Proposed guidance clarifies withholding and reporting obligations for transfers of partnership interests
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.
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.
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.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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