partnership.
(iv) This section shall not apply to a partner in a publicly-traded partnership subject to § 1.1446-4.
(c) Reduction of 1446 tax with respect to a foreign partner —(1) General rules. Under paragraph (c)(1)(i) of this section a foreign partner to whom this section applies may certify to a partnership for a partnership taxable year that it has certain deductions (other than charitable deductions) and losses properly allocated and apportioned to gross income that is effectively connected (or treated as effectively connected) with the conduct of the partner's trade or business in the United States, and that the partner reasonably expects those deductions and losses to be available and claimed on the partner's U.S. income tax return to be filed for that taxable year. Under paragraph (c)(1)(ii) of this section, a nonresident alien individual partner to whom this section applies may also certify to a partnership for a partnership taxable year that its only investment or activity giving rise to effectively connected items for the partnership's taxable year that ends with or within the partner's taxable year is (and will be) the partner's investment in the partnership. A certificate submitted by a foreign partner to a partnership under this section must be in accordance with the form and requirements set forth in paragraph (c)(2)(ii) of this section. Under paragraph (c)(1)(iii) of this section, a partnership may take into account certain state and local taxes withheld by the partnership on behalf of the partner.
(i) Certified deductions and losses —(A) Deductions and losses from the partnership. Under this paragraph (c)(1)(i)(A), a partner may certify to a partnership for a partnership taxable year deductions (other than charitable deductions) and losses properly allocated and apportioned to gross income which is effectively connected (or treated as effectively connected) with the conduct of the partner's trade or business in the United States, that are reported on a Form 1065 (Schedule K-1), “Partner's Share of Income, Credits, Deductions, etc.,” issued (or to be issued) to the partner by the partnership for a prior partnership taxable year, that are (or will be) reported on a qualifying U.S. income tax return for a partner's taxable year that ends before the installment due date or the close of the partnership taxable year for which the partner is certifying such deductions and losses, and that the partner reasonably expects to be available and claimed on a qualifying U.S. income tax return for the partner's taxable year ending with or after the close of the partnership taxable year. A partner that has a loss reported on a Form 1065 (Schedule K-1) issued (or to be issued) to the partner by the partnership for a prior partnership taxable year, but that is not (and will not be) reported on a qualifying U.S. income tax return for a prior taxable year of the partner because the loss is suspended under section 704(d) may also certify such suspended loss to the partnership under this paragraph (c)(1)(i)(A).
(B) Deductions and losses from other sources. Under this paragraph (c)(1)(i)(B), a foreign partner may certify to a partnership for a partnership taxable year deductions (other than charitable deductions) and losses properly allocated and apportioned to gross income that is effectively connected (or treated as effectively connected) with the conduct of the partner's trade or business in the United States and that are from sources other than the partnership to whom the certificate is submitted if the deductions and losses are (or will be) reported on a qualifying U.S. income tax return of the partner for a taxable year that ends before the installment due date or the close of the partnership taxable year for which the partner is certifying the deductions and losses and the partner reasonably expects the deductions and losses to be available and claimed on the qualifying U.S. income tax return filed for its taxable year ending with or after the close of the partnership taxable year. Any deductions and losses certified under this paragraph (c)(1)(i)(B) that are allocated to the partner from another partnership must be reported on a Form 1065 (Schedule K-1) issued (or to be issued) to the partner by such other partnership. However, the partner may not certify any deduction or loss allocated to it from another partnership that is suspended under section 704(d).
(C) Limit on the consideration of a partner's net operating loss deduction. A partnership may not consider a net operating loss deduction (as determined under section 172) certified by the partner under this paragraph (c)(1)(i) in an amount greater than the percentage limitation, if any, provided in section 56(a)(4) and (d) multiplied by the partner's allocable share of ECTI from the partnership reduced by all other certified deductions and losses whether or not taken into account by the partnership, as well as deductions considered under paragraph (c)(1)(iii) of this section.
(D) Limitation on losses subject to certain partner level limitations. Pursuant to paragraph (c)(2)(i) of this section, a partner must identify any certified losses or deductions that are subject to special limitations at the partner level (for example, sections 465 and 469) and provide information to the partnership that will allow the partnership to take the special limitations into account. For example, where a partner certifies a loss to the partnership that is a passive activity loss under section 469, the partner shall identify the activities the partnership conducts that the partner expects will be passive activities. The partnership shall then ensure that these limitations are taken into account when determining the 1446 tax due with respect to the partner.
(E) Certification of deductions and losses to other partnerships. Deductions and losses certified to a partnership for a taxable year of the partnership may not be certified for the taxable year of another partnership that begins or ends with or within the taxable year of the partnership to which the deductions and losses were certified.
(F) Partner level use of deductions and losses certified to a partnership. Any deductions and losses certified to a partnership for a taxable year of the partner and considered by the partnership in computing its section 1446 tax due may not be considered by that partner for the same taxable year in computing the amount of its required installments under section 6654(d) or 6655(d) on income unrelated to the partnership to which the partner has submitted the certificate.
(ii) De minimis certificate for nonresident alien individual partners —(A) In general. Under this paragraph (c)(1)(ii), a nonresident alien individual partner to whom this section applies and that satisfies the requirements of paragraph (c)(1)(ii)(B) of this section may certify to a partnership that its only activity giving rise to effectively connected income, gain, deduction, or loss for the partnership's taxable year that ends with or within the partner's taxable year is (and will be) the partner's investment in the partnership. A partnership that receives a certificate from a nonresident alien partner under this paragraph (c)(1)(ii) and that may reasonably rely on such certificate is not required to pay 1446 tax (or any installment of such tax) with respect to such partner if the partnership estimates that the annualized (or, in the case of a partnership completing its Form 8804, the actual) 1446 tax otherwise due with respect to such partner is less than $1,000, without taking into account any deductions or losses certified by the partner to the partnership under paragraph (c)(1)(i) of this section or any amounts under paragraph (c)(1)(iii) of this section.
(B) Requirements for exception. The requirements of this paragraph (c)(1)(ii)(B) are met if the nonresident individual alien partner's only activity giving rise to effectively connected income, gain, deduction, or loss for the partnership taxable year that ends with or within the partner's taxable year is (and will be) the partner's investment in the partnership. For this purpose, if the partner has (or has reason to expect to have) income or gain described in section 864(c)(6), such income or gain shall be considered derived from a separate investment activity. A certificate submitted by a nonresident alien individual partner under this paragraph (c)(1)(ii) is valid even if such certificate does not certify deductions and losses to partnership under this section. A nonresident alien individual partner that submits a certificate to a partnership under this paragraph (c)(1)(ii) must notify the partnership in writing and revoke such certificate within 10 days of the date that the partner invests or otherwise engages in another activity that may give rise to effectively connected income, gain, deduction, or loss for the partner's taxable year. For example, while an investment in a U.S. real property interest (as defined in section 897(c)) would not give rise to an activity requiring a notification (unless an election is in effect under section 871(d)), the disposition of the U.S. real property interest would give rise to an activity requiring a notification.
(iii) Consideration of certain current year state and local taxes. In addition to any deductions and losses certified by a foreign partner to a partnership under paragraph (c)(1)(i) of this section, the partnership may consider as a deduction of such partner 90-percent of any state and local income taxes withheld and remitted by the partnership on behalf of such partner with respect to the partner's allocable share of partnership ECTI. The partnership may consider the amount of state and local taxes of the foreign partner determined under this paragraph (c)(1)(iii) regardless of whether the foreign partner submits a certificate to the partnership under paragraph (c)(1)(i) or (ii) of this section.
(2) Form and time of certification —(i) Form of certification. A partner's certification to a partnership under paragraph (c)(1)(i) or (iii) of this section shall be made using Form 8804-C, “Certificate Of Partner-Level Items to Reduce Section 1446 Withholding” in accordance with the instructions of the form and the rules of this section.
(ii) Time for certification provided to partnership —(A) First certificate submitted for a partnership's taxable year. Provided the other requirements of this section are met, a partnership may only rely on the first certificate received from a foreign partner for any 1446 tax installment due or Form 8804 filing due (without regard to extensions) on or after the date on which the certificate is received. See § 1.1446-3 for 1446 tax installment due dates. See also paragraph (e) of this section for examples illustrating the rules of this paragraph (c)(2).
(B) Updated certificates and status updates —( 1 ) Preceding year tax returns not yet filed. If a foreign partner's U.S. income tax return for a preceding taxable year has not been filed as of the time the partner submits to the partnership its first certificate under this paragraph (c), the certificate shall specify this fact and set forth the filing due date for such return set forth in section 6072(c), plus any extension of time to file such return granted under section 6081 and the regulations under section 6081. The partner shall also submit an updated certificate to the partnership in accordance with this paragraph (c) within 10 days of the date the partner files its U.S. income tax return for any such taxable year. In addition, prior to the partnership's final 1446 tax installment due date the partner shall provide to the partnership, under penalties of perjury, a status update regarding any U.S. income tax return for the prior taxable year that has not (or will not) be filed as of the final installment due date. The status update must identify the due date, set forth in section 6072(c), plus any extension of time to file such return granted under section 6081 and the regulations under section 6081, for any un-filed return identified in the first certificate and state whether the first certificate submitted may continue to be considered by the partnership. If the partnership does not receive an updated certificate or a status update from the partner prior to the partnership's final installment due date, the partnership shall disregard the partner's certificate when computing the 1446 tax due with respect to that partner for the final installment period and when completing its Form 8804 for the taxable year. In addition, the foreign partner shall not be permitted to submit an additional or substitute certificate for the disregarded certificate. See § 1.1446-3(b)(2)(i) for computation requirements for installment payments of 1446 tax when a partnership receives, or fails to receive, an updated certificate or status update. See also paragraph (e)(2) Examples 4 and 8 of this section. Notwithstanding this paragraph (c)(2)(ii)(B)( 1 ), a partner that can meet the requirements of this section for a subsequent partnership taxable year may submit a certificate to the partnership under this section for such taxable year.
( 2 ) Other circumstances requiring an updated certificate. If at any time during the partnership taxable year the partner determines that its most recent certificate furnished to the partnership for such taxable year is incorrect, then the partner shall submit to the partnership an updated certificate in accordance with this paragraph (c) within 10 days of such determination. For example, if the partner determines that the amount or character of the certified deductions or losses is incorrect, the partner shall submit an updated certificate to the partnership. See § 1.1446-3(b)(2)(i) for computation requirements for installment payments of 1446 tax when a partnership receives an updated certificate.
( 3 ) Form and content of updated certificate. The updated certificate required by this paragraph (c)(2)(ii) must be provided using the form and instructions identified in paragraph (c)(2)(i) of this section. The updated certificate must indicate that it is an updated certificate filed in accordance with this paragraph (c)(2)(ii). The partner is not required to attach to the updated certificate a copy of the certificate that is being updated (superseded certificate).
( 4 ) Partnership consideration of an updated certificate. A partnership may consider an updated certificate, that meets the requirements of this paragraph (c), that is received prior to an installment due date in the same partnership taxable year for which the superseded certificate was provided, or prior to the due date of its Form 8804 (without regard to extensions) to be filed for the year the superseded certificate was provided. A partnership must consider an updated certificate that meets all the requirements of this paragraph (c) if it would increase the amount of 1446 tax the partnership would pay by the next installment due date, if any, or the due date of its Form 8804. An updated certificate considered by the partnership under this paragraph (c)(2)(ii)(B)(4) supersedes all prior certificates submitted by the foreign partner for the same partnership taxable year, beginning with the installment period or Form 8804 filing date for which the partnership considers the updated certificate. See paragraph (e)(2) Example 4 of this section.
(3) Notification to partnership when a partner's certificate cannot be relied upon. If the IRS determines, in its discretion based on all the facts and circumstances, that a foreign partner's certificate is defective (or that it lacks information sufficient to make this determination after providing written request for such information to the partnership), the IRS shall notify the partnership of such determination in writing. Upon receipt of such written notification, the partnership shall not rely on any certificate submitted by that foreign partner for the partnership taxable year to which the defective certificate relates (or any subsequent partnership taxable year), until the IRS provides written notification to the partnership revoking or modifying the original written notification. For purposes of this section, a foreign partner's certificate of deductions and losses shall be defective if—
(i) The partner is not described in paragraph (b) of this section;
(ii) Any deductions or losses set forth in such certificate are not described in paragraph (c)(1)(i) of this section;
(iii) The timing requirements under paragraph (c)(2) of this section for submitting an original certificate, an updated certificate or a status update to the partnership are not met;
(iv) The certificate does not include all of the information required by paragraph (c)(2)(i) of this section;
(v) Any representation made on the certificate is incorrect;
(vi) The actual amount of deductions and losses available to the partner is less than the amount of deductions and losses certified to the partnership for the partnership taxable year and considered by the partnership in determining its 1446 tax due; or
(vii) There is a failure to comply with any other provision of this section.
(4) Partner to receive copy of notice. If the IRS notifies a partnership under paragraph (c)(3) of this section that a certificate of a foreign partner is defective, the IRS shall send a copy of such notice to the partner's address as shown on the certificate. The partnership shall also promptly furnish a copy of the IRS notice to such partner.
(5) Notification to partnership when no foreign partner's certificate can be relied upon. If the IRS determines, in its discretion based on all the facts and circumstances, that there would be a substantial reduction in section 1446 tax as a result of the submission of one or more defective certificates or that a substantial portion of all certificates being submitted by partners to the partnership and by the partnership to the IRS are defective (or lack information sufficient to make this determination), then the IRS shall notify the partnership of such determination in writing. Upon receipt of such written notification, the partnership shall not rely on any certificate submitted by any partner for the partnership taxable year to which the notice relates or any subsequent partnership taxable year, until the IRS provides written notification to the partnership revoking or modifying the original notice.
(6) Partnership notification to partner regarding use of deductions and losses. Unless § 1.1446-3(d)(1)(i)(A) or (B) applies (relating to waiver of notice of tax paid during the partnership taxable year), a partnership must notify each foreign partner of the amount of such partner's certified deductions and losses and state and local taxes, if any, taken into account under this paragraph (c) in determining the 1446 tax due with respect to such partner for each installment period or Form 8804 filing date, as applicable.
(7) Partner's certificate valid only for partnership taxable year for which submitted. A partnership that receives a certificate from a partnership under this paragraph (c) shall consider such certificate only for the partnership taxable year for which the certificate is submitted, as set forth on the certificate.
(d) Effect of certificate of deductions and losses on partners and partnership —(1) Effect on partner —(i) No effect on liability for income tax of foreign partner. A foreign partner that certifies deductions and losses to a partnership under this section is not relieved of liability for income tax on its allocable share of ECTI from the partnership. Further, the submission of a certificate under this section does not constitute an acceptance by the IRS of the amount or character of the deductions or losses certified therein.
(ii) No effect on partner's estimated tax obligations. A foreign partner that certifies deductions and losses to a partnership under this section is not relieved of any estimated tax obligation otherwise applicable to such partner with respect to income or gain allocated to such partner from the partnership.
(iii) No effect on partner's obligation to file U.S. income tax return. The submission of a certificate under paragraph (c) of this section does not relieve the foreign partner from its obligation to file a U.S. income tax return even if as a result of the partnership considering the certificate the partner would have no additional tax due with such return. See also § 1.1446-3(f).
(2) Effect on partnership —(i) Reasonable reliance to relieve partnership from addition to tax under section 6655. A partnership that has reasonably relied on a certificate received from a foreign partner and complied with the filing requirements of paragraph (d)(3)(i) of this section, shall not be liable for any addition to tax under section 6655 (as applied through § 1.1446-3) for any period during which the partnership reasonably relied on such certificate, even if such certificate is later determined to be defective or the partner submits an updated certificate under paragraph (c)(2) of this section that increases the 1446 tax due with respect to such partner.
(ii) Continuing liability for withholding tax under section 1461 and for applicable interest and penalties —(A) In general. Except as otherwise provided in this section, a partnership that has reasonably relied on a certificate received from a foreign partner and complied with the filing requirements of paragraph (d)(3)(i) of this section, is not relieved from liability for the 1446 tax (or any installment of such tax) under section 1461, any additions to the tax, interest or penalties. However, the partnership may be relieved of additions to the tax or penalties in certain circumstances. See §§ 301.6651-1(c) and 301.6724-1 of this chapter. Further, see § 1.1446-3(e) which deems a partnership to have paid 1446 tax with respect to ECTI allocable to a partner in certain circumstances. See also paragraph (e)(2) Example 5 of this section.
(B) Certificate defective because of amount or character of deductions and losses. If a certificate is determined to be defective because the actual amount of deductions and losses available to the partner is less than the amount reflected on the certificate (other than when it is determined that the partner certified the same deduction or loss to more than one partnership), or because the character of the certified deductions and losses is erroneous, the partnership shall be liable for 1446 tax under section 1461 (or any installment of such tax) with respect to such partner to the extent the partnership considered an amount of certified deductions and losses greater than the amount actually available to the partner and permitted to be used under §§ 1.1446-1 through 1.1446-5 and this section, or to the extent that the proper character of the certified deductions and losses results in a greater amount of 1446 tax due with respect to such partner. See paragraph (e)(2) Example 6 of this section.
(3) Partnership level rules and requirements —(i) Filing requirement. A partnership that relies in whole or in part on a certificate received from a partner under this section in computing its 1446 tax due with respect to such partner must still file Form 8813 or Form 8804 and 8805, whichever is applicable, for the period for which the certificate is considered, even if as a result of relying on the certificate no 1446 tax (or an installment of such tax) is due with respect to such foreign partner. See generally § 1.1446-3(d)(1). Except as otherwise provided in this paragraph (d)(3)(i), the partnership must attach a copy of the foreign partner's certificate, and the computation of the 1446 tax due with respect to such partner, to both the Form 8813 and Form 8805 filed with the IRS for any installment period or year for which such certificate is considered in computing the partnership's 1446 tax. See § 1.1446-3(d)(1)(iii) requiring the partnership to furnish Form 8805 to the IRS and such foreign partner even if no 1446 tax is paid on behalf of the partner. The partnership must include in that computation the amount of state and local taxes described in paragraph (c)(1)(iii) of this section taken into account in computing the 1446 tax due with respect to that partner. The partnership must also attach a computation of the 1446 tax due with respect to a partner for whom only state and local taxes described in paragraph (c)(1)(iii) are taken into account. For an installment period other than the first installment period for which the partnership considers a foreign partner's certificate or updated certificate, the partnership may, instead of attaching any partner's certificate, attach to Form 8813 a list containing the name, TIN, the amount of certified deductions and losses, and the amount of state and local taxes the partnership may consider under paragraph (c)(1)(iii) of this section for each foreign partner whose certificate was relied upon. For purposes of the preceding sentence, if the partnership is relying on a certificate received under paragraph (c)(1)(ii) of this section, instead of providing the amounts described in the prior sentence, it should attach a statement to Form 8813 which provides that, relying on that certificate, no 1446 tax is due with respect to that partner.
(ii) Reasonable cause for failure to timely file a valid certificate and computation. This paragraph (d)(3)(ii) provides the sole source of relief for a partnership that fails to timely file a valid certificate or attach a computation of 1446 tax as required under paragraph (d)(3)(i) of this section. To permit the partnership to reasonably rely on such certificate, the partnership shall be considered to have satisfied the requirements of paragraph (d)(3)(i) of this section if the partnership demonstrates that such failure was due to reasonable cause and not willful neglect and if once the partnership becomes aware of the failure, the partnership attaches the certificate and computation, as well as a written statement setting forth the reasons for the failure to comply with the requirements of paragraph (d)(3)(i) of this section, to an amended Form 8813 or amended Forms 8804 and 8805 for the relevant period. All such submissions should be sent to the address provided in the instructions to Form 8804-C.
(A) Determining reasonable cause. In determining whether the partnership has reasonable cause, the Director shall consider whether the partnership acted reasonably and in good faith considering all the facts and circumstances.
(B) Notification. If the IRS has notified, as provided in paragraph (c)(3) of this section, the partnership that the certificate is defective or that no foreign partner's certificate may be relied upon, as provided in paragraph (c)(5) of this section, the partnership will be deemed not to have acted reasonably and in good faith. Otherwise, the Director shall notify the partnership in writing within 120 days of the amended filing if it is determined that the failure to comply was not due to reasonable cause, or if additional time will be needed to make such determination. If the Director fails to notify the partnership within 120 days of the amended filing, the partnership shall be considered to have demonstrated to the Director that such failure was due to reasonable cause and not willful neglect.
(e) Examples. (1) The rules of this section are illustrated by the examples in paragraph (e)(2) of this section. In 2008, the relevant rate of withholding for foreign partners that were not corporations (that is, the highest rate in section 1 as specified in § 1.1446-3(a)(2)(i)) was 35%, and the due date for filing Form 8804 for domestic calendar year partnerships (that is, the date specified in § 1.1446-3(d)(1)(iii)) was April 15. Except as otherwise provided, in each example assume:
(i) Section 1.1446-3(b)(2)(v)(F) (relating to the de minimis exception to paying 1446 tax) does not apply;
(ii) Paragraph (c)(1)(ii) of this section (relating to a nonresident alien individual partner whose sole investment generating effectively connected income or gain is the partnership) does not apply;
(iii) All income and losses are ordinary;
(iv) For purposes of applying paragraph (c)(1)(i)(C) of this section, the percentage limitation under section 56(a)(4) and (d) is 90 percent;
(v) Any loss is not a passive activity loss within the meaning of section 469;
(vi) The partnership uses an acceptable annualization method under § 1.1446-3;
(vii) NRA is a nonresident alien individual who maintains a calendar taxable year for U.S. tax purpose;
(viii) B and C are U.S. individuals who maintain a calendar taxable year; and
(ix) Any partnership maintains a calendar taxable year.
(2) The examples are as follows:
(ii) To be eligible to submit a certificate of deductions and losses to PRS under this section, NRA must satisfy the requirements of paragraph (b)(1) of this section. In accordance with § 1.1446-1, NRA provided valid documentation to PRS to establish its status for purposes of section 1446. NRA's year 1 U.S. income tax return is a qualifying U.S. income tax return because it reported income or gain effectively connected with a U.S. trade or business or deductions or losses properly allocated and apportioned to such activities and is described under paragraph (b)(2)(iii)(A) of this section. Although NRA filed its year 1 return after the due date of the return (determined under section 6072(c) without regard to any extension of time to file) the return was filed on March 11, year 3, which was on or before the earlier of June 15, year 3, the date one year after its section 6072(c) due date without regard to any extension of time to file, and March 20, year 4, the date on which NRA submitted the certificate to PRS. NRA's year 2 U.S. income tax return is a qualifying U.S. income tax return because it reported income or gain effectively connected with a U.S. trade or business or deductions or losses properly allocated and apportioned to such activities and is described under paragraph (b)(2)(iii)(A) of this section. Although NRA filed its year 2 return after the due date of the return (determined under section 6072(c) without regard to any extension of time to file) the return was filed on February 12, year 4, which was on or before the earlier of June 15, year 4, the date one year after its section 6072(c) due date without regard to any extension of time to file, and March 20, year 4, the date on which NRA submitted the certificate to PRS. NRA's year 3 U.S. income tax return is a qualifying U.S. income tax return because it reported income or gain effectively connected with a U.S. trade or business or deductions or losses properly allocated and apportioned to such activities and is described under paragraph (b)(2)(iii)(B) of this section. Because NRA filed its year 3 U.S. income tax return on April 13, year 4, the return will be considered timely-filed under paragraph (b)(2)(ii) of this section, as the due date under section 6072(c) was June 15, year 4. NRA's year 4 U.S. income tax return is a qualifying U.S. income tax return because it reported income or gain effectively connected with a U.S. trade or business or deductions or losses properly allocated and apportioned to such activities and is described under paragraph (b)(2)(iii)(C) of this section. Because NRA filed its year 4 U.S. income tax return on May 14, year 5, the return will be considered timely-filed under paragraph (b)(2)(ii) of this section. Accordingly, NRA meets the conditions of paragraph (b)(1) of this section and is eligible to provide a certificate of deductions and losses to PRS for year 4.
(ii) To be eligible to submit a certificate of deductions and losses to XYZ under this section, NRA must satisfy the requirements of paragraph (b)(1) of this section. NRA provided valid documentation to XYZ in accordance with § 1.1446-1. As described in Example 1, NRA's year 4 U.S. income tax return is a qualifying U.S. income tax return because it will report income or gain effectively connected with a U.S. trade or business and is described under paragraph (b)(2)(iii)(C) of this section. Although NRA's year 5 U.S. income tax return reports income or gain effectively connected with a U.S. trade or business or deductions or losses properly allocated and apportioned to such activities it is not a qualifying U.S. income tax return under paragraph (b)(2)(iii) of this section. Because NRA submitted a certificate to PRS in year 4, to constitute a qualifying U.S. income tax return the year 5 U.S. income tax return must be timely-filed and all amounts due with such return must be timely paid. See paragraph (b)(2)(iii)(C) of this section. However, NRA will not file its U.S. income tax return for year 5 until March 25, year 7, (after its section 6072(c) due date and any extension of time to file that could have been granted under section 6081). Because the year 5 tax return is not a qualifying U.S. income tax return under paragraph (b)(2)(iii) of this section, NRA does not satisfy the requirements of paragraph (b)(1)(ii) of this section and, therefore, may not submit a certificate of deductions and losses to XYZ under this section in year 7.
(i) In year 3, NRA may not submit a certificate to PRS under paragraph (c) because it will not have filed qualifying U.S. income tax returns for the preceding three years. In year 3, PRS has ECTI of $1,000 that is allocated equally between NRA and B. PRS satisfies its 1446 tax obligation with respect to NRA for year 3.
(ii) In year 4, PRS estimates that it will have ECTI of $4,000, which will be allocated equally between NRA and B. On or before April 15th of year 4 (the first installment due date), NRA submits a certificate to PRS under this section (using Form 8804-C) certifying that it reasonably expects to have an effectively connected net operating loss of $1,000 ($750 loss in both years 1 and 2, less $500 of income in year 3) available to offset its allocable share of ECTI from PRS in year 4. As of the date the certificate is submitted, NRA has received the Form 1065 (Schedule K-1) from PRS for year 3 but has not yet filed its U.S. income tax return for year 3.
(iii) With respect to year 4, and based upon paragraph (b)(1) of this section, NRA can include year 3 (NRA's preceding taxable year) as one of the preceding three years that it has filed or will file qualifying U.S. income tax returns (within the meaning of paragraph (b)(2)(iii) of this section). Therefore, provided PRS has, in accordance with paragraph (a)(2) of this section, no actual knowledge or reason to know the certificate is defective, PRS may reasonably rely on NRA's certificate. Accordingly, PRS may consider NRA's certificate to reduce the 1446 tax that would otherwise be required to be paid on NRA's behalf. Specifically, subject to paragraph (c)(1)(i)(C) of this section, the $1,000 of net losses that have been reported on Forms 1065 (Schedule K-1) issued to NRA that are available to reduce NRA's U.S. income tax on NRA's allocable share of effectively connected income or gain allocable from PRS may be used to reduce the $2,000 of ECTI estimated to be allocable to NRA. As a result, PRS must pay 1446 tax on only $1,100 of NRA's allocable share of partnership ECTI for the first installment period in year 5 ($2,000−($1,000 × .90)). PRS must pay 1446 tax of $96.25 for its first installment period with respect to the ECTI allocable to NRA ($1,100 (net ECTI after considering certified losses) × .35 (withholding tax rate) × .25 (section 6655(e)(2)(B) percentage for the first installment period)). See § 1.1446-3(b)(2). Pursuant to paragraph (d)(3) of this section, PRS must attach NRA's certificate and PRS's computation of its 1446 tax obligation with respect to NRA to its Form 8813, “Partnership Withholding Tax Payment Voucher (Section 1446),” filed for the first installment period. Under paragraph (c)(2)(ii)(B) of this section, NRA is required to provide an updated certificate on or before the 10th day after NRA files its U.S. income tax return for year 3, even if the updated certificate results in no change to the amount of deductions and losses reported on the superseded certificate.
(iv) The results are the same if NRA had not yet received a Form 1065 (Schedule K-1) from PRS for year 3. See paragraph (c)(1)(i)(A) of this section.
(i) On or before April 15, year 8, PRS receives from NRA a valid certificate under this section using Form 8804-C in which NRA certifies that it reasonably expects to have available effectively connected net operating losses in the amount of $5,000. Among other statements made in accordance with paragraph (c) of this section, NRA represents that it has not yet filed its year 7 U.S. income tax return, but will timely file such return (and timely pay all tax due with such return). For its first installment period in year 8, PRS estimates that it will earn taxable income of $10,000 for the year which will be allocated equally to NRA and B (NRA's allocable share of PRS's ECTI is $5,000).
(ii) Provided PRS has, in accordance with paragraph (a)(2) of this section, no actual knowledge or reason to know the certificate is defective, PRS may reasonably rely on NRA's certificate when computing its 1446 tax obligation for the first installment period. PRS is limited under paragraph (c)(1)(i)(C) of this section and PRS may only consider $4,500 ($5,000 × .90) of the certified net operating loss. After consideration of the certified loss, PRS owes 1446 tax in the amount of $43.75 for the first installment period ($5,000 estimated allocable ECTI less $4,500 (certified loss as limited under paragraph (c)(1)(i)(C)) × .35 (1446 tax applicable percentage) × .25 (section 6655(e)(2)(B) percentage for the first installment period)). See § 1.1446-3(b)(2). Pursuant to paragraph (d)(3) of this section, PRS must attach a copy of NRA's certificate and the computation of 1446 tax due with respect to NRA to the Form 8813 filed with respect to NRA.
(iii) PRS's estimate of ECTI allocable to NRA for the second installment period remains unchanged from the first installment period. On June 10, year 8, NRA provides PRS an updated certificate reporting that NRA now reasonably expects to have an effectively connected net operating loss of $4,000 available to offset its allocable share of ECTI from PRS in year 4. NRA provided the updated certificate within 10 days of filing its U.S. income tax return for the year 7 taxable year, as required by paragraph (c)(2)(ii)(B) of this section. Provided the updated certificate is otherwise valid, PRS may rely on the updated certificate for the second installment period (due date June 15, year 8). Even if the updated certificate were not valid, PRS could no longer rely on the original certificate.
(iv) Under paragraph (d) of this section, PRS is not relieved from liability for the 1446 tax due with respect to NRA under section 1461 if it relies on a certificate determined to be defective, or if it receives an updated certificate reporting an amount of deductions and losses less than the amount reported on the superseded certificate. Under the principles of section 6655 (as applied through § 1.1446-3), PRS is required to have paid 50-percent of the annualized 1446 tax due with respect to NRA on or before the due date of the second installment period (section 6655(e)(2)(B) percentage for the second installment period). Under paragraph (c)(2)(ii)(B) of this section, because NRA's updated certificate is valid for the second installment period, if PRS considers a certificate for that period it must consider the updated certificate. Under paragraph (c)(1)(i)(C) of this section, PRS can only consider $3,600 ($4,000 × .90) of NRA's updated effectively connected net operating loss. Assuming PRS considers NRA's updated certificate for the second installment period, PRS must have paid a total of $245 of 1446 tax with respect to the ECTI estimated to be allocable to NRA as of the second installment due date ($1,400 ($5,000 ECTI less $3,600 net operating loss deduction) × .35 (withholding tax rate) × .50 (section 6655(e)(2)(B) percentage for the second installment period)). After considering PRS's payment of 1446 tax for the first installment period, PRS is required to pay $201.25 for the second installment period ($245 less previous payment of $43.75). See § 1.1446-3(b)(2). Further, if PRS considers NRA's updated certificate for the second installment period, when PRS files Form 8813 it must attach the updated certificate along with PRS's computation of 1446 tax due with respect to NRA.
(v) Under paragraph (d) of this section, PRS is not liable for the addition to the tax under section 6655 (as applied through § 1.1446-3) for the first installment period because PRS reasonably relied on NRA's certificate of losses for that period.
(vi) Assume that PRS's estimate of its ECTI allocable to NRA for the third and fourth installment periods is the same as for the first and second installment periods. Assume PRS may reasonably rely on NRA's updated certificate in calculating its payment of 1446 tax for the third and fourth installment periods. The third installment of 1446 tax would be $122.50 (($5,000 − $3,600) × .35 × .75 = $367.50 − $245 (total previous payments)). The fourth installment of 1446 tax would be $122.50 (($5,000 − $3,600) × .35 × 1.00 = $490 − $367.50 (total previous payments)). See § 1.1446-3(b)(2). PRS must attach to each Form 8813 a computation of the 1446 tax due with respect to NRA that takes into account the amount of effectively connected net operating loss reported on NRA's updated certificate.
(vii) Because NRA's certified net operating loss has not changed for the third and fourth installments, in lieu of attaching NRA's certificate, PRS may attach a statement containing NRA's name, TIN, and the certified net operating loss amount. However, PRS must attach NRA's certificate and a computation of the 1446 tax due with respect to NRA that takes into account NRA's certified net operating loss to the Form 8805 filed with respect to NRA. See paragraph (d)(3) of this section.
(i) PRS reasonably relies on (within the meaning of paragraph (a)(2) of this section) NRA's certificate when computing each installment payment during year 4 and the 1446 tax due on Form 8804 and appropriately considers the limitation in paragraph (c)(1)(i)(C) of this section. As a result, PRS paid $175 of 1446 tax on behalf of NRA for the taxable year ($5,000 of ECTI less $4,500 net operating loss deduction × .35 applicable percentage). As required under paragraph (d) of this section, PRS attached the certificate to the Form 8813 for the first installment period and the Form 8805 for year 4. Because NRA did not submit an updated certificate to PRS in year 4, PRS attached to the Forms 8813 for the second, third and fourth installment periods a statement containing NRA's name, TIN, and the certified net operating loss as well as the computation of 1446 tax due with respect to NRA reflecting the amount of net operating loss considered.
(ii) In year 5, NRA timely submits to PRS a certificate under this section to be considered for the first installment period. The certificate represents that NRA reasonably expects to have an effectively connected net operating loss of $5,000 available to offset its allocable share of ECTI from PRS in year 5. For the first installment period, PRS estimates that NRA's allocable share of partnership ECTI is $5,000. PRS reasonably relies on the certificate for the first installment period and determines that it is required to make a 1446 tax installment payment of $43.75 ($5,000 allocable ECTI less $4,500 (certified net operating loss as limited under paragraph (c)(1)(i)(C) of this section) × .35 (1446 tax applicable percentage) × .25 (section 6655(e)(2)(B) percentage for the first installment period)). See § 1.1446-3(b)(2). PRS makes the installment payment with the Form 8813 filed for the first installment period, and complies with paragraph (d)(3) of this section by attaching NRA's certificate and the computation of 1446 tax due with respect to NRA to the Form 8813.
(iii) The IRS provides written notification to PRS on June 1, year 5, (pursuant to paragraph (c)(3) of this section) that the certificate received from NRA in year 4 is defective because NRA failed to file a qualifying U.S. income tax return (within the meaning of paragraph (b)(2)(iii) of this section) for one of the preceding taxable years as required under paragraph (b)(1) of this section. The notice further states that PRS is not to rely on any certificate received from NRA in year 5.
(iv) Under paragraph (d)(2)(ii) of this section, because the certificate submitted by NRA in year was determined to be defective for a reason other than the amount or character of the certified deductions and losses, under section 1461 PRS is fully liable for the 1446 tax due with respect to NRA's allocable share of ECTI year 4 without regard to the certificate. The total 1446 tax due for year 4 without regard to the certificate is $1,750 ($5,000 ECTI × .35) and PRS paid $175 of 1446 tax in year 4. Therefore, PRS owes $1,575 of 1446 tax. However, PRS may be deemed to have paid the outstanding 1446 tax due if NRA paid all of its U.S. tax due in year 4. See § 1.1446-3(e).
(v) However, because PRS did not have actual knowledge or reason to know that the certificate NRA submitted in year 4 was defective, PRS reasonably relied on the certificate for purposes of paragraph (d)(2) of this section. Therefore, PRS is not liable for an addition to the tax with respect to its underpayment of 1446 tax under the principles of section 6655 (as applied through § 1.1446-3) for any installment period in year 4.
(vi) However, PRS is generally liable for interest under section 6601 and for the failure to pay addition to tax under section 6651(a)(2) on the $1,575 of 1446 tax due for year 4 for the period from April 15, year 5 (last date prescribed for payment of 1446 tax) to the date PRS pays the 1446 tax or is deemed to have paid the 1446 tax under § 1.1446-3(e).
(vii) With respect to the year 5, PRS reasonably relied on NRA's certificate when computing its first installment payment (due on April 15, year 5). Therefore, in accordance with paragraph (d)(2)(i) of this section, PRS will not be liable for an addition to the tax under the principles of section 6655 (as applied through § 1.1446-3) for the first installment period. However, because the IRS provided written notification to PRS on June 1, year 5, to disregard any certificate received from NRA for year 5, PRS may not rely on any certificate received from NRA certificate (or any new certificate provided by NRA) when it computes its second installment payment in year 5. PRS is not permitted to consider any certificate submitted by NRA until the IRS provides written notification to PRS revoking or modifying the original notice. PRS's second installment payment in year 5 must include the additional amount of 1446 tax it would have paid for the first installment period without regard to the certificate received from NRA.
(i) Under paragraph (d)(2)(ii) of this section, PRS is not relieved from its liability for 1446 tax under section 1461 when it relies on a certificate of losses from a foreign partner that is later determined to be defective. However, when the IRS determines that a partner's certificate is defective because of the amount of the certified deductions and losses, the partnership is liable for the 1446 tax, interest, additions to tax, and penalties to the extent the amount of certified deductions and losses taken into account when computing 1446 tax (or, unless there was reasonable reliance on the certificate, any installment of such tax) is greater than the actual amount of available deductions and losses. Here, PRS considered the certified deductions and losses in the amount of $4,500. The IRS subsequently determined that NRA only had $1,000 of actual losses, only $900 of which were permitted to be considered under paragraph (c)(1)(i)(C) of this section. Accordingly, PRS is liable for the 1446 tax due with respect to the portion of the overstated losses that it considered when computing its 1446 tax. The remaining 1446 tax due for year 4 is $1,260 ($3,600 ($4,500 less $900) of excess losses considered × .35). However, PRS may be deemed to have paid the $1,260 of 1446 tax under § 1.1446-3(e) if NRA has paid all of NRA's U.S. income tax.
(ii) If PRS had considered only $900 (or a lesser amount) of NRA's certified net operating loss when computing and paying its 1446 tax during year 4 then, under paragraph (d)(2)(iii) of this section, PRS would not be liable for 1446 tax because it did not consider a net operating loss greater than the amount actually available to NRA.
(i) Assume that FC submits a valid certificate under this section certifying losses to the partnership for the partnership's year 5 taxable year. Further, assume that FC's only source of effectively connected income, gain, deduction, or loss is the activity of PRS.
(ii) For PRS's first installment period in year 5, FC may only certify deductions and losses under this section in the amount of $100 (the losses as reported on the Forms 1065 (Schedule K-1) issued for PRS's year 1 through 3 taxable years). Under section 706, the taxable income of a partner shall include the income, gain, loss, deduction, or credit of the partnership for the partnership taxable year ending within or with the taxable year of the partner. PRS's year 4 calendar taxable year ends during FC's fiscal taxable year ending June 30, year 5. Therefore, under paragraph (c)(1) of this section, as of April 15, year 5 (the last date FC may submit its first certificate under paragraph (c) of this section to have it considered for PRS's first installment due date of April 15, year 5), FC's allocable share of the PRS losses for years 1 through 3 are the only losses that FC can represent have been or will be reported on an FC U.S. income tax return filed for a taxable year ending prior to such installment due date.
(iii) The result in paragraph (ii) of this Example 7 is the same for the year 5 second installment period, the due date of which is June 15, year 5.
(iv) FC may submit an updated certificate under this section after June 30, year 5, which includes the $150 loss for year 4. PRS may consider such an updated certificate for its third installment period (due date September 15, year 5), provided the updated certificate is received by the due date for such installment in accordance with paragraph (c) of this section.
(i) In the current taxable year FC submits a certificate under this section using Form 8804-C prior to PRS's first installment due date. FC represents that it has filed or will file a qualifying U.S. income tax return (within the meaning of paragraph (b)(2)(iii) of this section) in each of the preceding three taxable years. FC specifies that it has not filed its U.S. income tax return for the immediately preceding taxable year. FC also represents that it will timely file its U.S. income tax return for the partnership taxable year during which the certificate is considered (and will timely pay all tax due with such return). Assume all other requirements under paragraph (c) of this section are met for FC's certificate to be valid.
(ii) Provided that PRS does not possess actual knowledge or reason to know that FC's certificate is defective under paragraph (a)(2) of this section, PRS may reasonably rely on FC's certificate for its first, second, and third installment payments.
(iii) If FC does not submit to PRS either an updated certificate or a status update as required by paragraph (c)(2)(ii)(B)( 1 ) of this section by December 15th (PRS's final installment due date), PRS must disregard FC's certificate when computing its fourth installment payment of 1446 tax and when completing its Form 8804 for the taxable year. PRS's payment of 1446 tax for its fourth installment period must include the additional amount of 1446 tax it would have paid in the first, second and third installment periods had it not considered FC's certificate. Further, even if the status update is provided by December 15th, PRS may only rely on the certificate if the status update does not contradict the original certificate and such update indicates that the immediately preceding year's return will be timely filed. Finally, even if the status update is provided by December 15th, FC must also submit an updated certificate to the partnership in accordance with paragraph (c) of this section within 10 days of the date FC timely files its U.S. income tax return for the preceding taxable year.
(i) In year 4, NRA's only activity giving rise to effectively connected income, gain, deduction, or loss is its interest in PRS. NRA submits to PRS a valid certificate (using Form 8804-C) certifying under paragraph (c)(1)(i) its effectively connected net operating losses from years 1 through 3 and under (c)(1)(ii) of this section that its only activity giving rise to effectively connected income, gain, deduction, or loss for the PRS taxable year that ends with or within its taxable year is (and will be) its investment in PRS.
(ii) During year 4, PRS allocates ECTI to NRA. If the 1446 tax otherwise due on the annualized amount allocated to NRA is less than $1,000, determined without regard to any deductions and losses certified by NRA under paragraph (c)(1)(i) of this section, PRS may consider the certificate received from NRA under paragraph (c)(1)(ii) of this section and not pay 1446 tax (or any installment of such tax) with respect to NRA. Alternatively, PRS may consider the deductions and losses certified by NRA under paragraph (c)(1)(i) of this section.
(iii) Regardless of whether PRS considers NRA's certification under paragraph (c)(1)(i) or (c)(1)(ii) of this section in computing its 1446 tax due with respect to NRA, PRS must file Form 8813 for all installment periods as well as a Form 8805 for NRA with its Form 8804. If PRS considers NRA's certification under paragraph (c)(1)(i) or (c)(1)(ii) of this section, PRS must attach to each Form 8813, as well as to the Form 8805, a computation of the 1446 tax with respect to NRA that takes into account its consideration of NRA's certificate. In addition, PRS must attach NRA's certificate to the Form 8813 for the first installment period it considers the certificate, as well as to the Form 8805. For all subsequent installment periods, PRS may attach a statement containing NRA's name, and TIN. If PRS is relying on NRA's certified losses under paragraph (c)(1)(i) of this section, the statement must indicate the amount of losses and deductions NRA certified. If PRS is relying on NRA's certification under paragraph (c)(ii) of this section, the statement must indicate that it is relying on NRA meeting the requirements under paragraph (c)(1)(ii) of this section and the 1446 tax on the annualized amount allocated to NRA is less than $1,000. See paragraph (d)(3)(i) of this section.
(i) On February 10, 2008, NRA submitted a certificate to PRS, reporting its aggregate $4,000 effectively connected loss to PRS, that met the requirements of § 1.1446-6T(c) (See 26 CFR Part 1, revised as of April 1, 2007), as in effect before January 1, 2008. The certificate stated that NRA had timely filed its U.S. income tax returns for the 2004, 2005 and 2006 tax years, and that it would timely file a U.S. income tax return for its 2007 tax year. For the first and second installments period in 2008, PRS estimates that it will earn ECTI of $10,000.
(ii) Because the certificate submitted by NRA to PRS on February 10, 2008, met the requirements of § 1.1446-6T (See 26 CFR Part 1, revised as of April 1, 2007), as in effect before January 1, 2008, PRS may consider such certificate when computing its 1446 tax due for the first and second installment period even if the certificate does not meet all the requirements of paragraph (c) of this section.
(iii) NRA timely files its U.S. income tax return for the 2007 tax year on July 24, 2008. In accordance with paragraph (c)(2)(ii)(B)( 1 ) of this section, within 10 days of filing such return NRA prepares an updated certificate to be submitted to PRS certifying that it reasonably expects to have only $3,500 of losses available to reduce its allocable share of ECTI from PRS. Because the updated certificate will be submitted after July 28, 2008, to be valid the updated certificate must meet the requirements of paragraph (c) this section.
(f) Effective/Applicability date. Except as otherwise provided in this paragraph (f), the rules of this section are applicable for partnership taxable years beginning after December 31, 2007. The rules of paragraphs (b)(3)(i)(B) through (D) shall apply to partnership taxable years beginning after July 28, 2008.
(g) Transition rule. A certificate that met the requirements of § 1.1446-6T(c) (See 26 CFR Part 1, revised as of April 1, 2007), as in effect before January 1, 2008, submitted on or before July 28, 2008 by a partner that met the requirements of § 1.1446-6T(b) (See 26 CFR Part 1, revised as of April 1, 2007), as in effect before January 1, 2008, shall not be considered defective because it does not meet the requirements of this section. However, any certificate (including any updated certificates and status updates) submitted, or required to be submitted, under paragraph (c) of this section after July 28, 2008, must meet the requirements of this section. See paragraph (e)(2) Example 10 of this section.
§ 1.1446-7   Applicability dates.
Sections 1.1446-1 through 1.1446-5 shall apply to partnership taxable years beginning after May 18, 2005. However, a partnership may elect to apply all of the provisions of §§ 1.1446-1 through 1.1446-5 to partnership taxable years beginning after December 31, 2004. A partnership shall make the election under this section by complying with the provisions of §§ 1.1446-1 through § 1.1446-5 and attaching a statement to the Form 8804 or Form 1042 annual return, filed for the taxable year in which the regulation provisions first apply, that indicates that the partnership is making the election under this section. The revisions to §§ 1.1446-3(b)(2), 1.1446-3(b)(3)(i)(A) and 1.1446-5(c)(2) contained in the final regulations published in 2008 apply to partnership taxable years beginning after December 31, 2007. See § 1.1446-6(f) and (g) for the Effective/Applicability date and Transition rule for § 1.1446-6. Section 1.1446-3 generally applies to returns filed on or after January 30, 2020 and § 1.1446-3T (as contained in 26 CFR part 1, revised as of April 1, 2019) generally applies to returns filed before January 30, 2020. The addition of § 1.1446-3(c)(4) applies to transfers of partnership interests that occur on or after January 29, 2021, except that a taxpayer may choose to apply § 1.1446-3(c)(4) to transfers of partnership interests that occur on or after January 1, 2018. Sections 1.1446-3(a)(2)(i), (d)(2)(vi), and (e)(4) and 1.1446-4(f)(1) apply to partnership taxable years beginning on or after November 30, 2020. For partnership taxable years beginning before November 30, 2020, see those sections as in effect and contained in 26 CFR part 1, revised as of April 1, 2020. Section 1.1446-4(b)(3) and (4), (c), (d), (e), and (f)(3) apply to distributions made on or after January 1, 2022. For distributions made before January 1, 2022, see §§ 1.1446-4(b)(3) and (4), (c), (d), (e), and (f)(3), as contained in 26 CFR part 1, revised as of April 1, 2020. Sections 1.1446-1(c)(2)(ii)(G) and (H) and 1.1446-2(b)(4)(iii) apply with respect to dispositions of U.S. real property interests and distributions described in section 897(h) occurring on or after December 29, 2022. For dispositions of U.S. real property interests and distributions described in section 897(h) occurring before December 29, 2022, see §§ 1.1446-1(c)(2)(ii)(G) and (H), as contained in 26 CFR part 1, revised as of April 1, 2021.
§ 1.1446(f)-1   General rules.
(a) Overview. This section and §§ 1.1446(f)-2 through 1.1446(f)-5 provide rules for withholding, reporting, and paying tax under section 1446(f) upon the sale, exchange, or other disposition of certain interests in partnerships. This section provides definitions and general rules that apply for purposes of section 1446(f). Section 1.1446(f)-2 provides withholding rules for the transfer of a non-publicly traded partnership interest under section 1446(f)(1). Section 1.1446(f)-3 provides rules that apply when a partnership is required to withhold under section 1446(f)(4) on distributions made to the transferee in an amount equal to the amount that the transferee failed to withhold plus interest. Section 1.1446(f)-4 provides special rules for the sale, exchange, or disposition of publicly traded partnership interests, for which the withholding obligation under section 1446(f)(1) is generally imposed on certain brokers that act on behalf of the transferor. Section 1.1446(f)-5 provides rules that address the liability for failure to withhold under section 1446(f) and rules regarding the liability of a transferor's or transferee's agent.
(b) Definitions. This paragraph (b) provides definitions that apply for purposes of this section and §§ 1.1446(f)-2 through 1.1446(f)-5.
(1) The term broker means any person, foreign or domestic, that, in the ordinary course of a trade or business during the calendar year, stands ready to effect sales made by others, and that, in connection with a transfer of a PTP interest, receives all or a portion of the amount realized on behalf of the transferor. The term broker includes a clearing organization (as defined in § 1.1471-1(b)(21)). In the case of a U.S. clearing organization clearing or settling sales of PTP interests, however, see § 1.1446(f)-4(a)(3) for an exception from the requirement to withhold on a sale of a PTP interest. The term broker does not include an escrow agent that does not effect sales other than transactions that are incidental to the purpose of escrow (such as sales to collect on collateral).
(2) The term controlling partner means a partner that, together with any person that bears a relationship described in section 267(b) or 707(b)(1) to the partner, owns directly or indirectly a 50 percent or greater interest in the capital, profits, deductions, or losses of the partnership at any time within the 12 months before the determination date (see paragraph (c)(4) of this section).
(3) The term effect has the meaning provided in § 1.6045-1(a)(10).
(4) The term foreign person means a person that is not a United States person, including a QI branch of a U.S. financial institution (as defined in § 1.1471-1(b)(109)).
(5) The term PTP interest means an interest in a publicly traded partnership if the interest is publicly traded on an established securities market or is readily tradable on a secondary market (or the substantial equivalent thereof).
(6) The term publicly traded partnership has the same meaning as in section 7704 and §§ 1.7704-1 through 1.7704-4 but does not include a publicly traded partnership treated as a corporation under that section.
(7) The term TIN means the tax identifying number assigned to a person under section 6109.
(8) The term transfer means a sale, exchange, or other disposition, and includes a distribution from a partnership to a partner, as well as a transfer treated as a sale or exchange under section 707(a)(2)(B).
(9) The term transferee means any person, foreign or domestic, that acquires a partnership interest through a transfer, and includes a partnership that makes a distribution.
(10) Except as otherwise provided in this paragraph, the term transferor means any person, foreign or domestic, that transfers a partnership interest. In the case of a trust, to the extent all or a portion of the income of the trust is treated as owned by the grantor or another person under sections 671 through 679 (such trust, a grantor trust), the term transferor means the grantor or such other person.
(11) The term transferor's agent or transferee's agent means any person who represents the transferor or transferee (respectively) in any negotiation with another person relating to the transaction or in settling the transaction. A person will not be treated as a transferor's agent or a transferee's agent solely because it performs one or more of the activities described in § 1.1445-4(f)(3) (relating to activities of settlement officers and clerical personnel).
(12) The term United States person or U.S. person means a person described in section 7701(a)(30).
(c) General rules of applicability —(1) In general. This paragraph (c) provides general rules that apply for purposes of this section and §§ 1.1446(f)-2 through 1.1446(f)-5.
(2) Certifications —(i) In general. This paragraph (c)(2) provides rules that are applicable to certifications described in this section and §§ 1.1446(f)-2 through 1.1446(f)-5, except as otherwise provided therein, or as may be prescribed by the Commissioner in forms or instructions or in publications or guidance published in the Internal Revenue Bulletin (see §§ 601.601(d)(2) and 601.602 of this chapter). A certification must provide the name and address of the person providing it. A certification must also be signed under penalties of perjury and, if the certification is provided by the transferor, must include a TIN if the transferor has, or is required to have, a TIN. A transferee (or other person required to withhold) may not rely on a certification if it knows that a transferor has, or is required to have, a TIN, and that TIN has not been provided with the certification. A certification includes any documents associated with the certification, such as statements from the partnership, IRS forms, withholding certificates, withholding statements, certifications, or other documentation. Documents associated with the certification form an integral part of the certification, and the penalties of perjury statement provided on the certification also applies to the associated documents. A certification (other than the certification described in § 1.1446(f)-2(d)(2)) may not be relied upon if it is obtained earlier than 30 days before the transfer or any time after the transfer.
(ii) Penalties of perjury. A certification signed under penalties of perjury must provide the following: “Under penalties of perjury, I declare that I have examined the information on this document, and to the best of my knowledge and belief, it is true, correct, and complete.”
(iii) Authority to sign certifications on behalf of a business entity. A certification provided by a business entity must be signed by an individual who is an officer, director, general partner, or managing member of the entity, or other individual that has authority to sign for the entity under local law.
(iv) Electronic submission. A certification may be sent electronically, including as text in an email, an image embedded in an email, or a Portable Document Format (.pdf) attached to an email. An electronic certification, however, may not be relied upon if the person receiving the submission knows that the certification was transmitted by a person not authorized to do so by the person required to execute the certification.
(v) Retention period. Any person that relies on a certification pursuant to this section and §§ 1.1446(f)-2 through 1.1446(f)-5 must retain the certification (including any documentation) for as long as it may be relevant to the determination of its withholding obligation under section 1446(f) or its withholding tax liability under section 1461.
(vi) Submission to IRS. The recipient of a certification is not required to mail a copy to the IRS, except as provided in § 1.1446(f)-2(b)(7) and (c)(4)(vi) (involving certifications relating to an income tax treaty), or as may be prescribed by the Commissioner in forms or instructions or in publications or guidance published in the Internal Revenue Bulletin (see §§ 601.601(d)(2) and 601.602 of this chapter).
(vii) Grantor trusts. A certification provided by a transferor that is a grantor or other owner of a grantor trust must identify the portion of the amount realized that is attributable to the grantor or other owner. A certification provided by a foreign grantor trust on behalf of a transferor that is a grantor or owner must also include a Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting ), (or similar statement for a domestic grantor trust with a foreign grantor or owner), that includes a withholding statement that provides the percentage of the amount realized allocable to each grantor or owner of the trust, and any applicable certification for each grantor or owner. In the case of a certification so provided, a grantor or owner of the trust is treated as having provided the certification to the transferee (or broker).
(3) Books and records. A partnership that relies on its books and records pursuant to this section and §§ 1.1446(f)-2 through 1.1446(f)-5 (including for purposes of providing a certification or other statement) must identify in its books and records the date on which the transfer occurred, the information on which the partnership relied, and the provisions of this section and §§ 1.1446(f)-2 through 1.1446(f)-5 supporting an exception from, or adjustment to, the partnership's obligation to withhold. The identification required by this paragraph (c)(3) must be made no later than 30 days after the date of the transfer. The partnership must retain the identified information in its books and records for the longer of five calendar years following the close of the last calendar year in which it relied on the information or for as long as it may be relevant to the determination of its withholding obligation under section 1446(f) or its withholding tax liability under section 1461.
(4) Determination date —(i) In general. This paragraph (c)(4) provides rules for the determination date. The same determination date must be used for all purposes with respect to a transfer. Any statement, certification, or books and records with regard to a transfer must state the determination date. The determination date of a transfer must be one of the following—
(A) The date of the transfer;
(B) Any date that is no more than 60 days before the date of the transfer; or
(C) The date that is the later of—
( 1 ) The first day of the partnership's taxable year in which the transfer occurs, as determined under section 706; or
( 2 ) The date, before the date of the transfer, of the most recent event described in § 1.704-1(b)(2)(iv)( f )( 5 ) or (b)(2)(iv)( s )( 1 ) (revaluation event), irrespective of whether the capital accounts of the partners are adjusted in accordance with § 1.704-1(b)(2)(iv)( f ).
(ii) Controlling partner. The determination date for a transferor that is a controlling partner is determined without regard to paragraph (c)(4)(i)(C) of this section.
(5) IRS forms and instructions. Any reference to an IRS form includes its successor form. Any form must be filed in the manner prescribed by the Commissioner in forms or instructions or in publications or guidance published in the Internal Revenue Bulletin (see §§ 601.601(d)(2) and 601.602 of this chapter).
(d) Coordination with section 1445. A transferee that is otherwise required to withhold under section 1445(e)(5) or § 1.1445-11T(d)(1) with respect to the amount realized, as well as under section 1446(f)(1), will be subject to the payment and reporting requirements of section 1445 only, and not section 1446(f)(1), with respect to that amount. However, if the transferor has applied for a withholding certificate under the last sentence of § 1.1445-11T(d)(1), the transferee must withhold the greater of the amounts required under section 1445(e)(5) or 1446(f)(1). A transferee that has complied with the withholding requirements under either section 1445(e)(5) or 1446(f)(1), as applicable under this paragraph (d), will be deemed to satisfy the withholding requirement.
(e) Applicability date. This section applies to transfers that occur on or after January 29, 2021.
§ 1.1446(f)-2   Withholding on the transfer of a non-publicly traded partnership interest.
(a) Transferee's obligation to withhold. Except as otherwise provided in this section, a transferee is required to withhold under section 1446(f)(1) a tax equal to 10 percent of the amount realized on any transfer of a partnership interest. This section does not apply to a transfer of a PTP interest that is effected through one or more brokers, including a distribution made with respect to a PTP interest held in an account with a broker. For rules regarding those transfers, see § 1.1446(f)-4.
(b) Exceptions to withholding —(1) In general. A transferee is not required to withhold under this section if it properly relies on a certification or its books and records as described in this paragraph (b). A transferee may not rely on a certification if it has actual knowledge that the certification is incorrect or unreliable. A partnership that is a transferee because it makes a distribution may not rely on its books and records if it knows, or has reason to know, that the information is incorrect or unreliable.
(2) Certification of non-foreign status by transferor. A transferee may rely on a certification of non-foreign status from the transferor that states that the transferor is not a foreign person, states the transferor's name, TIN, and address, and is signed under penalties of perjury. For purposes of this paragraph (b)(2), a certification of non-foreign status includes a valid Form W-9, Request for Taxpayer Identification Number and Certification. For purposes of this paragraph (b)(2), a transferee may rely on a valid Form W-9 from the transferor that it already possesses if the form meets the requirements of this paragraph (b)(2).
(3) No realized gain by transferor —(i) In general. A transferee (other than a partnership that is a transferee because it makes a distribution) may rely on a certification from the transferor that states that the transfer of the partnership interest would not result in any realized gain (including ordinary income arising from the application of section 751 and § 1.751-1) to the transferor as of the determination date (see § 1.1446(f)-1(c)(4)). See paragraph (b)(6) of this section for rules that apply when the transferor realizes gain but is not required to recognize the gain under a provision of the Internal Revenue Code.
(ii) No section 751 income. For purposes of paragraph (b)(3)(i) of this section, a transferor may rely on a certification from the partnership stating that the transfer of the partnership interest would not result in any ordinary income arising from the application of section 751 and § 1.751-1 to the transferor as of the determination date. The certification from the partnership must be attached to, and forms part of, the certification of no realized gain that the transferor provides to the transferee.
(iii) Partnership distributions. A partnership that is a transferee because it makes a distribution may rely on its books and records, or on a certification from the transferor, to determine that the distribution would not result in any realized gain to the transferor as of the determination date.
(4) Less than 10 percent effectively connected gain —(i) In general. A transferee (other than a partnership that is a transferee because it makes a distribution) may rely on a certification from the partnership that states that—
(A) If the partnership sold all of its assets at fair market value as of the determination date in the manner described in § 1.864(c)(8)-1(c), either—
( 1 ) The partnership would have no gain that would have been effectively connected with the conduct of a trade or business within the United States, or, if the partnership would have a net amount of such gain, the amount of the partnership's net gain that would have been effectively connected with the conduct of a trade or business within the United States would be less than 10 percent of the total net gain; or
( 2 ) The transferor would not have a distributive share of net gain from the partnership that would have been effectively connected with the conduct of a trade or business in the United States, or, if the transferor would have a distributive share of such gain from the partnership, the transferor's distributive share of net gain from the partnership that would have been effectively connected with the conduct of a trade or business within the United States would be less than 10 percent of the transferor's distributive share of the total net gain from the partnership; or
(B) The partnership was not engaged in a trade or business within the United States at any time during the taxable year of the partnership through the date of transfer.
(ii) Partnership distributions. A partnership that is a transferee because it makes a distribution may rely on its books and records to determine that paragraph (b)(4)(i)(A) of this section is satisfied as of the determination date or paragraph (b)(4)(i)(B) of this section is satisfied for the taxable year of the partnership through the date of transfer.
(5) Less than 10 percent effectively connected income —(i) In general. A transferee (other than a partnership that is a transferee because it makes a distribution) may rely on a certification from the transferor that states that—
(A) The transferor was a partner in the partnership throughout the look-back period described in paragraph (b)(5)(ii) of this section;
(B) The transferor's distributive share of gross effectively connected income from the partnership, as reported on a Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., or other statement required to be furnished under § 1.6031(b)-1T, including any gross effectively connected income included in the distributive share of a partner that bears a relationship to the transferor described in section 267(b) or 707(b)(1), was less than $1 million for each of the taxable years within the look-back period described in paragraph (b)(5)(ii) of this section;
(C) The transferor's distributive share of gross effectively connected income from the partnership, as reported on a Schedule K-1 (Form 1065), or other statement required to be furnished under § 1.6031(b)-1T, for each of the taxable years within the look-back period described in paragraph (b)(5)(ii) of this section, was less than 10 percent of the transferor's total distributive share of gross income from the partnership for that year as determined under subchapter K of the Internal Revenue Code (as provided on a Schedule K-1 (Form 1065) or other statement required to be furnished under § 1.6031(b)-1T); and
(D) The transferor's distributive share of income or gain from the partnership that is effectively connected with the conduct of a trade or business within the United States or deductions or losses properly allocated and apportioned to that income in each of the taxable years within the look-back period described in paragraph (b)(5)(ii) of this section has been reported on a Federal income tax return (either filed by the transferor or, in the case of transferor that is a partnership, filed by its direct or indirect nonresident alien individual or foreign corporate partners) on or before the due date (including extensions), and all amounts due with respect to the reported amounts have been timely paid to the IRS, provided that the return was required to be filed when the transferor furnishes the certification (taking into account any extensions of time to file).
(ii) Look-back period —(A) In general. The transferor's look-back period is the transferor's immediately prior taxable year and the two preceding taxable years.
(B) Immediately prior taxable year. The transferor's immediately prior taxable year is the transferor's most recent taxable year—
( 1 ) With or within which a taxable year of the partnership ended; and
( 2 ) For which a Schedule K-1 (Form 1065) was due (including extensions) or furnished (if earlier) before the transfer.
(C) Limitation. A transferee may not rely on a certification that is provided before the transferor's receipt of the Schedule K-1 (Form 1065) described in paragraph (b)(5)(ii)(B) of this section.
(iii) No distributive share of gross income. A transferor that did not have a distributive share of gross income in any year described in paragraph (b)(5)(ii)(A) of this section cannot provide the certification described in this paragraph (b)(5).
(iv) Partnership distributions. A partnership that is a transferee by reason of making a distribution may rely on its books and records to determine that the requirements in paragraphs (b)(5)(i)(A) through (C) of this section have been satisfied (subject to the rules in paragraphs (b)(5)(ii) and (iii) of this section). The partnership must also obtain a representation from the transferor stating that the requirement in paragraph (b)(5)(i)(D) of this section has been satisfied.
(6) Certification of nonrecognition by transferor —(i) In general. A transferee may rely on a certification from the transferor that states that by reason of the operation of a nonrecognition provision of the Internal Revenue Code the transferor is not required to recognize any gain or loss with respect to the transfer. The certification must briefly describe the transfer and provide the relevant law and facts relating to the certification.
(ii) Partial nonrecognition. Paragraph (b)(6)(i) of this section does not apply if only a portion of the gain realized on the transfer is subject to a nonrecognition provision. However, see paragraph (c)(4)(v) of this section for rules applicable to a transferor's claim for partial nonrecognition.
(7) Income tax treaties —(i) In general. A transferee may rely on a certification from the transferor that states that the transferor is not subject to tax on any gain from the transfer pursuant to an income tax treaty in effect between the United States and a foreign country if the requirements of this paragraph (b)(7) are met. The transferor makes the certification on a withholding certificate (on a Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), or Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities) ) that meets the requirements for validity under § 1.1446-1(c)(2)(iv) (or an applicable substitute form that meets the requirements under § 1.1446-1(c)(5)) and that contains the information necessary to support the claim for treaty benefits. A transferee may rely on a certification of treaty benefits only if, within 30 days after the date of the transfer, the transferee mails a copy of the certification to the Internal Revenue Service, at the address provided in § 1.1445-1(g)(10), together with a cover letter providing the name, TIN, and address of the transferee and the partnership in which an interest was transferred.
(ii) Treaty claim for less than all of the gain. Paragraph (b)(7)(i) of this section does not apply if treaty benefits apply to only a portion of the gain from the transfer. However, see paragraph (c)(4)(vi) of this section for rules applicable to situations in which treaty benefits apply to only a portion of the gain.
(iii) Exclusive means to claim an exception from withholding based on treaty benefits. A transferor claiming treaty benefits with respect to all of the gain from the transfer must use the exception in this paragraph (b)(7) and not any other exception or determination procedure in paragraphs (b) and (c) of this section to claim an exception to withholding by reason of a claim of treaty benefits.
(c) Determining the amount to withhold —(1) In general. A transferee that is required to withhold under this section must withhold 10 percent of the amount realized on the transfer of the partnership interest, except as otherwise provided in this paragraph (c). Any procedures in this paragraph (c) apply solely for purposes of determining the amount to withhold under section 1446(f)(1) and this section. A transferee may not rely on a certification if it has actual knowledge that the certification is incorrect or unreliable. A partnership that is a transferee because it makes a distribution may not rely on its books and records if it knows, or has reason to know, that the information is incorrect or unreliable.
(2) Amount realized —(i) In general. The amount realized on the transfer of the partnership interest is determined under section 1001 (including §§ 1.1001-1 through 1.1001-5) and section 752 (including §§ 1.752-1 through 1.752-7). Thus, the amount realized includes the amount of cash paid (or to be paid), the fair market value of other property transferred (or to be transferred), the amount of any liabilities assumed by the transferee or to which the partnership interest is subject, and the reduction in the transferor's share of partnership liabilities. In the case of a distribution, the amount realized is the sum of the amount of cash distributed (or to be distributed), the fair market value of property distributed (or to be distributed), and the reduction in the transferor's share of partnership liabilities.
(ii) Alternative procedures for transferee to determine share of partnership liabilities —(A) In general. A transferee (other than a partnership that is a transferee because it makes a distribution), as an alternative to determining the share of partnership liabilities under paragraph (c)(2)(i) of this section, may use the procedures of this paragraph (c)(2)(ii) to determine the extent to which a reduction in partnership liabilities is included in the amount realized.
(B) Certification of liabilities by transferor. Except as otherwise provided in this section, a transferee may rely on a certification from a transferor, other than a controlling partner, that provides the amount of the transferor's share of partnership liabilities reported on the most recent Schedule K-1 (Form 1065) issued by the partnership. If the transferor's actual share of liabilities at the time of the transfer differs from the amount reported on that Schedule K-1 (Form 1065), the certification will not be treated as incorrect or unreliable if the transferor also certifies that it does not have actual knowledge of any events occurring after receiving the Schedule K-1 (Form 1065) and before the date of the transfer that would cause the amount of the transferor's share of partnership liabilities at the time of the transfer to differ by more than 25 percent from the amount shown on the Schedule K-1 (Form 1065). A transferee may not rely on a certification if the last day of the partnership taxable year for which the Schedule K-1 (Form 1065) was provided was more than 22 months before the date of the transfer.
(C) Certification of liabilities by partnership. A transferee may rely on a certification from a partnership that provides the amount of the transferor's share of partnership liabilities on the determination date. If the transferor's actual share of liabilities at the time of the transfer differs from the amount on the certification, the certification will not be treated as incorrect or unreliable if the partnership also certifies that it does not have actual knowledge of any events occurring after the determination date and before the date on which the partnership provides the certification to the transferee that would cause the amount of the transferor's share of partnership liabilities at the time of the transfer to differ by more than 25 percent from the amount shown on the certification by the partnership for the determination date.
(iii) Partnership's determination of partnership liabilities for distributions. A partnership that is a transferee because it makes a distribution may rely on its books and records to determine the extent to which the transferor's share of partnership liabilities on the determination date are included in the amount realized. The information in the books and records will not be treated as incorrect or unreliable unless the partnership has actual knowledge, on or before the date of the distribution, of any events occurring after the determination date that would cause the amount of the transferor's share of partnership liabilities at the time of the transfer to differ by more than 25 percent from the amount determined by the partnership as of the determination date.
(iv) Certification by a foreign partnership of modified amount realized —(A) In general. When a transferor is a foreign partnership, a transferee may use the procedures of this paragraph (c)(2)(iv) to determine the amount realized. For purposes of this paragraph (c)(2)(iv)(A), the transferee may treat the modified amount realized as the amount realized to the extent that it may rely on a certification from the transferor providing the modified amount realized.
(B) Determining modified amount realized. The modified amount realized is determined by multiplying the amount realized (as determined under this paragraph (c)(2), without regard to this paragraph (c)(2)(iv)) by the aggregate percentage computed as of the determination date. The aggregate percentage is the percentage of the gain (if any) arising from the transfer that would be allocated to presumed foreign taxable persons. For purposes of this paragraph (c)(2)(iv)(B), a presumed foreign taxable person is any direct or indirect partner of the transferor that has not provided either a certification of non-foreign status that meets the requirements of paragraph (b)(2) of this section or a certification of treaty benefits that states that the partner is not subject to tax on any gain from the transfer pursuant to an income tax treaty in effect between the United States and a foreign country. A valid certification of treaty benefits must meet the requirements of paragraph (b)(7) of this section (as applied to the partner claiming treaty benefits), including the requirement that the transferee mail a copy of the certification to the IRS within the time prescribed. For purposes of this paragraph (c)(2)(iv), an indirect partner is a person that owns an interest in the transferor indirectly through one or more foreign partnerships.
(C) Certification. The certification is made by providing a withholding certificate (on Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting ) that includes a withholding statement that provides the percentage of gain allocable to each direct or indirect partner and that provides whether each such person is a United States person, a foreign partner eligible for treaty benefits, or a presumed foreign taxable person. The certification must also include the certification of non-foreign status or the certification of treaty benefits from each direct or indirect partner that is not a presumed foreign taxable person.
(3) Lack of money or property or lack of knowledge regarding liabilities. The amount to withhold equals the amount realized determined without regard to any decrease in the transferor's share of partnership liabilities if—
(i) The amount otherwise required to be withheld under this paragraph (c) would exceed the amount realized determined without regard to the decrease in the transferor's share of partnership liabilities; or
(ii) The transferee is unable to determine the amount realized because it does not have actual knowledge of the transferor's share of partnership liabilities (and has not received or cannot rely on a certification described in paragraph (c)(2)(ii)(B) or (C) of this section).
(4) Certification of maximum tax liability —(i) In general. A transferee may use the procedures of this paragraph (c)(4) for determining the amount to withhold for purposes of section 1446(f)(1) and paragraph (a) of this section. A transferee (other than a partnership that is a transferee because it makes a distribution) may rely on a certification from a transferor that is a foreign corporation, a nonresident alien individual, a foreign partnership, or a foreign trust regarding the transferor's maximum tax liability as described in paragraph (c)(4)(ii) of this section. A partnership that is a transferee because it makes a distribution may instead rely on its books and records to determine the transferor's maximum tax liability if the books and records includes the information required by paragraphs (c)(4)(iii) and (iv) of this section. A transferor that is a foreign partnership or a foreign trust is treated as a nonresident alien individual for purposes of determining the transferor's maximum tax liability.
(ii) Maximum tax liability. For purposes of this paragraph (c)(4), the term maximum tax liability means the amount of the transferor's effectively connected gain (as determined under paragraph (c)(4)(iii)(E) of this section) multiplied by the applicable percentage, as defined in § 1.1446-3(a)(2).
(iii) Required information. The certification must include—
(A) A statement that the transferor is either a nonresident alien individual, a foreign corporation, a foreign partnership, or a foreign trust;
(B) The transferor's adjusted basis in the transferred interest on the determination date;
(C) The transferor's amount realized (determined in accordance with paragraph (c)(2) of this section) on the determination date;
(D) Whether the transferor remains a partner immediately after the transfer;
(E) The amount of outside ordinary gain and outside capital gain that would be recognized and treated as effectively connected gain under § 1.864(c)(8)-1(b) on the determination date (effectively connected gain);
(F) The transferor's maximum tax liability on the determination date;
(G) A representation from the transferor that the transferor determined the amounts described in paragraph (c)(4)(iii)(E) of this section based on the statement described in paragraph (c)(4)(iv) of this section, if applicable; and
(H) A representation from the transferor that it has provided the transferee with a copy of the statement described in paragraph (c)(4)(iv) of this section.
(iv) Partnership statement. A transferor may make the representation in paragraph (c)(4)(iii)(G) of this section only if the partnership provides to the transferor a statement (that meets the requirements for a certification under the general rules for applicability in § 1.1446(f)-1(c)) that includes—
(A) The partnership's name, address, and TIN; and
(B) The transferor's aggregate deemed sale EC ordinary gain, within the meaning of § 1.864(c)(8)-1(c)(3)(ii)(A) (if any) and the transferor's aggregate deemed sale EC capital gain, within the meaning of § 1.864(c)(8)-1(c)(3)(ii)(B) (if any), in each case, on the determination date.
(v) Partial nonrecognition. If a nonrecognition provision applies to only a portion of the gain realized on the transfer, a certification described in paragraph (c)(4)(i) may be relied upon only if the certification also includes the information required in paragraph (b)(6) of this section (substituting “a portion of the gain or loss” for “any gain or loss” in paragraph (b)(6)(i) of this section).
(vi) Income tax treaties. If only a portion of the gain on the transfer is not subject to tax pursuant to an income tax treaty in effect between the United States and a foreign country, a certification described in paragraph (c)(4)(i) of this section may be relied upon only if the requirements of paragraph (b)(7)(i) of this section have been met, including the requirement to obtain the applicable withholding certificate indicating that the gain from the transfer is not subject to tax pursuant to an income tax treaty (substituting “a portion of the gain” for “any gain” in paragraph (b)(7)(i) of this section), and the requirement to mail a copy of the withholding certificate to the IRS.
(d) Reporting and paying withheld amounts —(1) In general. A transferee required to withhold under this section must report and pay any tax withheld by the 20th day after the date of the transfer using Forms 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, in accordance with the instructions to those forms. The IRS will stamp Form 8288-A to show receipt and mail a stamped copy to the transferor (at the address reported on the form). See paragraph (e)(2) of this section for the procedures for the transferor to claim a credit for amounts withheld. Forms 8288 and 8288-A must include the TINs of both the transferor and the transferee. If any required TIN is not provided, the transferee must still report and pay any tax withheld on Form 8288.
(2) Certification of withholding to partnership for purposes of section 1446(f)(4). A transferee (other than a partnership that is a transferee because it makes a distribution) must certify to the partnership the extent to which it has satisfied its obligation to withhold under this section no later than 10 days after the transfer. The certification must either include a copy of Form 8288-A that the transferee files with respect to the transfer, or state the amount realized and the amount withheld on the transfer. The certification must also include any certifications that the transferee relied on to apply an exception to withholding under paragraph (b) of this section or to determine the amount to withhold under paragraph (c) of this section. A transferee that relied on a certification to apply an exception or adjustment to withholding remains liable under this section when the partnership knows, or has reason to know, that the certification is incorrect or unreliable. See § 1.1446(f)-3 for rules regarding a partnership's obligation to withhold on distributions to a transferee when this certification establishes only partial satisfaction of the required amount, is not provided, or cannot be relied upon.
(e) Effect of withholding on transferor —(1) In general. The withholding of tax by a transferee under this section does not relieve a foreign person from filing a U.S. tax return with respect to the transfer. See §§ 1.6012-1(b)(1), 1.6012-2(g)(1), and 1.6031(a)-1. Further, the withholding of tax by a transferee does not relieve a nonresident alien individual or foreign corporation subject to tax on gain by reason of section 864(c)(8) from paying any tax due with the return that has not been fully satisfied through withholding.
(2) Manner of obtaining credit —(i) Individuals or corporations. Except as provided in paragraph (e)(3) of this section, an individual or corporation may claim a credit under section 33 for the amount withheld under this section by attaching to its applicable return the stamped copy of Form 8288-A provided to it under paragraph (d)(1) of this section.
(ii) Partnerships, trusts, or estates. For a rule allowing a foreign partnership that is a transferor to claim a credit for the amount withheld under this section against its tax liability under section 1446(a), see § 1.1446-3(c)(4). For the rule providing the extent to which a foreign trust or estate may claim a credit for an amount withheld under this section, see § 1.1462-1. Except as provided in paragraph (e)(3) of this section, a foreign partnership, trust, or estate claiming a credit for an amount withheld must attach to its applicable return the stamped copy of Form 8288-A provided to it under paragraph (d)(1) of this section. A foreign trust or estate must also provide any other information required in forms or instructions to any beneficiary or owner that is liable for tax on any of the gain under section 864(c)(8).
(3) Failure to receive Form 8288-A. If a stamped copy of Form 8288-A has not been provided to the transferor by the IRS, the transferor may establish the amount of tax withheld by the transferee by attaching to its return substantial evidence of the amount. The transferor must attach to its return a statement that includes all of the information otherwise required to be provided on Form 8288-A.
(f) Applicability date. This section applies to transfers that occur on or after January 29, 2021.
§ 1.1446(f)-3   Partnership's requirement to withhold under section 1446(f)(4) on distributions to transferee.
(a) Partnership's obligation to withhold amounts not withheld by the transferee —(1) In general. If a transferee fails to withhold any amount required to be withheld under § 1.1446(f)-2, the partnership in which the interest was transferred must withhold from any distributions with respect to the transferred interest pursuant to this section. To determine its withholding obligation under this paragraph (a)(1), a partnership may rely on a certification received from the transferee described in § 1.1446(f)-2(d)(2) unless it knows, or has reason to know, that the certification is incorrect or unreliable. A partnership that already possesses a certification of non-foreign status (including a Form W-9) for the transferor that meets the requirements provided in § 1.1446(f)-2(b)(2) may instead rely on this certification to determine that it has no withholding obligation under this paragraph (a)(1) unless it knows, or has reason to know, that the certification is incorrect or unreliable. A partnership that receives a certification described in § 1.1446(f)-2(d)(2) that is inconsistent with the information on the certification of non-foreign status in its possession is treated as having actual knowledge, or reason to know, that the certification of non-foreign status is incorrect or unreliable.
(2) Notification by IRS. A partnership that receives notification from the IRS that a transferee has provided incorrect information regarding the amount realized or amount withheld on the certification described in § 1.1446(f)-2(d)(2), or has failed to pay the IRS the amount reported as withheld on the certification, must withhold the amount prescribed in the notification on distributions with respect to the transferred interest made on or after the date that is 15 days after it receives the notification. The IRS will not issue a notification on the basis that the amount realized on the certification described in § 1.446(f)-2(d)(2) is incorrect if it determines that the transferee properly relied on a certification that included the incorrect information to compute the amount realized pursuant to § 1.1446(f)-2(c)(2).
(3) Subsequent transferees. A partnership is not required to withhold under paragraph (a)(1) or (2) of this section on distributions that are made after the date on which the transferee disposes of the transferred interest, unless the partnership has actual knowledge that any person that acquires the transferee's interest in the partnership is a related person, i.e., a person that bears a relationship described in section 267(b) or 707(b)(1) with respect to the transferee or the transferor from which the transferee acquired the interest. A related person that acquires the transferee's interest is treated as liable for tax under section 1461 to the same extent that the transferee is liable for its failure to withhold under § 1.1446(f)-2.
(b) Exceptions to withholding —(1) Withholding has been satisfied by transferee. A partnership is not required to withhold under paragraph (a)(1) of this section if it relies on a certification described in § 1.1446(f)-2(d)(2) received from the transferee (within the time prescribed in § 1.1446(f)-2(d)(2)) that states that an exception to withholding described in § 1.1446(f)-2(b) applies or that the transferee withheld the full amount required to be withheld (taking into account any adjustments under § 1.1446(f)-2(c)) under § 1.1446(f)-2.
(2) PTP interests. A partnership is not required to withhold under this section on distributions made with respect to a PTP interest.
(3) Distributing partnerships. A partnership that is a transferee because it makes a distribution is not required to withhold under this section.
(c) Withholding rules —(1) Timing of withholding —(i) In general. A partnership required to withhold under paragraph (a)(1) of this section must withhold on distributions made with respect to a transferred interest beginning on the later of—
(A) The date that is 30 days after the date of transfer; or
(B) The date that is 15 days after the date on which the partnership acquires actual knowledge that the transfer has occurred.
(ii) Satisfaction of withholding obligation. A partnership is treated as satisfying its withholding obligation under paragraph (a)(1) of this section and may stop withholding on distributions with respect to a transferred interest on the earlier of—
(A) The date on which the partnership completes withholding and paying the amount required to be withheld under paragraph (c)(2) of this section; or
(B) The date on which the partnership receives and may rely on a certification from the transferee described in § 1.1446(f)-2(d)(2) (without regard to whether the certification is received by the time prescribed in § 1.1446(f)-2(d)(2)) that claims an exception to withholding under § 1.1446(f)-2(b).
(2) Amount to withhold —(i) In general. A partnership required to withhold under paragraph (a)(1) of this section must withhold the full amount of each distribution made with respect to the transferred interest until it has withheld—
(A) A tax of 10 percent of the amount realized (determined solely under § 1.1446(f)-2(c)(2)(i)) on the transfer, reduced by any amount withheld by the transferee; plus
(B) Any interest computed under paragraph (c)(2)(ii) of this section.
(ii) Computation of interest. The amount of interest required to be withheld under paragraph (a)(1) of this section is the amount of interest that would be required to be paid under section 6601 and § 301.6601-1 of this chapter if the amount that should have been withheld by the transferee was considered an underpayment of tax. For purposes of this paragraph (c)(2)(ii), interest is payable between the date that is 20 days after the date of the transfer and the date on which the tax due under paragraph (a)(1) of this section is paid to the IRS.
(iii) Certifications required. For purposes of paragraph (c)(2)(i)(A) of this section, a partnership must determine the amount realized on the transfer and any amount withheld by the transferee based on a certification from the transferee described in § 1.1446(f)-2(d)(2), without regard to whether the certification is received by the time prescribed in § 1.1446(f)-2(d)(2). A partnership that does not receive or cannot rely on a certification from the transferee described in § 1.1446(f)-2(d)(2) must withhold tax equal to the full amount of each distribution made with respect to a transferred interest until it receives a certification that it can rely on.
(3) Coordination with other withholding provisions. Any amount required to be withheld on a distribution under any other provision of the Internal Revenue Code is not also required to be withheld under section 1446(f)(4) or this section.
(d) Reporting and paying withheld amounts. The partnership must report and pay the tax withheld using Forms 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and 8288-C, Statement of Withholding Under Section 1446(f)(4) for Withholding on Dispositions by Foreign Persons of Partnership Interests, as provided in forms, instructions, or other guidance.
(e) Effect of withholding on transferor and transferee —(1) Transferor. The withholding of tax by a partnership under this section does not relieve a foreign person from filing a U.S. income tax return with respect to the transfer. See §§ 1.6012-1(b)(1), 1.6012-2(g)(1), and 1.6031(a)-1. Further, the withholding of tax by a partnership does not relieve a nonresident alien individual or foreign corporation subject to tax on gain by reason of section 864(c)(8) from paying any tax due with the return that has not been fully satisfied through withholding. An individual or corporation is not allowed a credit under section 33 for amounts withheld on distributions to the transferee under this section. See, however, §§ 1.1446(f)-5(a) and 1.1463-1(a), which generally provide that tax will not be recollected if paid by another person.
(2) Transferee. A transferee is treated as satisfying its withholding tax liability under § 1.1446(f)-2 to the extent that a partnership withholds tax (which does not include interest) under this section. Interest computed under paragraph (c)(2)(ii) of this section that is withheld by the partnership from the transferee is treated as interest paid by the transferee with respect to its withholding tax liability under § 1.1446(f)-2. An excess amount under this section is the amount of tax and interest withheld under this section that exceeds the transferee's withholding tax liability under § 1.1446(f)-2 plus any interest owed by the transferee with respect to such liability. A transferee may claim a refund for the excess amount if payments have been made in excess of the tax which is properly due by the transferee for the tax period.
(f) Applicability date. This section applies to transfers that occur on or after January 1, 2022.
§ 1.1446(f)-4   Withholding on the transfer of a publicly traded partnership interest.
(a) Obligation to withhold on a transfer of a PTP interest —(1) In general. If a transfer of a PTP interest is effected through one or more brokers (as defined in § 1.1446(f)-1(b)(1)), the transferee is not required to withhold under section 1446(f)(1) and§ 1.1446(f)-2. Rather, any broker required to withhold under paragraph (a)(2) of this section must withhold a tax equal to 10 percent of the amount realized (as defined in paragraph (c)(2) of this section) on the transfer of a PTP interest, except as otherwise provided in this section. For cases in which a publicly traded partnership is liable for withholding under this section, see paragraphs (b)(3)(i) and (c)(2)(iii) of this section.
(2) Broker's requirement to withhold —(i) In general. Except as otherwise provided in this section, a broker is required to withhold under this section if it pays an amount realized to another broker that it is required to treat as a foreign person, or if a broker pays an amount realized to a foreign transferor that is its customer.
(ii) Payments to foreign brokers. A broker that pays an amount realized from the transfer of a PTP interest to another broker that it is required to treat as a foreign person must withhold under this section unless the first-mentioned broker obtains documentation on which it may rely establishing that the second-mentioned broker is described in paragraph (a)(2)(ii)(A) or (B) of this section. A broker must treat any broker to which it pays an amount realized from the transfer of a PTP interest as a foreign person unless it obtains, or already possesses, documentation (including a certification of non-foreign status) on which it may rely that establishes that the other broker is a U.S. person. A broker may rely on documentation described in this paragraph (a)(2)(ii), or in paragraph (a)(2)(ii)(A) or (B) of this section, unless it has actual knowledge that the documentation is unreliable or incorrect.
(A) A broker is described in this paragraph (a)(2)(ii)(A) if it is a qualified intermediary (as defined in § 1.1441-1(e)(5)(ii)) that provides a valid qualified intermediary withholding certificate (as described in § 1.1441-1(e)(3)(ii)) that states that it assumes primary withholding responsibility for the payment.
(B) A broker is described in this paragraph (a)(2)(ii)(B) if it is a U.S. branch of a foreign person (as described in § 1.1441-1(b)(2)(iv)) that provides a valid U.S. branch withholding certificate (as described in § 1.1441-1(e)(3)(v), but without regard to the requirement in § 1.1441-1(e)(3)(v) that the certificate state that the amount is not effectively connected with a trade or business within the United States) that states that the U.S. branch agrees to be treated as a U.S. person with respect to the payment.
(iii) Payments to foreign transferors that are customers of the broker. A broker that pays an amount realized to a foreign transferor that is its customer (as defined in § 1.6045-1(a)(2)) from the transfer of a PTP interest is required to withhold under this section unless an exception under paragraph (b) of this section applies.
(3) Exception from certain withholding by U.S. clearing organizations. A broker that is a U.S. clearing organization clearing or settling a sale of a PTP interest is not required to withhold on the amount realized from the sale. However, see § 1.1461-1(c)(2)(i)(R)( 2 ) for the requirement that a U.S. clearing organization acting as a central counterparty report on Form 1042-S sales of PTP interests that it clears and settles on a net basis.
(4) Exception when withholding already satisfied. A broker that receives from another broker an amount realized from the transfer of a PTP interest is required to withhold under this section unless the other broker has withheld the full amount required. A broker that receives from another broker an amount realized from the transfer of a PTP interest may treat the withholding as having been satisfied on the full amount required unless it knows or has reason to know that the withholding obligation has not already been satisfied. A broker that is a qualified intermediary determines its withholding requirement for purposes of this paragraph (a)(4) in accordance with its qualified intermediary agreement.
(5) Documentation obtained from another person to determine a broker's status. A U.S. clearing organization may act as an agent for a broker receiving an amount realized from another broker that is a member of the clearing organization for purposes of furnishing valid documentation described in paragraph (a)(2) of this section of the first-mentioned broker's status to such other broker, provided the clearing organization notifies the first-mentioned broker and such broker has the ability to opt out. A broker that obtains documentation from a clearing organization under this paragraph (a)(5) for a broker to which the first-mentioned broker is paying an amount realized may rely on such documentation unless it has actual knowledge that the documentation is incorrect or unreliable.
(6) Date of withholding with respect to a transfer other than a distribution. For a transfer of a PTP interest that is not a distribution, a broker is required to apply the principles of § 31.3406(a)-4(b)(1) of this chapter to determine the date on which to withhold under this section.
(7) Payments to qualified intermediaries not assuming primary withholding responsibility. With respect to the transfer of a PTP interest, if a broker pays the amount realized to a foreign person that the broker may treat as a qualified intermediary (as defined in § 1.1441-1(e)(5)(ii)) that does not assume primary withholding responsibility for the payment based on a valid qualified intermediary withholding certificate described in § 1.1441-1(e)(3)(ii) upon which the broker may rely under paragraph (a)(2) of this section, the broker may withhold as provided in this paragraph (a)(7). Under this paragraph (a)(7), a broker may withhold under this section by reference to the amount of the payment that the broker can reliably determine, based on the withholding statement provided with the withholding certificate, is allocable to—
(i) Foreign transferors included in a chapter 3 withholding rate pool (as described in § 1.1441-1(e)(5)(v)(C)) that are subject to a 10 percent rate of withholding on the payment of the amount realized;
(ii) Foreign transferors included in a chapter 3 withholding rate pool (as described in § 1.1441-1(e)(5)(v)(C)) that qualify for an exception from withholding on the payment of the amount realized under paragraph (b) of this section;
(iii) Each foreign transferor for which a form acceptable under § 1.1446-1 is provided; or
(iv) U.S. transferors, based on a valid Form W-9 provided for each such transferor to the extent that the transferor is not included in a chapter 4 withholding rate pool of U.S. payees (as described in § 1.1441-1(e)(5)(v)(C), to the extent permitted for purposes of chapter 4 of the Internal Revenue Code).
(8) Qualified intermediary or U.S. branch withholding requirement. A broker that is a qualified intermediary (as defined in § 1.1441-1(e)(5)(ii)) or U.S. branch must assume primary withholding responsibility under this section for a distribution from a publicly traded partnership for which the qualified intermediary or U.S. branch acts as a nominee for purposes of section 1446(a). See § 1.1446-4(b)(3).
(b) Exceptions to withholding —(1) In general. A broker is not required to withhold under this section if it properly relies on a certification described in paragraph (b)(2), (5), or (6) of this section, a qualified notice described in paragraph (b)(3) of this section, or if the exception described in paragraph (b)(4) of this section applies. A broker may not rely on a certification described in this paragraph (b) if it has actual knowledge that the certification is incorrect or unreliable.
(2) Certification of non-foreign status. A broker may rely on a certification of non-foreign status that it obtains from the transferor. A certification of non-foreign status under this section means a Form W-9, Request for Taxpayer Identification Number and Certification, or valid substitute form, that meets the requirements of § 1.1441-1(d)(2). For purposes of this paragraph (b)(2), a broker may rely on a valid form that it already possesses from the transferor. A broker may instead rely on certification from a second broker (as defined in § 1.6045-1(a)(1)) that acts as an agent for the transferor when the second broker does not receive the amount realized from the transfer of the PTP interest. This certification must state that the second broker has collected a valid certification of non-foreign status (within the meaning of this paragraph (b)(2)) from the transferor, and it must include the transferor's TIN and status as a foreign or U.S. person.
(3) Less than 10 percent effectively connected gain by partnership —(i) In general. A broker may rely on a qualified notice described in paragraph (b)(3)(iii) of this section that states that the 10-percent exception applies, as determined under paragraph (b)(3)(ii) of this section. In a case in which a broker properly relies on a qualified notice under paragraph (b)(1) of this section that results in underwithholding on a transfer of a PTP interest, the publicly traded partnership that issued the notice is solely liable for the underwithheld tax under section 1461. A publicly traded partnership's liability referenced in the preceding sentence, however, applies only when the publicly traded partnership fails to make a reasonable estimate of the amounts required for determining the applicability of the 10-percent exception.
(ii) 10-percent exception —(A) In general. The 10-percent exception applies to a transfer if, on the PTP designated date described in paragraph (b)(3)(ii)(B) of this section—
( 1 ) If the publicly traded partnership sold all of its assets at fair market value in the manner described in § 1.864(c)(8)-1(c), either—
( i ) The amount of net gain that would have been effectively connected with the conduct of a trade or business within the United States would be less than 10 percent of the total net gain; or
( ii ) No gain would have been effectively connected with the conduct of a trade or business in the United States; or
( 2 ) The partnership was not engaged in a trade or business within the United States at any time during the taxable year of the partnership through the PTP designated date.
(B) PTP designated date. The PTP designated date for a transfer is any date for a deemed sale determination that is designated by the publicly traded partnership in a qualified notice described in paragraph (b)(3)(iii) of this section, provided that the PTP designated date occurs on or after the date that is 92 days before the date on which the publicly traded partnership posted the qualified notice naming the PTP designated date.
(iii) Qualified notice —(A) In general. Except as provided in paragraphs (b)(3)(iii)(B) and (C) of this section, a qualified notice described in this paragraph (b)(3)(iii) is the most recent qualified notice (within the meaning of § 1.1446-4(b)(4)) posted by the publicly traded partnership.
(B) Qualified notice posting date requirement. A qualified notice is described in this paragraph (b)(3)(iii) only if the publicly traded partnership has posted it within the 92-day period ending on the date of the transfer. For a transfer that is a distribution by the publicly traded partnership, the qualified notice is described in paragraph (b)(3)(iii) of this section only if the qualified notice is posted with respect to the distribution.
(C) Recent posting of qualified notice. If the most recent qualified notice posted by the publicly traded partnership was posted during the 10-day period ending on the date of the transfer, a broker may instead rely on the immediately preceding qualified notice (within the meaning of § 1.1446-4(b)(4)) posted by the publicly traded partnership, provided that it satisfies the condition described in paragraph (b)(3)(iii)(B) of this section.
(4) Amount subject to withholding under section 3406. A broker is not required to withhold under this section if the amount realized from the transfer of the PTP interest is subject to withholding under § 31.3406(b)(3)-2 of this chapter.
(5) Income tax treaties. A broker may rely on a certification from the transferor that states that the transferor is not subject to tax on any gain from the transfer pursuant to an income tax treaty in effect between the United States and a foreign country if the requirements of this paragraph (b)(5) are met. The transferor makes the certification on a withholding certificate (on a Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), or Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities) ) that meets the requirements for validity under § 1.1446-1(c)(2)(iv) (or an applicable substitute form that meets the requirements under § 1.1446-1(c)(5)) and that contains the information necessary to support the claim for treaty benefits. For purposes of this paragraph (b)(5), a broker may rely on a withholding certificate that it already possesses from the transferor that meets the requirements of this paragraph (b)(5) unless it has actual knowledge that the information is incorrect or unreliable. The exception in this paragraph (b)(5) does not apply if treaty benefits apply to only a portion of the gain from the transfer.
(6) Foreign dealers that provide Form W-8ECI. A broker may rely on a certification provided by a transferor that certifies that it is a dealer in securities (as defined in section 475(c)(1)) and that any gain from the transfer of the PTP interest is effectively connected with the conduct of a trade or business within the United States without regard to the provisions of section 864(c)(8). The certification described in the preceding sentence is made on a Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States, that meets the requirements for validity under § 1.1446-1(c)(2)(iv) (or an applicable substitute form that meets the requirements under § 1.1446-1(c)(5)) and that contains any other information required in the instructions to the form. A broker may rely on a withholding certificate that it already possesses from the transferor that meets the requirements of this paragraph (b)(6) unless it has actual knowledge that the information is incorrect or unreliable.
(c) Determining the amount to withhold —(1) In general. A broker that is required to withhold under this section must withhold 10 percent of the amount realized on the transfer of the PTP interest, except as provided in this paragraph (c). Any procedures in this paragraph (c) apply solely for purposes of determining the amount to withhold under section 1446(f)(1) and this section. A broker may not rely on a certification described in this paragraph (c) if it has actual knowledge that the certification is incorrect or unreliable.
(2) Amount realized —(i) In general. Solely for purposes of this section, the amount realized is the amount of gross proceeds (as defined in § 1.6045-1(d)(5)) paid or credited upon the transfer to the customer or other broker (as applicable), or, in the case of a distribution, the amount determined under paragraph (c)(2)(iii) of this section.
(ii) Certification by a foreign partnership of modified amount realized —(A) In general. When a transferor is a foreign partnership, a broker may use the procedures of this paragraph (c)(2)(ii) to determine the amount realized. For purposes of this paragraph (c)(2)(ii)(A), the broker may treat the modified amount realized as the amount realized to the extent it may rely on a certification from the transferor providing the modified amount realized.
(B) Determining modified amount realized. The modified amount realized is determined by multiplying the amount realized (as determined under this paragraph (c)(2), without regard to this paragraph (c)(2)(ii)) by the aggregate percentage computed as of the determination date (see § 1.1446(f)-1(c)(4)). The aggregate percentage is the percentage of the gain (if any) arising from the transfer that would be allocated to presumed foreign taxable persons. For purposes of this paragraph (c)(2)(ii)(B), a presumed foreign taxable person is any direct or indirect partner of the transferor that has not provided either a certification of non-foreign status that meets the requirements of paragraph (b)(2) of this section or a certification of treaty benefits that states that the partner is not subject to tax on any gain from the transfer pursuant to an income tax treaty in effect between the United States and a foreign country. A valid certification of treaty benefits must meet the requirements of paragraph (b)(5) of this section (as applied to the partner claiming treaty benefits). For purposes of this paragraph (c)(2)(ii), an indirect partner is a person that owns an interest in the transferor indirectly through one or more foreign partnerships.
(C) Certification. The certification is made by providing a withholding certificate (on Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting ) that includes a withholding statement that provides the percentage of gain allocable to each direct or indirect partner and that provides whether each such person is a United States person, a foreign partner eligible for treaty benefits, or a presumed foreign taxable person. The certification must also include the certification of non-foreign status or the certification of treaty benefits from each direct or indirect partner that is not a presumed foreign taxable person. For purposes of this paragraph (c)(2)(ii), a broker may rely on a withholding certificate and withholding statement that it already possesses from the partnership unless it has actual knowledge that the information is incorrect or unreliable.
(iii) Determination of amount realized on a distribution. The amount realized on a distribution from a publicly traded partnership is the amount of the distribution reduced by the portion of the distribution that is attributable to the cumulative net income of the partnership. The cumulative net income is the net income earned by the publicly traded partnership since its formation that has not been previously distributed by the partnership. A publicly traded partnership identifies such excess portion of the distribution as an amount in excess of cumulative net income on a qualified notice (within the meaning of § 1.1446-4(b)(4)) posted with respect to the distribution. If a broker properly withholds based on the qualified notice (applying the rules of § 1.1446-4(d)(1) to the distribution), the broker is not liable for any underwithholding on any amount attributable to an amount in excess of cumulative net income. Rather, the publicly traded partnership that issued the qualified notice is solely liable for the underwithheld tax under section 1461 on such amount that results from a broker's reliance on the notice.
(d) Reporting and paying withheld amounts. A broker that is required to withhold under this section must pay the withheld tax pursuant to the deposit rules in § 1.6302-2. For rules regarding reporting on Forms 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, that apply to a broker that withholds under this section, see § 1.1461-1(b) and (c). For rules regarding when an amount realized on the transfer of a PTP interest is reportable on a Form 1042-S (including in certain cases in which withholding is not required), see § 1.1461-1(c)(2)(i)(Q) and (R). A broker that pays the amount realized to a foreign partnership must issue a Form 1042-S directly to the partnership rather than issuing a form to each of the partners of the partnership. See § 1.1461-1(c)(1)(ii)(A)( 8 ) (treating the foreign partnership as a recipient for reporting purposes). A broker making a payment to a U.S. branch treated as a U.S. person must not treat the branch as a U.S. person for purposes of reporting the payment made to the branch. Therefore, a payment to that U.S. branch must be reported on Form 1042-S. See § 1.1461-1(c). A Form 1042-S issued directly to the transferor must include the TIN of the transferor unless the broker does not know the TIN at the time of issuance.
(e) Effect of withholding on transferor —(1) In general. The withholding of tax under this section does not relieve a foreign person from filing a U.S. tax return with respect to the transfer. See §§ 1.6012-1(b)(1), 1.6012-2(g)(1), and 1.6031(a)-1. Further, the withholding of tax by a broker does not relieve a nonresident alien individual or foreign corporation subject to tax on gain by reason of section 864(c)(8) from paying any tax due with the return that has not been fully satisfied through withholding.
(2) Manner of obtaining credit —(i) Individuals and corporations. An individual or corporation may claim a credit under section 33 for the amount withheld under this section by attaching to its applicable return a copy of a Form 1042-S that includes its TIN (or as otherwise provided in IRS forms or instructions).
(ii) Partnerships, trusts, or estates. For a rule allowing a foreign partnership that is a transferor to claim a credit for the amount withheld under this section against its obligation to withhold under section 1446(a), see § 1.1446-3(c)(4). For the rule providing the extent to which a foreign trust or estate may claim a credit for an amount withheld under this section, see § 1.1462-1. A foreign partnership, trust, or estate claiming a credit for an amount withheld must attach to its applicable return the Form 1042-S provided to it under paragraph (d) of this section (or as otherwise provided in IRS forms or instructions). A foreign trust or estate must also provide any information required in forms or instructions to any beneficiary or owner that is liable for tax on any of the gain under section 864(c)(8).
(f) Applicability date. This section applies to transfers that occur on or after January 1, 2022.
§ 1.1446(f)-5   Liability for failure to withhold.
(a) Liability for failure to withhold. Every person required to withhold and pay tax under section 1446(f), but that fails to do so, is liable for the tax under section 1461, plus any applicable interest, penalties, or additions to tax. A partnership that failed to withhold and pay tax under § 1.1446(f)-3 is liable only for the amount of tax that it failed to collect (but not any interest computed on that amount under § 1.1446(f)-3(c)(2)(ii)), plus any interest, penalties, or additions to tax with regard to the partnership's failure to withhold.
(b) Tax liability otherwise satisfied. Under section 1463, if the tax required to be withheld under section 1446(f) is paid by another person required to withhold under section 1446(f), or by the nonresident alien individual or foreign corporation subject to tax on gain resulting from section 864(c)(8), the tax will not be recollected. The person required to withhold must establish proof of payment by another person required to withhold or by the nonresident alien individual or foreign corporation subject to the tax on gain resulting from section 864(c)(8). The person required to withhold may show that a reduced rate of withholding was appropriate by establishing the amount of tax due by the foreign transferor (as defined in § 1.864(c)(8)-1(g)(3)) on gain resulting from section 864(c)(8). The person required to withhold under section 1446(f) is not relieved from liability for any interest, penalties, or additions to tax that would otherwise apply. However, if the person required to withhold establishes to the satisfaction of the Commissioner that no gain on the transfer is treated as effectively connected with the conduct of a trade or business within the United States under section 864(c)(8), no interest, penalties, or additions to tax will apply.
(c) Liability of agents —(1) Duty to provide notice of false certification. A transferee's or transferor's agent (other than a broker required to withhold under § 1.1446(f)-4) must provide notice to a transferee (or other person required to withhold) if that person is furnished with a certification described in §§ 1.1446(f)-1 through 1.1446(f)-4 that the agent knows is false. A person required to withhold may not rely on a certification if it receives the notice described in this paragraph (c)(1).
(2) Procedural requirements. Any agent who is required to provide notice under paragraph (c)(1) of this section must do so in writing (including by electronic submission) as soon as possible after learning of the false certification. If the agent first learns of the false certification before the date of transfer, notice must be given by the third day following that discovery but no later than the date of transfer (before the transferee's payment of consideration). If an agent first learns of a false certification after the date of transfer, notice must be given by the third day following that discovery. The notice must also explain the possible consequences to the recipient of a failure to withhold. The notice need not disclose the information on which the agent's statement is based. The agent must also furnish a copy of the notice to the IRS by the date on which the notice is required to be given to the recipient. The copy of the notice must be delivered to the address provided in § 1.1445-1(g)(10) and must be accompanied by a cover letter stating that the copy is being filed pursuant to the requirements of this paragraph (c)(2).
(3) Failure to provide notice. Any agent who is required to provide notice under paragraph (c)(1) of this section, but fails to do so in the manner required in paragraph (c)(2) of this section, is liable for the tax that the person who should have been provided notice in accordance with paragraph (c)(2) of this section was required to withhold under section 1446(f) if the notice had been given.
(4) Limitation on liability. An agent's liability under paragraph (c)(3) of this section is limited to the amount of compensation that the agent derives from the transaction. In addition, an agent that assists in the preparation of, or fails to disclose knowledge of, a false certification may be liable for civil and criminal penalties.
(d) Applicability date. This section applies to transfers that occur on or after January 29, 2021.
§ 1.1451-1   Tax-free covenant bonds issued before January 1, 1934.
(a) Rates of withholding —(1) Rate of 2 percent. Withholding of a tax equal to 2 percent is required in the case of interest upon bonds or other corporate obligations containing a tax-free covenant and issued before January 1, 1934, paid to an individual, a fiduciary, or a partnership, whether resident or nonresident, or to a nonresident foreign corporation, regardless of whether the liability assumed by the obligor is less than, equal to, or greater than 2 percent.
(2) Rate of 30 percent. Notwithstanding subparagraph (1) of this paragraph, if the liability assumed by the obligor does not exceed 2 percent of the interest, withholding is required at the rate of 30 percent in the case of payments to a nonresident alien individual, a nonresident partnership composed in whole or in part of nonresident aliens, a nonresident foreign corporation, or an owner who is unknown to the withholding agent.
(3) Obligations of resident payers. The rates of withholding specified in subparagraphs (1) and (2) of this paragraph are applicable to interest on such tax-free covenant bonds issued by a domestic corporation or by a resident foreign corporation.
(4) Obligations of nonresident payers. A nonresident foreign corporation having a fiscal or paying agent in the United States is required to withhold a tax of 2 percent in the case of interest upon its tax-free covenant bonds issued before January 1, 1934, which is paid to an individual or fiduciary who is a citizen or resident of the United States, to a partnership any member of which is a citizen or resident, or to an unknown owner.
(5) Interest from sources without the United States. Withholding is not required under section 1451 in the case of interest upon bonds or other corporate obligations issued before January 1, 1934, and containing a tax-free covenant if the interest is not to be treated as income from sources within the United States and the payments are made to a nonresident alien, a partnership composed wholly of nonresident aliens, or a nonresident foreign corporation.
(6) Tax treaties. The rates of tax to be withheld in accordance with this paragraph shall be reduced as may be provided by treaty with any country. See section 894 and § 1.1441-6 relating to income subject to a reduced rate of, or an exemption from, income tax pursuant to an income tax convention.
(b) Date of issue. The withholding provisions of section 1451 are applicable only to bonds, mortgages, or deeds of trust, or other similar obligations of a corporation which were issued before January 1, 1934, and which contain a tax-free covenant. For the purpose of section 1451, bonds, mortgages, or deeds of trust, or other similar obligations of a corporation, are issued when delivered. If a broker or other person acts as selling agent of the obligor, the obligation is issued when delivered by the agent to the purchaser. If a broker or other person purchases the obligation outright for the purpose of holding or reselling it, the obligation is issued when delivered to such broker or other person.
(c) Extended maturity date. In cases where on or after January 1, 1934, the maturity date of bonds or other obligations of a corporation is extended, the bonds or other obligations shall be considered to have been issued on or after January 1, 1934. The interest on such obligations is not subject to the withholding provisions of section 1451 but falls within the class of interest described in section 1441. See paragraph (c)(5)(iii) of § 1.1441-3.
(d) Covenant in trust deed. Bonds issued under a trust deed containing a tax-free covenant are treated as if they contain such a covenant. If neither the bonds nor the trust deeds given by the obligor to secure them contained a tax-free covenant, but the original trust deeds were modified before January 1, 1934, by supplemental agreements containing a tax-free covenant executed by the obligor corporation and the trustee, the bonds issued before January 1, 1934, are subject to the provisions of section 1451, provided appropriate authority existed for the modification of the trust deeds in this manner. The authority must have been contained in the original trust deeds or actually secured from the bondholders.
(e) Notation showing date of issue. In order that the date of issue of bonds, mortgages, deeds of trust, or other similar corporate obligations containing a tax-free covenant may be readily determined by the owner for the purpose of preparing the ownership certificates required by § 1.1461-1, the issuing or debtor corporation shall indicate the date of issue by an appropriate notation, or use the phrase “issued on or after January 1, 1934,” on each such obligation or in a statement accompanying the delivery of the obligation.
(f) Effect of withholding on income taxes of bondholder and issuing corporation —(1) Federal tax. In the case of corporate bonds or other corporate obligations issued before January 1, 1934, and containing a tax-free covenant, the corporation paying a Federal tax, or any part of it, for someone else pursuant to its agreement is not entitled to deduct such payment from its gross income on any ground; nor shall the tax so paid be included in the gross income of the bondholder. The amount of the tax so paid may, nevertheless, be claimed by the bondholder in accordance with paragraph (a) of § 1.1462-1 as a credit against the total amount of income tax due. See also section 32. The tax so paid by the corporation upon tax-free covenant bond interest payable to a domestic or resident fiduciary and allocable to any nonresident alien beneficiary under section 652 or 662 is allowable, pro rata, as a credit against:
(i) The tax required to be withheld by the fiduciary in accordance with paragraph (f) of § 1.1441-3 from the income of the beneficiary, and
(ii) The total income tax computed in the return of the beneficiary, as indicated in paragraph (a) of § 1.1462-1.
(2) State taxes. In the case of corporate bonds or other obligations containing an appropriate tax-free covenant, the corporation paying for someone else, pursuant to its agreement, a State tax or any tax other than a Federal tax may deduct such payment as interest paid on indebtedness.
(g) Alien resident of Puerto Rico. For purposes of this section the term “nonresident alien individual” includes an alien resident of Puerto Rico.
(h) Other rules for withholding of tax under section 1451. The rules for withholding stated in paragraphs (c) (2) and (3), (f), and (g) of § 1.1441-3 shall also apply for purposes of withholding the tax under this section.
§ 1.1451-2   Exemptions from withholding under section 1451.
(a) Claiming personal exemptions. Withholding under § 1.1451-1 from interest on bonds or other obligations of corporations issued before January 1, 1934, and containing a tax-free covenant shall not be required if there is filed with the withholding agent when presenting coupons for payment, or not later than February 1 of the following year, an ownership certificate on Form 1000 stating:
(1) In the case of a citizen or resident of the United States, that his taxable income does not exceed his deductions for personal exemptions allowed under section 151; or
(2) In the case of an estate or trust the fiduciary of which is a citizen or resident of the United States, that its taxable income does not exceed the deduction for the personal exemption allowed under section 642(b).
(b) Claiming residence in United States. To claim residence in the United States for purposes of section 1451, see § 1.1441-5.
(c) Other exemptions. The exemptions allowed by paragraphs (d) and (h) of § 1.1441-4 shall also apply for purposes of section 1451.