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05/22/2019
Proposed guidance clarifies withholding and reporting obligations for transfers of partnership interests
Recently released proposed regulations clarify withholding rules and impose significant documentation and compliance obligations for transferors and transferees of interests in partnerships engaged in a U.S. trade or business, as well as on the partnerships themselves.
Withholding on transfer of non-publicly traded partnerships
Section 1446(f) of the Internal Revenue Code requires buyers or transferees of interests in non-publicly traded partnerships engaged in the conduct of a trade or business in the U.S. to withhold 10 percent of the amount realized on the transfer when the transfer is from a foreign entity or person.Publicly traded partnerships
The proposed regulations also provide rules for withholding and reporting on transfers of publicly traded partnerships (PTPs) and would end the suspension of such rules announced last year in Notice 2018-08 pending issuance of regulations. When a PTP interest is transferred through a broker, the transferee is not required to withhold and the obligation is instead imposed on the broker.Transfer
For purposes of both publicly and non-publicly traded partnerships, “transfer” is defined as a sale, exchange, or other disposition, and includes a distribution from a partnership to a partner on which gain or loss is recognized.Amount of withholding
If withholding is required, transferees are generally required to withhold 10 percent of amounts realized on a transfer.
For non-publicly traded partnerships, the amount realized on a transfer includes the transferor’s share of liabilities assumed by the transferee or otherwise relieved. The transferee may generally rely on a certification from the transferor of its share of partnership liabilities reported on its most recent Schedule K-1, provided the K-1 was issued no more than 22 months prior to the transfer and the transferor is not a controlling partner. A transferee may also rely on a certification of the transferee’s share of partnership liabilities from the partnership. However, this certification must be made on the determination date rather than the most recent K-1.
For purposes of withholding with respect to transfers of a PTP, the amount realized will include only gross proceeds paid or credited to a customer or broker or to amounts distributed, and will not generally include relief of liabilities.
Maximum tax liability
With respect to transfers of non-publicly traded partnerships, withholding can be limited to the transferor’s maximum tax where the transferor provides a certification, among other requirements, identifying the actual amount of outside gain (capital and ordinary) treated as effectively connected on the determination date. The transferor’s maximum tax liability is calculated as the amount of the transferor’s effectively connected gain multiplied by the highest applicable rate of tax with respect to each type of income or gain.Exceptions
Withholding is generally required for transfers of both publicly and non-publicly traded partnerships, unless one of the exceptions described below applies and the related certification is provided prior to the transfer. The transferee or broker may generally rely on such certifications unless they have actual knowledge that the certification is incorrect or unreliable. The proposed regulations provide for the following exceptions to the withholding requirement described above:
1) The transferor provides a Form W-9 certifying that the transferor is not a foreign entity or person
2) With respect to transfers of non-publicly traded partnerships, the transferor provides a certification that the transferor will not realize any gain on the transfer, including any ordinary income arising from the disposition of so-called hot assets such as unrealized accounts receivable or inventory items, which may arise even when there is an overall loss realized on the transfer
3) The partnership provides a certification that the net effectively connected gain arising from a sale of all of its assets would be less than 10 percent of the total net gain, or, in the case of a PTP, a qualified notice is issued by the PTP that net effectively connected gain would be less than 10 percent of total gain on a deemed sale of all of the PTP’s assets
4) With respect to transfers of non-publicly traded partnerships, the transferor provides a certification that for the immediately preceding taxable year and the two taxable years prior, (a) the transferor was at all times a partner in the partnership, (b) the transferor’s allocable share of effectively connected taxable income was less than $1 million and less than 10 percent of the transferor’s total distributive share of net income, and (c) that the transferor has properly reported such income and paid all amounts due on its timely filed federal income tax returns for such years
5) The transferor provides a certification that no gain will be recognized by the transferor on the transfer by reason of an applicable nonrecognition provision of the Code
6) With respect to transfers of PTPs, no withholding is required under Section 1446(f) to amounts already subject to withholding under Section 3406, generally applicable to payments to nonexempt U.S. recipients; or
7) The transferor provides a certification that it is not subject to tax on any gain arising from the transfer pursuant to an income tax treaty in effect between the U.S. and a foreign country for which the transferor qualifies for benefits, as well as a properly completed form W-8 BEN or W-8 BEN-E. In such a case, the transferee is generally required to send a copy of the certification to the IRS within 30 days of the transfer, however this requirement is waived for brokers with respect to a transfer of a PTP interest.
Partnership withholding on distributions
A non-publicly traded partnership engaged in the conduct of a U.S. trade or business is required to withhold on a distribution by the partnership to a foreign partner on which gain or loss is realized, including distributions in excess of the partner’s basis, generally treated as a sale or exchange of a partnership interest by the foreign distributee. The partnership may generally rely on its own books and records to apply the exceptions described above, however a certification may still be required with respect to certain partner-level items, such as nonforeign status or certification that the partner has timely filed federal income tax returns and properly reported effectively connected taxable income.
With respect to distributions by a PTP, no withholding is required when a qualified notice is posted by a PTP certifying that the distribution does not exceed net income of the PTP in the period since the last distribution by the PTP.
Partnership withholding on transfers
A non-publicly traded partnership engaged in the conduct of a U.S. trade or business may also be required to withhold on future distributions to a transferee to the extent there was a transfer of an interest in the partnership and the transferee failed to properly withhold as described above. The partnership must generally withhold on the entire amount of future distributions unless or until it receives a certification from the transferee stating that an exception to withholding applies or that the proper amount has been withheld or providing sufficient information to allow the partnership to determine the amount that should have been withheld (see discussion below).Reporting and payment
With respect to non-publicly traded partnerships, a transferee who is required to withhold must report and pay any tax withheld by the 20th day after the date of the transfer using Forms 8288 and 8288-A. The IRS will stamp a copy of the Form 8288-A and send to the transferor, who may use the form to claim a credit for tax withheld on its federal income tax return. In addition, a transferee is required to provide a copy of the Form 8288-A or a certification to the partnership whose interests were transferred within 10 days of the transfer describing the amount realized and any amounts withheld. The certification should include copies of any underlying certifications from the transferor that the transferee has relied upon to claim an exemption or reduction in withholding. In addition, for purposes of determining the amount of withholding, with respect to PTPs, brokers are required to report withholding on Forms 1042 and 1042-S pursuant to procedures similar to those already applicable to payments of U.S.-source fixed, determinable, annual, or periodic income to non-U.S. persons.Contact
James Robbins, Principal – National Tax
646.762.3033
James Wall, Principal – National Tax
646.254.7460
Christina Lee, Partner – National Tax
646.254.7450
Subject matter expertise
James Robbins
JD, LLM, Principal
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