Special Rules To Reduce Section 1446 Withholding, 23069-23086 [E8-9356]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 73, Number 83 (Tuesday, April 29, 2008)]
[Rules and Regulations]
[Pages 23069-23086]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-9356]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 301, and 602

[TD 9394]
RIN 1545-BD80


Special Rules To Reduce Section 1446 Withholding

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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[[Page 23070]]

SUMMARY: This document contains final regulations regarding when a 
partnership may consider certain deductions and losses of a foreign 
partner to reduce or eliminate the partnership's obligation to pay 
withholding tax under section 1446 on effectively connected taxable 
income allocable under section 704 to such partner. The regulations 
will affect partnerships engaged in a trade or business in the United 
States that have one or more foreign partners. The final regulations 
also include conforming amendments to Sec. Sec.  1.1446-3 and 1.1446-5 
and to regulations under sections 1464, 6071, 6091, 6151, 6302, 6402, 
6414, and 6722.

DATES: Effective Date: These regulations are effective on April 29, 
2008.
    Applicability Dates: The regulations are generally applicable for 
partnership taxable years beginning after December 31, 2007. See Sec.  
1.1446-6(f). For a transition rule see Sec.  1.1446-6(g).

FOR FURTHER INFORMATION CONTACT: Ronald M. Gootzeit at (202) 622-3860 
(not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-1934. The collection of information 
in these final regulations is in Sec.  1.1446-6(c) and (d). This 
information is required to determine the extent to which a partnership 
will consider certifications of losses and deductions in calculating 
the amount of withholding tax it must pay with respect to a foreign 
partner on the partner's allocable share of effectively connected 
taxable income earned by such partnership.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    On September 3, 2003, the IRS and the Treasury Department published 
in the Federal Register a notice of proposed rulemaking [REG-108524-00; 
2003-42 IRB 869; 68 FR 52466], corrected at 68 FR 62553 (November 5, 
2003) under sections 871, 1443, 1446, 1461, 1462, 1463, 6109, and 6721 
of the Internal Revenue Code (Code). The regulations provide guidance 
for partnerships required to pay withholding tax under section 1446 of 
the Code (1446 tax). On May 18, 2005, the IRS and the Treasury 
Department issued final and temporary regulations under section 1446. 
The 2005 final regulations set forth the provisions of the 2003 
proposed regulations in final form and the temporary regulations 
established a new procedure by which a partnership could consider 
certain partner-level deductions and losses when computing its 1446 
tax. The temporary regulations generally apply to partnership taxable 
years beginning after the date of their issuance, but an election was 
provided that permitted a partnership to apply the regulations to 
partnership taxable years beginning after December 31, 2004, provided 
the partnership elected to apply the 2005 final regulations to 
partnership taxable years beginning after December 31, 2004. On May 18, 
2005, the IRS and the Treasury Department also published in the Federal 
Register a notice of proposed rulemaking [REG-108524-00; 2005-1CB 1158; 
70 FR 28701], under sections 1464, 6071, 6091, 6151, 6302, 6402, 6414, 
and 6722 of the Code to implement the section 1446 regime, as well as 
cross-referencing the temporary regulations under Sec.  1.1446-6T (see 
26 CFR Part 1, revised as of April 1, 2007). Written comments were 
received in response to the notice of proposed rulemaking, and a public 
hearing was held on November 16, 2005. After consideration of all the 
comments, the proposed regulations are adopted, as revised by this 
Treasury decision and the temporary regulations are removed.

Explanation of Provisions

    Section 1446 requires a partnership to pay section 1446 tax on a 
foreign partner's allocable share of effectively connected taxable 
income (ECTI) from the partnership. The temporary regulations allow 
certain foreign partners to certify certain deductions and losses to a 
partnership to reduce the 1446 tax required to be paid by the 
partnership with respect to ECTI allocable to such partners. The 
temporary regulations also permit a nonresident alien partner to 
certify to the partnership that the partnership investment is (and will 
be) its only activity for its taxable year that gives rise to 
effectively connected income, gain, deduction, or loss. In that case, 
the partnership 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 ``Annual Return for Partnership Withholding Tax (Section 
1446),'' the actual) 1446 tax due with respect to such nonresident 
alien partner is less than $1,000.

I. Modifications to the Temporary Regulations

A. Format of Certificate Submitted to a Partnership
    The temporary regulations state that no particular form is required 
for the partner's certificate of deduction and losses to the 
partnership. However, the temporary regulations list 13 items the 
certificate must contain and the caption that must appear at the top of 
the certificate. To ensure uniformity of the certificates and to reduce 
the likelihood of an inadvertently omitted item causing the certificate 
to be defective, the IRS developed a form (Form 8804-C, ``Certificate 
of Partner-Level Items to Reduce Section 1446 Withholding'') to be used 
by the partner providing a certificate to the partnership. The IRS and 
the Treasury Department believe that the Form 8804-C will facilitate a 
partner's ability to provide original and updated certificates.
B. Partners Entitled To Certify Deductions and Losses
    1. Filing period requirement: number of years
    To be eligible to provide a certificate to a partnership the 
temporary regulations require a partner to have timely filed (or to 
represent that it will timely file) a U.S. income tax return for each 
of its preceding four taxable years and for the taxable year during 
which the certificate is provided and will be considered by the 
partnership. The partner is also required to have timely paid (or to 
represent that it will timely pay) all tax shown on such returns. The 
final regulations clarify that only returns that report income or gain 
effectively connected with a U.S. trade or business or deductions or 
losses properly allocated and apportioned to such activities will 
satisfy the tax return filing requirement (for the current or relevant 
prior years). Accordingly, the partner may not fulfill this requirement 
with a U.S. income tax return that reports no items of income or gain 
effectively connected with a U.S. trade or business or deductions or 
losses properly allocated and apportioned to such activities.

[[Page 23071]]

    Several commentators suggested reducing the temporary regulations' 
prior years U.S. tax return filing requirement. One commentator 
suggested reducing the requirement to the lesser of the two prior years 
or the number of years the partner has been a partner in the relevant 
partnership. Another commentator suggested reducing the requirement 
from four to two years.
    The IRS and the Treasury Department believe it appropriate to 
require the foreign partner to have filed a certain number of returns 
and paid any tax relating to those returns regardless of the number of 
years the partner has been a member of the relevant partnership. The 
IRS and the Treasury Department do not believe that a reduction to two 
years is appropriate. Because the return for the year immediately 
preceding the year a partner submits a certificate to a partnership may 
not have been filed by the date when the certificate is submitted, 
reducing the prior years filing requirement to two years could result 
in only one return being filed by the date on which the certificate is 
submitted. In response to these comments, however, the IRS and the 
Treasury Department have determined that it is appropriate to reduce 
the prior years filing requirement to three years.
    The IRS and the Treasury Department have also decided to modify the 
filing requirement of a tax return for a preceding taxable year in 
which the partner did not submit a certificate to any partnership, if 
the return has a due date (without extensions) before the beginning of 
the partnership taxable year for which the certificate is provided. The 
final regulations provide that such returns must be filed and all 
amounts due with such return (including interest, penalties, and 
additions to tax, if any) must be paid on or before the earlier of: (1) 
The date that is one year from the due date (without extensions) of 
such return; or (2) The date on which the certificate for the current 
taxable year is submitted to the partnership. Once a partner submits a 
certificate to a partnership, however, it must timely file all its 
subsequent years' returns (and timely pay all amounts due with the 
returns) to submit a certificate to a partnership in a later year. The 
IRS and the Treasury Department anticipate that this modified rule will 
permit more foreign partners to provide certificates to partnerships 
under the final regulations.
    2. Trusts and estates
    One commentator requested that the IRS and the Treasury Department 
explain why foreign estates and domestic or foreign trusts, other than 
grantor trusts, are not permitted to certify deductions and losses to 
partnerships. Another commentator asked that the decedent's compliance 
record be considered in determining whether the estate can certify 
deductions and losses to a partnership. The final regulations do not 
modify the treatment of estates and trusts. The IRS and the Treasury 
Department continue to believe, as stated in the preamble to the 
temporary regulations, that because trusts and estates are not always 
pure conduits for tax purposes it is difficult for a partnership to 
determine the taxpayer (that is, the trust, estate or beneficiary) that 
will pay tax on the ECTI allocated to the trust or estate. Further, a 
decedent's filing history may have limited relevance in predicting the 
estate's likely compliance.
    3. Tiered partnerships
    In a tiered partnership structure, a lower-tier partnership must 
withhold 1446 tax on ECTI allocable to an upper-tier foreign 
partnership that is a partner in the lower-tier partnership. However, 
if the upper-tier foreign partnership provides sufficient information 
regarding its partners to the lower-tier partnership, the lower-tier 
partnership may withhold 1446 tax based on the partners in the upper-
tier partnership. These rules may also apply to upper-tier domestic 
partnerships that have foreign partners. See Sec.  1.1446-5. Similarly, 
an upper-tier partnership that receives certificates of deductions and 
losses from its foreign partners may provide the certificates to the 
lower-tier partnerships.
    The final regulations add several rules to ensure that deductions 
and losses certified to an upper-tier partnership are not taken into 
account by both the upper-tier partnership and a lower-tier partnership 
or by more than one lower-tier partnership. A new rule is also added 
requiring that sufficient information regarding a partner in the upper-
tier partnership submitting the certificate be provided to the lower-
tier partnership and then to the IRS so that the IRS can reliably 
associate the ECTI and the certificate with the partner in the upper-
tier partnership.
C. Submissions of Certificates
    1. Time lags for submission of certificates
    The temporary regulations provide that the partnership may rely on 
the first certificate submitted by the foreign partner for a 
partnership taxable year only if the partnership receives the 
certificate at least 30 days before the installment due date or the 
annual Form 8804 filing due date (without regard to extensions) for the 
partnership taxable year for which the partner would like the 
certificate to be considered in computing the 1446 tax due with respect 
to the partner. Updated certificates may only be considered if received 
at least ten days before the installment due date or the Form 8804 
filing date (without regard to extensions). Several commentators 
questioned the appropriateness of these timing requirements if the 
partnership is willing to rely on a certification submitted at the last 
moment and remits the 1446 tax installment or files the final return on 
a timely basis. The IRS and the Treasury Department agree with the 
commentators and have removed these requirements in the final 
regulations.
    2. Resubmission of certificates
    The temporary regulations require the partnership to attach a copy 
of any certificate, and the computation of 1446 tax due with respect to 
a partner, to both the Form 8813, ``Partnership Withholding Tax Payment 
Voucher (Section 1446),'' and Form 8805, ``Foreign Partner's 
Information Statement of Section 1446 Withholding Tax,'' filed with the 
IRS for any period for which such certificate is considered in 
computing the partnership's 1446 tax (or any installment of such tax). 
One commentator suggested that a certificate submitted with Form 8813 
should not be required to be submitted with subsequent filings of Form 
8813 or with Form 8805. The IRS and the Treasury Department agree with 
the comment regarding Form 8813. The final regulations provide that a 
partner's certificate need only be submitted for the first installment 
period for which it is considered. For subsequent installment periods 
for which the certificate is considered, the partnership may instead 
attach a list of the name, taxpayer identification number, and the 
amount of certified deductions of each foreign partner whose 
certificate was previously considered during the taxable year and whose 
certificate was again considered in the subject installment period. The 
partnership would also indicate if it was relying on the state and 
local taxes withheld and remitted on behalf of the partner. If the 
partnership is relying on the de minimis rule for the partner, the 
partnership would indicate that, in lieu of indicating the amount of 
certified deductions. However, if a partnership receives an updated 
certificate from a partner, that certificate must be attached with the 
Form 8813 for the first installment period it is considered. In all 
events, a partnership must attach to the Form 8813 and Form 8805, a 
computation of 1446 tax due with respect to such

[[Page 23072]]

partner for all periods for which a certificate received from the 
partner is considered by the partnership. In addition, in all events 
the partnership must attach to the Form 8805 a copy of the partner's 
original or updated certificate, as appropriate.
    3. Denying partnerships the ability to submit certificates
    Consistent with the temporary regulations, the final regulations 
provide that upon receipt of written notification from the IRS that a 
foreign partner's certificate is defective, the partnership may no 
longer rely on the defective certificate or any other certificate 
submitted by the partner until the IRS notifies the partnership in 
writing and revokes or modifies the original notice. The final 
regulations provide that the IRS may also notify the partnership in 
writing if either a substantial portion of the certificates submitted 
by the partnership are defective or a substantial amount of the 
deductions and losses relied on by the partnership in computing its 
1446 tax due are reported on one or more defective certificates. Upon 
receiving that notification the partnership may not rely on any 
certificate submitted by any partner for the partnership taxable year 
in which such notification is received or any subsequent partnership 
taxable year, until the IRS notifies the partnership again in writing 
and revokes or modifies the original notice.
D. Deductions and Losses Certified to the Partnership
    1. Current year deductions
    The temporary regulations provide that a foreign partner can only 
certify deductions and losses that are or will be reflected on the 
partner's U.S. income tax return filed (or to be filed) for a taxable 
year ending prior to the installment due date or Form 8804 filing date 
(without regard to extensions) for the partnership taxable year for 
which the certificate is considered. Therefore, no anticipated 
deduction or loss with respect to current operations may be considered. 
One commentator suggested that partners should be permitted to certify 
current year deductions to the partnership. The IRS and the Treasury 
Department are concerned about the uncertainty associated with 
fluctuations in estimates of current-year activities and therefore have 
not adopted this suggestion.
    2. Charitable deductions
    One commentator requested that partners be permitted to certify 
charitable contribution deductions. The IRS and the Treasury Department 
have not adopted this recommendation because of the difficulty a 
partnership would have in determining the amount of a charitable 
contribution deduction allowed to the foreign partner. Section 170 
provides separate rules for corporations and individuals, the type of 
charity to which the contribution is made, and the type of property 
contributed to the charity. In addition, separate rules apply to 
determine the deduction amount in the case of charitable contribution 
carryover.
    3. Suspended losses
    One commentator raised a concern that a foreign partner could 
certify a passive activity loss to a partnership that conducts a 
different activity in which the partner materially participates. If the 
partnership took that loss into account it would inappropriately reduce 
its 1446 tax due with respect to that partner. Because on its income 
tax return the partner could not offset the loss against its allocable 
share of partnership ECTI, the partner might inappropriately each year 
recertify that loss to the partnership. To address that concern the 
final regulations clarify that a partner must identify any certified 
deductions and losses that are subject to special limitations at the 
partner level and provide information to the partnership that will 
allow the partnership to take into account the special limitations.
    4. Net operating losses
    The temporary regulations provide that a partnership may not 
consider a partner's net operating loss (NOL) deduction in an amount 
greater than 90 percent of the partner's allocable share of ECTI. Two 
commentators discerned that this requirement reflects a concern about 
the alternative minimum tax (AMT) limitation on NOL deductions and 
suggested the regulations should be tied to the continuing 
applicability of the 90 percent AMT limitation on the use of NOL 
carryovers. The IRS and the Treasury Department have adopted this 
suggestion. One commentator further suggested that if the 90 percent 
limitation is retained, or as long as it applies, the regulations 
should be clarified to explain that the limitation should be applied on 
a cumulative basis for each installment period. This suggestion has 
also been adopted. With this clarification, if the partnership's 
annualized income changes during the year, the NOL deduction that the 
partnership may take into account can increase or decrease accordingly.
E. Partnership Items Allocable to Partners That Give Rise to Partner 
Level Deductions, Losses or Credits But Are Not Partnership Allocations 
of Deductions and Losses Under Section 704
    1. State income taxes
    One commentator suggested allowing the partnership to reduce a 
foreign partner's ECTI by the amount of any state and local taxes paid 
by the partnership on behalf of the partner with respect to the 
partner's allocable share of partnership income. The final regulations 
adopt this recommendation but provide that the partnership may only 
consider 90 percent of the state and local taxes withheld and remitted 
on behalf of the partner but only with respect to the partner's 
allocable share of ECTI. The partnership may consider these amounts 
regardless of whether the partner submits a certification of deductions 
and losses or of its de minimis status to the partnership for the 
relevant partnership taxable year.
    2. Section 199 deductions
    One commentator suggested allowing a partnership to consider a 
partner's available deduction under section 199 in determining its 
section 1446 tax with respect to that partner. The section 199 
deduction is a percentage of the lesser of the qualified production 
activities income (QPAI) of the taxpayer for the taxable year or the 
taxpayer's taxable income or, in the case of an individual, adjusted 
gross income determined without regard to section 199 for the taxable 
year. In addition, the deduction is limited to 50 percent of the Form 
W-2, ``Wage and Tax Statement'', wages for the taxpayer for the taxable 
year. Depending on a taxpayer's gross receipts and assets, there are up 
to three permissible methods for calculating QPAI.
    In the case of a pass-through entity (such as a partnership), 
section 199(d)(1)(A) provides that the section 199 deduction is 
calculated at the partner level. A partner may be a member of more than 
one partnership and may engage in its own qualifying activities under 
section 199. The QPAI and Form W-2 wages, and any other QPAI and Form 
W-2 wages reported by a partnership to the partner, must be added to 
the partner's own calculation of QPAI and Form W-2 wages. Therefore, 
because of the difficulty in a partnership determining the section 199 
deduction of a partner, the IRS and the Treasury Department determined 
it would be inappropriate to allow a partnership to consider the 
section 199 deduction of a partner in determining

[[Page 23073]]

the amount of section 1446 tax to be withheld with respect to that 
partner.
    3. Section 470 deductions
    One commentator suggested that the regulations allow the 
partnership to consider partner-level deductions previously suspended 
under section 470 (limitation on deductions allocable to property used 
by governments or other tax-exempt entities) and relating to the 
partnership, when the deductions become available. Section 470 
currently allows the partnership to consider these suspended partner-
level deductions in determining the partner's ECTI. Therefore, there is 
no need to modify the regulations in response to this suggestion.
    4. Tax credits
    One commentator suggested that a foreign partner should be able to 
certify credits to the partnership and that the partnership be able to 
consider current-year credits in determining the amount of its 1446 
tax. Section 1446 requires that a partnership pay a withholding tax on 
its ECTI allocable to foreign partners. It provides no authority for 
partnerships to consider credits in determining the amount of 1446 tax 
the partnership is required to withhold and pay. Therefore, this 
suggestion has not been adopted.
F. Effect on Reasonable Reliance on Certificate of Deductions and 
Losses
    The temporary regulations provide that a partnership is not 
relieved from liability for 1446 tax under section 1461 or for any 
applicable addition to the tax, interest, or penalties if a partner's 
certificate is defective or the partner submits an updated certificate 
that increases the 1446 tax due with respect to such partner. If a 
certificate is determined to be defective for a reason other than the 
amount or character of the deductions and losses set forth on such 
certificate (for example, the partner failed to timely file a U.S. 
income tax return), then the partnership is liable for the entire 1446 
tax amount under section 1461 (or any installment of such tax).
    Further, under the temporary regulations, if it is determined that 
a certificate is defective because the actual deductions and losses 
available to the partner are less than the amount certified to the 
partnership (other than when it is determined that the partner 
certified the same deduction or loss to more than one partnership), the 
partnership is liable for 1446 tax under section 1461 (or any 
installment of such tax) only to the extent the amount of certified 
deductions and losses taken into account by the partnership is greater 
than the amount determined to be actually available to the partner and 
permitted to be used under regulations.
    Similarly, if it is determined that a certificate is defective 
because the character of the certified deductions and losses is 
erroneous, the partnership is liable for 1446 tax under section 1461 
(or any installment of such tax) only to the extent the actual 
character of the deductions and losses results in an increase in the 
1446 tax due with respect to such partner.
    However, the temporary regulations provide that the partnership is 
not liable for the addition to tax under section 6655 (as applied 
though Sec.  1.1446-3) for the period during which the partnership 
reasonably relied on the certificate. Further, the temporary 
regulations provide that although a partnership is generally liable for 
the 1446 tax, any addition to the tax, interest, and penalties, the 
partnership may be relieved of some penalties in certain circumstances.
    One commentator stated that reasonable reliance on a certificate 
should protect a partnership against liability not only under section 
6655, but also for liability for the tax under section 1461, interest 
on the tax under section 6601, and various other penalty provisions. 
The IRS and the Treasury Department have not adopted this 
recommendation. Use of the certification procedures under Sec.  1.1446-
6 is voluntary. The foreign partner is not required to submit a 
certificate of deductions and losses to the partnership. Moreover, even 
if the partnership receives a certificate it may consider all, none or 
only a portion of the certified deductions and losses when calculating 
its payment of 1446 tax. Further, as the temporary regulations stated, 
the partnership may be relieved of some penalties in certain 
circumstances.
G. Relief for a Partnership's Failure To Comply Timely With the 
Requirements of This Section
    Among other requirements, to apply the rules of Sec.  1.1446-6 the 
partnership must receive a valid certificate from the foreign partner 
and attach the certificate, along with the computation of 1446 tax due 
with respect to that partner, to certain Forms 8813 and Form 8805 filed 
with respect to that partner. The IRS and the Treasury Department 
believe that a reasonable cause standard should be applied to determine 
whether a partnership that failed to attach the certificate and 1446 
tax computation to the relevant filing is eligible for an extension of 
time to comply with this requirement.
    Under the reasonable cause standard, if a partnership that may 
otherwise rely on a partner's certificate fails to comply timely with 
the requirements of Sec.  1.1446-6, the partnership is considered to 
have satisfied the timeliness requirement if it demonstrates, to the 
satisfaction of the Area Director, Field Examination, Small Business/
Self-Employed or the Director, Field Operations, Large and Mid-Size 
Business (Director) having jurisdiction of the partnership's return for 
the taxable year, that such failure was due to reasonable cause and not 
willful neglect. Once the partnership becomes aware of the failure, the 
partnership must demonstrate reasonable cause and must satisfy the 
filing requirement by attaching the certificate and the partnership's 
computation of 1446 tax due with respect to that partner to an amended 
Form 8813 or Forms 8804 and 8805 (that amends the tax return to which 
the certificate and computation should have been attached). A written 
statement must be included that explains the reasons for the failure to 
comply.
    In determining whether the partnership has reasonable cause, the 
Director shall determine whether the partnership acted reasonably and 
in good faith based on all the facts and circumstances. The Director 
shall notify the partnership in writing within 120 days of the 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 filing, the partnership shall be considered to have 
demonstrated to the Director that such failure was due to reasonable 
cause and not willful neglect.
H. Effective/Applicability Dates and Transition Rule
    The final regulations are effective for partnership taxable years 
beginning after December 31, 2007. However, any certificate submitted 
on or before July 28, 2008 that met the requirements of the temporary 
regulations shall not be considered defective solely because it does 
not meet the requirements of the final regulations. However, any 
certificate (including any updated certificates and status reports) 
submitted, or required to be submitted, after July 28, 2008, must 
comply with the requirements of these final regulations.

[[Page 23074]]

II. Modifications to the 2005 Final Regulations

    The final regulations make several clarifying and conforming 
changes to the 2005 final regulations including with respect to the 
calculation of installment payments of 1446 tax when a partnership 
considers a certificate received under Sec.  1.1446-6 and the 
information that a lower-tier partnership must receive from an upper-
tier partnership when the lower-tier partnerships pays 1446 tax on 
behalf of the partners in the upper-tier partnership. Also the prior 
year safe harbor provision in Sec.  1.1446-3 was conformed with section 
6655 to provide that the partnership must compute its current year 1446 
tax installments based on the total 1446 tax (without regard to Sec.  
1.1446-6) as computed for the prior taxable year. These revisions are 
effective for partnership taxable years beginning after December 31, 
2007.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. It 
also has been determined that section 553(b) of the Administrative 
Procedures Act (5 U.S.C. chapter 5) does not apply to these 
regulations. It is hereby certified that the collections of information 
contained in these regulations will not have a significant economic 
impact on a substantial number of small entities. This certification is 
based upon the fact that only a few small entities are expected to be 
impacted by these collections and the burden associated with such 
collections is estimated to be 0.5 hours. Moreover, the information 
collection in Sec.  1.1446-6 and its use is voluntary. Therefore, a 
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the 
Code, the notice of proposed rulemaking preceding the final regulations 
was submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Drafting Information

    The principal author of these regulations is Ronald M. Gootzeit of 
the Office of the Associate Chief Counsel (International). However, 
other personnel from the IRS and the Treasury Department participated 
in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1, 301, and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.1446-0 is amended is as follows:
0
1. Adding entries for Sec.  1.1446-6.
0
2. Removing entries for Sec.  1.1446-6T.
0
3. Revising the entry for Sec.  1.1446-7.
    The addition and revision read as follows:


Sec.  1.1446-0  Table of contents.

* * * * *


Sec.  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.
    (2) Reasonable reliance on a certificate.
    (b) Foreign partners to whom this section applies.
    (1) In general.
    (2) Definitions.
    (i) U.S. income tax return.
    (ii) Timely-filed.
    (iii) Qualifying U.S. income tax return.
    (3) Special rules.
    (c) Reduction of 1446 tax with respect to a foreign partner.
    (1) General rules.
    (i) Certified deductions and losses.
    (A) Deductions and losses from the partnership.
    (B) Deductions and loss from other sources.
    (C) Limit on the consideration of a partner's net operating loss 
deduction.
    (D) Limitation on losses subject to certain partner level 
limitations.
    (E) Certification of deductions and losses to other 
partnerships.
    (F) Partner level use of deductions and losses certified to a 
partnership.
    (ii) De minimis certificate for nonresident alien individual 
partners.
    (A) In general.
    (B) Requirements for exception.
    (iii) Consideration of certain current year state and local 
taxes.
    (2) Form and time of certification.
    (i) Form of certification.
    (ii) Time of certification provided to partnership.
    (A) First certificate submitted for a partnership's taxable 
year.
    (B) Updated certificates and status updates.
    (1) Preceding year tax returns not yet filed.
    (2) Other circumstances requiring an updated certificate.
    (3) Form and content of updated certificate.
    (4) Partnership consideration of an updated certificate.
    (3) Notification to partnership when a partner's certificate 
cannot be relied upon.
    (4) Partner to receive copy of notice.
    (5) Notification to partnership when no foreign partner's 
certificate can be relied upon.
    (6) Partnership notification to partner regarding use of 
deductions and losses.
    (7) Partner's certificate valid only for partnership taxable 
year for which submitted.
    (d) Effect of certificate of deductions and losses on partner 
and partnership.
    (1) Effect on partner.
    (i) No effect on liability for income tax of foreign partner.
    (ii) No effect on partner's estimated tax obligations.
    (iii) No effect on partner's obligation to file U.S. income tax 
return.
    (2) Effect on partnership.
    (i) Reasonable reliance to relieve partnership from addition to 
tax under section 6665.
    (ii) Continuing liability for withholding tax under section 1461 
and for applicable interest and penalties.
    (A) In general.
    (B) Certificate defective because of amount or character of 
deductions and losses.
    (3) Partnership level rules and requirements.
    (i) Filing requirement.
    (ii) Reasonable cause for failure to timely file a valid 
certificate and computation.
    (A) Determining reasonable cause.
    (B) Notification.
    (e) Examples.
    (f) Effective/Applicability date.
    (g) Transition rule.
    Sec.  1.1446-7 Effective/Applicability date.


0
Par. 3. For each entry in the table in the ``Section'' column remove 
the phrase in the ``Remove'' column and add the phrase in the ``Add'' 
column in its place.

------------------------------------------------------------------------
           Section                 Remove                 Add
------------------------------------------------------------------------
1.1443-1(a) (First sentence)  1.1446-6T......  1.1446-6
1.1446-1(a).................  1.1446-6T......  1.1446-6
1.1446-1(b).................  Sec.   1.1446-   Sec.   1.1446-6
                               6T.

[[Page 23075]]

 
1.1446-1(c)(5) (Second        1.1446-6T......  1.1446-6
 sentence).
1.1446-2(a) (Third sentence)  Sec.   1.1446-   Sec.   1.1446-6
                               6T.
1.1446-2(b)(1) (Second        Sec.   1.1446-   Sec.   1.1446-6
 sentence).                    6T.
1.1446-2(b)(1) (Last          1.1446-6T......  1.1446-6
 sentence).
1.1446-2(b)(3)(iii) (First    Sec.   1.1446-   Sec.   1.1446-6
 sentence).                    6T.
1.1446-2(b)(3)(iii) (Second   Sec.   1.1446-   Sec.   1.1446-6
 sentence).                    6T.
1.1446-2(b)(3)(vii).........  Sec.   1.1446-   Sec.   1.1446-6
                               6T.
1.1446-2(b)(5) Example 3      Sec.   1.1446-   Sec.   1.1446-6
 (Sixth sentence).             6T.
1.1446-3(b)(2)(v)(F) (Second  Sec.   1.1446-   Sec.   1.1446-6(c)(1)(ii)
 sentence).                    6T.
1.1446-3(d)(1)(i) (Third      Sec.   1.1446-   Sec.   1.1446-6(d)(3)
 sentence).                    6T.
1.1446-3(d)(1)(iii) (Third    Sec.   1.1446-   Sec.   1.1446-6
 sentence).                    6T.
1.1446-3(e)(3)(i) (Last       Sec.   1.1446-   Sec.   1.1446-6(d)(2)(i)
 sentence).                    6T.
1.1446-5(f) Example 1(i)      Sec.   1.1446-   Sec.   1.1446-6
 (Ninth sentence).             6T.
------------------------------------------------------------------------


0
Par. 4. Section 1.1446-3 is amended by:
0
1. Removing the acronym ``ECTI'' from the first sentence in paragraph 
(b)(1) and adding the language ``effectively connected taxable income 
(ECTI)'' in its place.
0
2. Revising paragraphs (b)(2)(i) and (b)(3)(i)(A).
    The revisions read as follows:


Sec.  1.1446-3  Time and manner of calculating and paying over the 1446 
tax.

* * * * *
    (b) * * *
    (2) * * * (i) Application of the principles of section 6655--(A) In 
general. Installment payments of 1446 tax required during the 
partnership's taxable year are based upon partnership ECTI for the 
portion of the partnership taxable year to which the payments relate, 
and, except as set forth in this paragraph (b)(2) or paragraph (b)(3) 
of this section, shall be calculated using the principles of section 
6655. The principles of section 6655, except as otherwise provided in 
Sec.  1.6655-2, are applied to annualize the partnership's items of 
effectively connected income, gain, loss, and deduction to determine 
each foreign partner's allocable share of partnership ECTI. Each 
foreign partner's allocable share of partnership ECTI is then 
multiplied by the relevant applicable percentage for the type of income 
allocable to the foreign partner under paragraph (a)(2) of this 
section. The respective 1446 tax amounts are then added for each 
foreign partner to yield an annualized 1446 tax with respect to such 
partner. The installment of 1446 tax due with respect to a foreign 
partner equals the excess of the section 6655(e)(2)(B)(ii) percentage 
of the annualized 1446 tax for that partner (or, if applicable, the 
adjusted seasonal amount) for the relevant installment period, over the 
aggregate amount of 1446 tax installment payments previously paid with 
respect to that partner during the partnership's taxable year. The 
partnership's total 1446 tax installment payment equals the sum of the 
installment payments due for such period on behalf of all the 
partnership's foreign partners.
    (B) Calculation rules when certificates are submitted under Sec.  
1.1446-6--(1) To the extent applicable, in computing the 1446 tax due 
with respect to a foreign partner, a partnership may consider a 
certificate received from such partner under Sec.  1.1446-6(c)(1)(i) or 
(ii) and the amount of state and local taxes permitted to be considered 
under Sec.  1.1446-6(c)(1)(iii). For this purpose, a partnership shall 
first annualize the partner's allocable share of the partnership's 
items of effectively connected income, gain, deduction, and loss 
before--
    (i) Considering under Sec.  1.1446-6(c)(1)(i) the partner's 
certified deductions and losses;
    (ii) Determining under Sec.  1.1446-6(c)(1)(ii) whether the 1446 
tax otherwise due with respect to that partner is less than $1,000 
(determined with regard to any certified deductions or losses); or
    (iii) Considering under Sec.  1.1446-6 (c)(1)(iii) the amount of 
state and local taxes withheld and remitted on behalf of the partner.
    (2) The amount of the limitation provided in Sec.  1.1446-
6(c)(1)(i)(C) shall be based on the partner's allocable share of these 
annualized amounts. For any installment period in which the partnership 
considers a partner's certificate, the partnership must also consider 
the following events to the extent they occur prior to the due date for 
paying the 1446 tax for such installment period--
    (i) The receipt of an updated certificate or status update from the 
partner under Sec.  1.1446-6(c)(2)(ii)(B) certifying an amount of 
deductions or losses that is less than the amount reflected on the 
superseded certificate (see Sec.  1.1446-6(e)(2) Example 4);
    (ii) The failure to receive an updated certificate or status update 
from the partner that should have been provided under Sec.  1.1446-
6(c)(2)(ii)(B); and
    (iii) The receipt of a notification from the IRS under Sec.  
1.1446-6(c)(3) or (c)(5) (see Sec.  1.1446-6(e)(2) Example 5).
* * * * *
    (3) * * * (i) * * *
    (A) The average of the amount of the current installment and prior 
installments during the taxable year is at least 25 percent of the 
total 1446 tax (without regard to Sec.  1.1446-6) for the prior taxable 
year;
* * * * *

0
Par. 5. Section 1.1446-5(c)(2) is amended by adding two new sentences 
after the first sentence to read as follows:


Sec.  1.1446-5  Tiered partnership structures.

* * * * *
    (c) * * *
    (2) * * * 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. * * *


Sec.  1.1446-6T  [Removed]

0
Par. 6. Section 1.1446-6T is removed.

0
Par. 7. Section 1.1446-6 is added to read as follows:


Sec.  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

[[Page 23076]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  1.874-1(b)(6) or Sec.  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.

[[Page 23077]]

    (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 Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 23078]]

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)(