Withholding of Tax and Information Reporting With Respect to Interests in Partnerships Engaged in a U.S. Trade or Business, 76910-76947 [2020-22619]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 85, Number 230 (Monday, November 30, 2020)]
[Rules and Regulations]
[Pages 76910-76947]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-22619]



[[Page 76909]]

Vol. 85

Monday,

No. 230

November 30, 2020

Part IV





Department of the Treasury





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 Internal Revenue Service





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26 CFR Part 1





Withholding of Tax and Information Reporting With Respect to Interests 
in Partnerships Engaged in a U.S. Trade or Business; Final Rule

Federal Register / Vol. 85 , No. 230 / Monday, November 30, 2020 / 
Rules and Regulations

[[Page 76910]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9926]
RIN 1545-BO60


Withholding of Tax and Information Reporting With Respect to 
Interests in Partnerships Engaged in a U.S. Trade or Business

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final rule.

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SUMMARY: This document contains final regulations that provide guidance 
related to the withholding of tax and information reporting with 
respect to certain dispositions of interests in partnerships engaged in 
a trade or business within the United States. The final regulations 
affect certain foreign persons that recognize gain or loss from the 
sale or exchange of an interest in a partnership that is engaged in a 
trade or business within the United States, and persons that acquire 
those interests. The final regulations also affect partnerships that, 
directly or indirectly, have foreign persons as partners.

DATES: 
    Effective date: These regulations are effective on November 30, 
2020.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.864(c)(8)-2(e), 1.1445-2(e), 1.1445-5(h), 1.1445-8(j), 1.1446-7, 
1.1446(f)-1(e), 1.1446(f)-2(f), 1.1446(f)-3(f), 1.1446(f)-4(f), 
1.1446(f)-5(d), 1.1461-1(i), 1.1461-2(d), 1.1461-3, 1.1463-1, 1.1464-
1(c), 1.6050K-1(h), and 1.6302-2(g).

FOR FURTHER INFORMATION CONTACT: In general, Chadwick Rowland or Ronald 
M. Gootzeit (202) 317-6937; concerning Sec.  1.1446(f)-4, Charles Rioux 
(202) 317-6933 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Section 1446(f), which was added to the Internal Revenue Code (the 
Code) by the Tax Cuts and Jobs Act, Public Law 115-97 (2017) (the Act), 
provides rules for withholding on the transfer of a partnership 
interest described in section 864(c)(8). On December 29, 2017, the 
Department of the Treasury (the Treasury Department) and the IRS 
released Notice 2018-08, 2018-7 I.R.B. 352, which temporarily suspended 
the requirement to withhold on amounts realized in connection with the 
sale, exchange, or disposition of certain interests in a publicly 
traded partnership that are publicly traded on an established 
securities market or readily tradable on a secondary market (or the 
substantial equivalent thereof) (PTP interests). On April 2, 2018, the 
Treasury Department and the IRS released Notice 2018-29, 2018-16 I.R.B. 
495, which provided temporary guidance and announced an intent to issue 
proposed regulations under section 1446(f) with respect to the sale, 
exchange, or disposition of certain interests in non-publicly traded 
partnerships. On May 13, 2019, the Treasury Department and the IRS 
published proposed regulations (REG-105476-18) primarily under section 
1446(f) relating to the withholding of tax and information reporting in 
the Federal Register (84 FR 21198) (the proposed regulations). The 
proposed regulations implemented section 1446(f) by providing guidance 
related to the withholding of tax and information reporting with 
respect to certain dispositions by a foreign person of an interest in a 
partnership that is engaged in a trade or business within the United 
States. In general, the proposed regulations provided rules that apply 
to transfers of interests in non-publicly traded partnerships (non-PTP 
interests) and transfers of PTP interests.
    Section 864(c)(8) was also added to the Code by the Act. On 
December 27, 2018, the Treasury Department and the IRS published 
proposed regulations (REG-113604-18) under section 864(c)(8) in the 
Federal Register (83 FR 66647) (the proposed section 864(c)(8) 
regulations). The proposed section 864(c)(8) regulations provided rules 
for determining the amount of gain or loss treated as effectively 
connected with the conduct of a trade or business within the United 
States (effectively connected gain or effectively connected loss) under 
section 864(c)(8), including certain rules that coordinate section 
864(c)(8) with other relevant sections of the Code. On November 6, 
2020, the Treasury Department and the IRS published final regulations 
(TD 9919) under section 864(c)(8) in the Federal Register (85 FR 70958) 
(the final section 864(c)(8) regulations).
    All written comments received in response to the proposed 
regulations are available at www.regulations.gov or upon request. 
Additionally, a public hearing was scheduled for August 26, 2019, but 
it was not held because there were no requests to speak.

Summary of Comments and Explanation of Revisions

I. Overview

    The final regulations retain the basic approach and structure of 
the proposed regulations with certain revisions based on comments 
received. This Summary of Comments and Explanation of Revisions 
discusses the comments received with respect to the proposed 
regulations and any revisions made in response to those comments, as 
well as other revisions made that were not directly in response to 
those comments. Sections VI.A and VII.C of this Summary of Comments and 
Explanation of Revisions also describe certain requirements specific to 
entities acting as qualified intermediaries for section 1446 
withholding purposes that are anticipated to be included in a revised 
qualified intermediary agreement and that are not included in these 
final regulations.\1\
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    \1\ The final regulations also include certain conforming 
changes to regulations under sections 1445 and 1446 to reflect the 
rate changes made by section 13001(b)(3)(A)-(D) of the Act and the 
due date changes made by section 2006 of the Surface Transportation 
and Veterans Health Care Choice Improvement Act of 2015 (the Surface 
Transportation Act), Public Law 114-41 (2015). Although the changes 
to these regulations are applicable based on the date of publication 
of this document in the Federal Register, the same result applies 
before that date as of the relevant effective dates of the Act and 
the Surface Transportation Act.
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II. Reporting Requirements for Foreign Transferors and Partnerships 
With Foreign Transferors

    Proposed Sec.  1.864(c)(8)-2 provided rules that facilitate the 
transfer of information between a foreign partner and the partnership 
whose interest is transferred for purposes of determining the 
transferor's tax liability under section 864(c)(8). These rules 
required a notifying transferor (generally, any foreign person and 
certain domestic partnerships that have a foreign person as a direct or 
indirect partner) that transfers (within the meaning of proposed Sec.  
1.864(c)(8)-1(g)(5)) an interest in a partnership (other than certain 
PTP interests) in a transaction described in section 864(c)(8) to 
notify the partnership within 30 days of the transfer. Proposed Sec.  
1.864(c)(8)-2(a). After receiving the notification from a notifying 
transferor, a specified partnership (generally, a partnership that is 
engaged in a trade or business within the United States or a 
partnership that owns, directly or indirectly, an interest in a 
partnership so engaged) is required to furnish to a notifying 
transferor the information necessary for the transferor to comply with 
section 864(c)(8) by the due date of the Schedule K-1 (Form 1065), 
Partner's Share of Income, Deductions, Credits, etc., for the tax year 
of the partnership in which the transfer occurred. Proposed Sec.  
1.864(c)(8)-2(b).

[[Page 76911]]

    While the final section 864(c)(8) regulations generally require a 
three-year lookback period for purposes of determining the foreign 
source portion of deemed sale gain or loss attributable to a 
partnership's inventory property or intangibles, the regulations also 
allow, in certain cases, the relevant foreign source portion of deemed 
sale gain or loss to be determined by reference to the source of the 
partnership's income occurring after the date, if any, on which a 
material change in circumstances occurs. Sec.  1.864(c)(8)-
1(c)(2)(ii)(E). The final regulations provide that a specified 
partnership must include in the statement provided to the notifying 
transferor information regarding whether the transferor's deemed sale 
EC gain or loss (as described in Sec.  1.864(c)(8)-1(c)(2)) was 
determined under the material change in circumstances rule provided in 
Sec.  1.864(c)(8)-1(c)(2)(ii)(E). Sec.  1.864(c)(8)-2(b)(2)(ii).
    The final regulations also revise the definition of specified 
partnership to remove unnecessary language on publicly traded 
partnerships. See Sec.  1.864(c)(8)-1(d)(2).

III. Scope of the Withholding Obligation Under Section 1446(f)

    The general approach in the proposed regulations required 
withholding on the transfer of a partnership interest unless an 
exception or adjustment to withholding applied. See proposed Sec. Sec.  
1.1446(f)-2(a) and 1.1446(f)-4(a). Comments suggested that proposed 
Sec.  1.1446(f)-2(a) was overly broad in that it could impose a 
withholding obligation on any transfer of a partnership interest, 
regardless of whether the partnership in question has any assets in, or 
any other connection to, the United States, or whether a transfer of an 
interest in the partnership would result in tax on gain under section 
864(c)(8), and so required a transferee to withhold in a number of 
circumstances where section 1446(f)(1)'s statutory language does not. 
To address this issue, the comments suggested various exceptions to 
withholding.
    One comment requested that the final regulations provide that even 
if a transferee does not obtain a certification allowing an exception 
to withholding, the transferee should not be considered to have failed 
to withhold if the transferee demonstrates that the transfer did not 
result in any gain under section 864(c)(8). The comment also suggested 
that in such a case, the transferee should be excused from any 
penalties that would otherwise apply. In addition, the comment 
suggested an exception to withholding when the transferee can 
demonstrate that no deemed sale EC gain would be allocated to the 
transferor. Another comment suggested adding an exception to 
withholding when the transferee can demonstrate that the partnership is 
not engaged in a trade or business within the United States.
    One comment suggested limiting the scope of withholding by allowing 
a transferee to rely on a certification from the partnership providing 
that it has not been required to file a Form 1065, U.S. Return of 
Partnership Income, for some number of past years, and it does not 
expect to be required to file a Form 1065 for the taxable year in which 
the transfer occurs. The comment suggested, however, that the 
partnership should not be required to provide this certification at the 
time of the transfer.
    One comment generally requested that the final regulations expand 
the scope of the withholding obligation under section 1446(f). 
Specifically, the comment requested that the final regulations limit 
the number of exceptions and adjustments to withholding and, for any 
exception or adjustment to withholding retained in the final 
regulations, the comment requested that the final regulations increase 
the requirements necessary to qualify for such an exception or 
adjustment.
    The final regulations retain the general rule in proposed Sec.  
1.1446(f)-2(a) that requires withholding on the transfer of a 
partnership interest unless an exception or adjustment to withholding 
applies. While the statutory language of section 1446(f)(1) imposes a 
withholding requirement when a portion of the gain from a transfer 
would be treated under section 864(c)(8) as effectively connected gain, 
a transferee will not know whether a transfer results in tax on gain 
under section 864(c)(8) without information from either the transferor 
or the partnership. These rules, therefore, require that the transferee 
presume that a transfer is subject to withholding unless it obtains a 
certification from the transferor establishing otherwise (or, if the 
partnership is the transferee because it makes a distribution, by 
relying on information in its books and records to make such 
determination). A transferee that obtains and properly relies on this 
certification (or, when the partnership is the transferee, its books 
and records) will generally not be subject to any withholding tax 
liability, even if the transfer results in tax on gain under section 
864(c)(8). See, however, Sec.  1.1446(f)-3(a) and section V.A. of this 
Summary of Comment and Explanation of Revisions regarding a 
partnership's obligation to withhold on distributions made to a 
transferee for cases in which the partnership receives a certification 
from the transferee that it knows, or has reason to know, is incorrect 
or unreliable.
    However, in response to comments, the final regulations add a rule 
in Sec.  1.1446(f)-5(b) that provides that any person required to 
withhold under section 1446(f) is not liable for failure to withhold, 
or any interest, penalties, or additions to tax, if it establishes to 
the satisfaction of the Commissioner that the transferor had no gain 
under section 864(c)(8) subject to tax on the transfer. Accordingly, 
while the general scope of the withholding obligation under Sec.  
1.1446(f)-2(a) is retained in these final regulations, the consequences 
for failing to comply with the obligation are modified when the 
transferor had no gain under section 864(c)(8) subject to tax on the 
transfer. As this rule applies for all purposes of section 1446(f), it 
also modifies the consequences for a partnership that fails to comply 
with its withholding obligation under Sec.  1.1446(f)-3 or a broker 
that fails to comply with its withholding obligation under Sec.  
1.1446(f)-4 on the transfer of a PTP interest. The final regulations 
also add an exception to withholding if the partnership certifies to 
the transferee that it is not engaged in a trade or business within the 
United States. See section IV.A.3.ii of this Summary of Comments and 
Explanation of Revisions. The same exception is added for a publicly 
traded partnership that is not engaged in a trade or business within 
the United States. See section VI.B.2 of this Summary of Comments and 
Explanation of Revisions.

IV. Withholding on the Transfer of a Non-PTP Interest

    In general, section 1446(f)(1) provides that a transferee of a 
partnership interest must withhold a tax equal to 10 percent of the 
amount realized on any disposition that results in effectively 
connected gain under section 864(c)(8). Proposed Sec.  1.1446(f)-2(a) 
implemented this rule by providing that 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 (other than a 
PTP interest) unless an exception to withholding, or an adjustment to 
the amount to withhold, applies under proposed Sec.  1.1446(f)-2(b) or 
(c), respectively. Proposed Sec.  1.1446(f)-2(d)(1) provided rules for 
reporting and paying the amount of any tax withheld and proposed Sec.  
1.1446(f)-2(e) provided rules regarding the effect of withholding on a 
transferor. For a discussion of the

[[Page 76912]]

rules that apply to a transfer of a PTP interest, see section VI of 
this Summary of Comments and Explanations of Revisions.

A. Exceptions to Withholding

    Proposed Sec.  1.1446(f)-2(b)(2) through (7) provided six 
exceptions to withholding by a transferee under section 1446(f)(1). The 
applicability of these exceptions was determined in one of three ways: 
Self-certification by the transferor (that is, the transferee relies on 
a certification received from the transferor); certification by the 
partnership (for purposes of the exception to withholding provided in 
proposed Sec.  1.1446(f)-2(b)(4)(i)); or reliance on the books and 
records of the partnership (for cases in which a partnership is a 
transferee because it makes a distribution). These final regulations 
modify certain exceptions to withholding in response to comments 
received.
1. Non-Foreign Status Exception
    Proposed Sec.  1.1446(f)-2(b)(2) provided for an exception to 
withholding if the transferor of an interest in a partnership provides 
a certification of non-foreign status to the transferee (the Non-
foreign Status Exception). One comment requested that the final 
regulations expand the Non-foreign Status Exception to match similar 
rules provided in Sec. Sec.  1.1445-2(b) and 1.1446-1(c)(3) that allow 
for reliance upon means other than a certification or statement to 
ascertain the non-foreign status of the transferor.
    The final regulations do not adopt this recommendation. While the 
provisions cited in the comment generally allow for reliance on means 
other than a certification or statement to ascertain non-foreign 
status, those provisions provide that the transferee or partnership 
remains liable under section 1461 if the determination of non-foreign 
status is incorrect. See Sec. Sec.  1.1445-2(b)(1) (last sentence) and 
1.1446-1(c)(3). As described in section III of this Summary of Comments 
and Explanation of Revisions, Sec.  1.1446(f)-5(b) provides similar 
flexibility in that it would allow a transferee that did not rely on a 
certification of non-foreign status to show that the transferor had no 
gain under section 864(c)(8) subject to tax on the transfer because the 
transferor is not a foreign person; in such a case, no interest, 
penalties, or additions to tax will apply under the rules of these 
final regulations.
    The comment also made the same recommendation regarding the Non-
Foreign Status Exception provided in proposed Sec.  1.1446(f)-4(b)(2) 
as it applied to transfers of PTP interests. The final regulations do 
not adopt this recommendation for the reasons described in the 
preceding paragraph.
2. No Realized Gain Exception
i. In General
    Proposed Sec.  1.1446(f)-2(b)(3) provided an exception to 
withholding if the transferee relies 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 Sec.  1.751-1 (the No 
Gain Exception). One comment suggested that a transferor realizing an 
overall loss on a transfer should be eligible for the No Gain 
Exception, even if the transferor realizes ordinary income under 
section 751 and Sec.  1.751-1. The final regulations do not adopt this 
comment because the comment is inconsistent with the basic computation 
of outside gain and outside loss provided in Sec.  1.864(c)(8)-1(b)(2). 
As explained in Section I.B of the Explanation of Provisions in the 
preamble to the proposed section 864(c)(8) regulations, the amount of 
gain or loss determined under section 741 (before application of 
section 751) is not a limitation on the amount of gain or loss 
characterized as effectively connected with the conduct of a trade or 
business within the United States. 83 FR 66648; see also Sec. Sec.  
1.751-1(a) and 1.864(c)(8)-1(i) (Example 3). Thus, because a transferor 
can realize ordinary income under section 751 that is characterized as 
effectively connected with the conduct of a trade or business within 
the United States under section 864(c)(8) even if the transferor 
realizes an overall loss with respect to the partnership interest, it 
would be inappropriate for the No Gain Exception to apply merely 
because the transferor does not realize an overall gain with respect to 
the transfer of the partnership interest.
ii. Ordinary Income Arising From the Deemed Sale of Section 751 
Property
    A comment explained that many transferors would be unable to use 
the No Gain Exception, even if they would otherwise qualify, because 
transferors need information from the partnership regarding the 
partnership's unrealized receivables or inventory items (section 751 
property) and the relevant deemed sale computations associated with 
that property. While the proposed regulations require a partnership to 
provide the information necessary to make these computations on Form 
8308, Report of a Sale or Exchange of Certain Partnership Interests, 
proposed Sec.  1.6050K-1(c) did not accelerate the date on which the 
partnership must provide Form 8308 to the transferor.\2\ Thus, the 
comment suggested that a transferor may not have the information 
necessary at the time of transfer to use the No Gain Exception. To 
address this issue, the comment requested certain regulatory safe 
harbors that would allow a transferor to use the No Gain Exception at 
the time of the deemed sale, including a rule that would allow a 
transferor to make reasonable assumptions regarding the presence and 
value of section 751 property based on information at hand (for 
example, information used by the partnership in preparing a recent Form 
8308).
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    \2\ Under Sec.  1.6050K-1(c), the partnership must provide Form 
8308 to the transferor by January 31 of the calendar year following 
the calendar year in which the relevant exchange occurred or, if 
later, 30 days after the partnership is notified of the exchange.
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    These final regulations modify the No Gain Exception to address the 
concerns raised in the comment, but do not adopt the solution suggested 
in the comment. Specifically, Sec.  1.1446(f)-2(b)(3)(ii) provides that 
a transferor may rely on a certification from the partnership stating 
that, as of the determination date (as determined under the rules of 
Sec.  1.1446(f)-1(c)(4)), the transfer of the partnership interest 
would not result in any ordinary income arising from the application of 
section 751 and Sec.  1.751-1. This certification, in turn, is attached 
to, and forms part of, the general certification provided by the 
transferor to the transferee as part of the No Gain Exception. By 
adopting this approach, instead of the one suggested by the comment, 
the underlying issues raised in the comment are addressed in a manner 
consistent with the rest of the exceptions to withholding provided in 
Sec.  1.1446(f)-2(b), which generally allow determinations regarding 
the applicability of an exception to be made as of the determination 
date. This approach allows a partnership that holds section 751 
property to provide the same information to transferors that use the 
same determination date; therefore, this approach provides an 
administrable, clear solution that taxpayers can consistently apply, 
while also taking into account the unique nature of section 751 
property.
3. 10-Percent EC Gain Exception
i. In General
    Proposed Sec.  1.1446(f)-2(b)(4) provided an exception to 
withholding if the transferee relies on a certification from the 
partnership stating that if the

[[Page 76913]]

partnership sold all of its assets at fair market value on the 
determination date, the amount of net effectively connected gain 
resulting from the deemed sale would be less than 10 percent of the 
total net gain from the deemed sale (the EC Gain Exception). The EC 
Gain Exception also applied to a partnership that is a transferee 
because it makes a distribution, in which case the partnership can rely 
on its books and records as of the determination date to determine if 
the EC Gain Exception applies. One comment suggested that the EC Gain 
Exception should refer to the transferor's distributive share of net 
effectively connected gain and should take into account, when 
applicable, the transferor's eligibility for benefits under an income 
tax treaty, rather than the aggregate amount of net effectively 
connected gain that would be realized by the partnership upon the 
deemed sale described in section 864(c)(8) and proposed Sec.  
1.864(c)(8)-1. With respect to treaty benefits, however, the comment 
acknowledged that the maximum tax liability certification provided in 
Sec.  1.1446(f)-2(c)(4) could provide the same result.
    The final regulations adopt this comment in part. Specifically, 
Sec.  1.1446(f)-2(b)(4)(i)(A)(2) provides, in relevant part, that a 
transferee may rely on a certification from the partnership that states 
that if the partnership sold all of its assets at fair market value on 
the determination date in the manner described in Sec.  1.864(c)(8)-
1(c), the transferor's distributive share of net effectively connected 
gain from the partnership would be either zero or less than 10 percent 
of the transferor's distributive share of the total net gain from the 
partnership. Accordingly, this modification applies to situations in 
which the transferor would not have a distributive share of net 
effectively connected gain (including by reason of having a 
distributive share of net effectively connected loss). This 
modification, therefore, generally adopts the suggestion provided in 
the comment to account for the transferor's distributive share of net 
effectively connected gain. Additionally, these final regulations 
retain the rules provided in proposed Sec.  1.1446(f)-2(b)(4)(i)(A) and 
(B) to allow partnerships to make the relevant determination at the 
partnership level as of the determination date, without regard to the 
transferor's distributive share of net effectively connected gain. 
Sec.  1.1446(f)-2(b)(4)(i)(A)(1). For this purpose, however, the final 
regulations simplify the partnership-level exception to withholding by 
combining proposed Sec.  1.1446(f)-2(b)(4)(i)(A) and (B) into a single 
rule; this simplification is intended to be non-substantive.
    These final regulations do not adopt the suggestion in the comment 
regarding the transferor's eligibility for benefits under an income tax 
treaty. With respect to treaty benefits, the Treasury Department and 
the IRS believe that existing exceptions and adjustments, including 
modifications provided in this rulemaking, adequately address that 
aspect of the comment. See, e.g., Sec.  1.1446(f)-2(b)(7) (exception to 
withholding when a treaty claim covers all of the gain from the 
transfer); Sec.  1.1446(f)-2(c)(2)(iv) and section IV.B.3 of this 
Summary of Comments and Explanation of Revisions (modified amount 
realized procedures for transferors that are foreign partnerships); and 
Sec.  1.1446(f)-2(c)(4) (adjustments to the amount to withhold based on 
the transferor's maximum tax liability).
ii. Partnership Not Engaged in a Trade or Business Within the United 
States
    Section 864(c)(8), by its terms, applies only to a transfer of an 
interest in a partnership that is engaged in a trade or business within 
the United States (a USTB partnership). See section 864(c)(8)(A); see 
also Sec.  1.864(c)(8)-1(b)(1). When a partnership holds U.S. real 
property interests and is also subject to section 864(c)(8) because it 
is engaged in a trade or business within the United States, the 
computations provided in Sec.  1.864(c)(8)-1(c) take into account any 
U.S. real property interests held by the partnership. Sec.  
1.864(c)(8)-1(d). Alternatively, for a partnership that is not a USTB 
partnership (for example, the partnership's only assets consist of 
foreign business assets and U.S. real property interests that are not 
used in a trade or business within the United States, such as shares of 
a United States real property holding corporation), Sec.  1.864(c)(8)-
1(d) provides that the rules of section 864(c)(8) and Sec.  
1.864(c)(8)-1 do not apply to a transfer of an interest in that 
partnership. One comment requested that the final regulations 
coordinate section 1446(f)(1) withholding with the rule provided in 
Sec.  1.864(c)(8)-1(d) by clarifying that, for a partnership that is 
not described in Sec.  1.1445-11T(d)(1), the EC Gain Exception applies 
to situations in which the partnership would not have effectively 
connected gain as of the determination date without the application of 
section 897(a). The comment noted that under the proposed regulations, 
no exception to withholding is provided for a transfer that would not 
be subject to section 864(c)(8) because the partnership is not a USTB 
partnership.
    The Treasury Department and the IRS agree that a transfer of an 
interest in a partnership that is not engaged in a trade or business in 
the United States is not subject to section 864(c)(8) and, therefore, 
should be excepted from withholding under section 1446(f). Accordingly, 
Sec.  1.1446(f)-2(b)(4)(i)(B) provides that the transferee may rely on 
a certification from the partnership stating that 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 
(that is, the partnership was not a USTB partnership at any time during 
the period beginning on the first day of the partnership's taxable year 
in which the transfer occurs and ending on the close of the date of 
transfer). While this modification takes into account the general 
scenario described in the comment (that is, the partnership only holds 
foreign business assets and U.S. real property interests that are not 
part of a trade or business and thus is not a USTB partnership), this 
modification also applies to any situation in which a partnership whose 
interest is transferred is not a USTB partnership during the relevant 
period, regardless of whether that partnership holds U.S. real property 
interests. For USTB partnerships that hold U.S. real property 
interests, deemed sale gain attributable to U.S. real property 
interests continues to be treated as effectively connected gain for 
purposes of the 10-percent prong of the EC Gain Exception provided in 
Sec.  1.1446(f)-2(b)(4)(i)(A). Finally, for partnerships that are 
described in Sec.  1.1445-11T(d)(1), see Sec.  1.1446(f)-1(d).
    Similar changes are made to the EC Gain Exception as it applies to 
transfers of PTP interests. See section VI.B.2 of this Summary of 
Comments and Explanation of Revisions and Sec.  1.1446(f)-4(b)(3).
4. 10-Percent ECI Exception
    Proposed Sec.  1.1446(f)-2(b)(5) provided an exception to 
withholding if the transferee relies on a certification from the 
transferor providing, in relevant part, that the transferor was a 
partner in the partnership for the immediately prior taxable year and 
the two preceding taxable years and the transferor's allocable share of 
effectively connected taxable income (determined under Sec.  1.1446-2) 
(ECTI) was less than 10 percent of the transferor's total distributive 
share of net income received from the partnership, and less than $1 
million, in each of those years. For this purpose, proposed Sec.  
1.1446(f)-

[[Page 76914]]

2(b)(5) provided that the transferor's allocable share of ECTI is 
determined by reference to Form 8805, Foreign Partner's Information 
Statement of Section 1446 Withholding Tax, unless the transferor was 
allocated an allocable share of loss that is effectively connected with 
the conduct of a trade or business within the United States, or had 
deductions that are properly allocated and apportioned to income 
effectively connected with the conduct of a trade or business within 
the United States, in which case it is treated as having an allocable 
share of ECTI for that year of zero. See proposed Sec.  1.1446(f)-
2(b)(5)(iii). As a result, the exception provided in proposed Sec.  
1.1446(f)-2(b)(5) could be used only if a transferor was allocated 
either a positive amount of ECTI (as reported on Form 8805) or an 
effectively connected loss (such that no Form 8805 was provided) in 
each year. Additionally, under proposed Sec.  1.1446(f)-2(b)(5)(iv), a 
transferor could not provide the certification required for the 
exception if the transferor did not have a distributive share of net 
income from the partnership for each year described in proposed Sec.  
1.1446(f)-2(b)(5)(i)(A). Finally, the proposed regulations provided 
that a transferee may not rely on a certification provided by the 
transferor if the transferor was not a partner in the partnership for 
each year described in proposed Sec.  1.1446(f)-2(b)(5)(i)(A).
    Comments explained that in some cases partnership investments are 
structured to minimize the risk that a foreign partner will have 
effectively connected income or loss; and, for this purpose, a foreign 
partner in such a structure will not have an allocable share of ECTI or 
effectively connected loss under the partnership agreement. As a 
result, if that foreign partner transfers its interest in the 
partnership, it would not qualify for the exception to withholding 
provided in proposed Sec.  1.1446(f)-2(b)(5) because it would not 
receive a Form 8805 nor have an effectively connected loss for each of 
the taxable years described in proposed Sec.  1.1446(f)-2(b)(5)(i)(A). 
To address this issue, one of the comments suggested that the final 
regulations modify proposed Sec.  1.1446(f)-2(b)(5) to provide relief 
to transferors with neither an allocable share of ECTI nor an 
effectively connected loss.
    The same comment suggested that, for situations in which a foreign 
partner is allocated effectively connected items, the exception should 
look to allocations of gross amounts rather than net amounts in order 
to more accurately reflect the partnership's capacity to produce 
effectively connected income or gain. The comment explained that this 
change would serve as a more accurate proxy for the tax consequences 
that would occur under section 864(c)(8) by reason of the transfer. For 
example, a partnership may generate significant amounts of losses or 
deductions during the relevant period resulting in small amounts of net 
ECTI, but nevertheless hold assets with significant amounts of built-in 
gain that would be treated as effectively connected gain on a deemed 
sale. In that case, the transferor would be able to use the exception 
to withholding provided in proposed Sec.  1.1446(f)-2(b)(5) even though 
the transferor may realize a significant amount of gain under section 
864(c)(8) by reason of the transfer. Finally, with respect to the 
period during which the transferor was required to be a partner in the 
partnership, the comment recommended changing the period provided in 
proposed Sec.  1.1446(f)-2(b)(5)(i)(A) to allow for an exception to 
withholding when the transferor was not a partner in the partnership 
for the transferor's immediately prior taxable year and the two 
preceding taxable years (the look-back period), provided the transferor 
was a partner in the partnership long enough to receive at least one 
Schedule K-1 (Form 1065).
    In response to comments, these final regulations modify the 
exception to withholding under Sec.  1.1446(f)-2(b)(5). Under the 
exception in these final regulations (the ECI Exception), a transferor 
may qualify if its distributive share of gross effectively connected 
income from the partnership for each taxable year within the look-back 
period was less than $1 million and less than 10 percent of the 
transferor's total distributive share of gross income from the 
partnership for that year, with both amounts reflected on a Schedule K-
1 (Form 1065) (or other statement furnished to the partner) received 
from the partnership for each year. Because the ECI Exception looks to 
the transferor's share of effectively connected income (as reported on 
a Schedule K-1 or other statement furnished to the partner), rather 
than its allocable share of ECTI, a transferor that is not allocated 
any effectively connected income or loss in any relevant year can still 
use the exception even if it has not received a Form 8805 for that 
year. The ECI Exception also adopts the suggestion in the comment to 
look to gross amounts of income, rather than net amounts of income, for 
purposes of determining whether the transferor's distributive share of 
effectively connected income was less than 10 percent of the 
transferor's total distributive share of income from the partnership. 
As suggested by the comment, this change is intended to provide a more 
accurate proxy for the tax consequences that would arise under section 
864(c)(8) by reason of the transfer. Consistent with this change, the 
rule provided in proposed Sec.  1.1446(f)-2(b)(5)(iv) is modified to 
state that a transferor cannot provide the certification required for 
the ECI Exception if the transferor did not have a distributive share 
of gross income from the partnership in each of the relevant years. 
Sec.  1.1446(f)-2(b)(5)(iii). Therefore, a transferor will generally be 
able to use the ECI Exception even if it is allocated a distributive 
share of net loss from the partnership for the relevant taxable year.
    These final regulations do not adopt the recommendation in the 
comment with respect to the relevant holding period because the 
Treasury Department and the IRS have determined that reducing a 
transferor's required length of time to be a partner in a partnership 
for purposes of the ECI Exception would not provide an adequate 
indication of the amount of the transferor's effectively connected gain 
realized in connection with the transfer.
5. Claims for Treaty Benefits
    Under the proposed regulations, a transferor may claim an exception 
or adjustment to withholding when it qualifies for treaty benefits with 
respect to a transfer of a partnership interest (including a transfer 
of a PTP interest). See proposed Sec. Sec.  1.1446(f)-2(b)(7) and 
1.1446(f)-4(b)(6). These rules required that the certification to claim 
treaty benefits include an applicable withholding certificate that 
contains the information necessary to support the claim. Comments 
requested clarification of the information required to be provided on 
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) in order to claim treaty benefits 
for purposes of section 1446(f).
    To address the comments, the IRS intends to revise the instructions 
to Forms W-8BEN and W-8BEN-E to describe the information required to be 
provided for making a treaty claim for purposes of section 1446(f), 
including a treaty claim made with respect to a transfer of a PTP 
interest. To make the rules regarding claims for treaty benefits more 
administrable, these final

[[Page 76915]]

regulations allow a transferor to use the applicable withholding 
certificate as the certification for making a claim for benefits under 
an income tax treaty.
6. Additional Comments Regarding Exceptions to Withholding
i. Disguised Sales
    Proposed Sec.  1.864(c)(8)-1(g)(5) defined a transfer for purposes 
of the section 864(c)(8) proposed regulations as including a transfer 
treated as a sale or exchange under section 707(a)(2)(B) (a disguised 
sale). One comment requested an exception from section 1446(f) 
withholding for certain transactions that occur in connection with the 
formation and initial funding of an investment partnership, as well as 
redemptions and admissions of new partners over time, that could be 
characterized as disguised sales of partnership interests. The comment 
acknowledged that addressing the substantive issue regarding what 
constitutes a disguised sale of a partnership interest is beyond the 
scope of this rulemaking. Nonetheless, the comment recommended an 
exception from section 1446(f) withholding for certain transactions 
involving the formation and funding of a partnership and redemptions 
and admissions of new partners over time. The final regulations do not 
adopt the recommendation provided in this comment. If a contributing 
partner is treated as acquiring a partnership interest from a foreign 
person for Federal income tax purposes, it is appropriate to impose a 
withholding obligation on the contributing partner to ensure the 
collection of tax on gain under section 864(c)(8). Further, as the 
comment noted, the issue of what constitutes a disguised sale of a 
partnership interest and the tax consequences flowing from that 
treatment are not unique to the application of these final regulations. 
After studying the issue, the Treasury Department and the IRS have 
determined that adding an exception to withholding to take certain 
cases into account would require a determination, at least in part, of 
what constitutes a disguised sale of a partnership interest in this 
context, and the issue is, therefore, outside the scope of this 
rulemaking.
ii. Withholding Foreign Partnerships and Withholding Foreign Trusts
    Comments requested an exception to withholding for transferors that 
are withholding foreign partnerships (WPs) and withholding foreign 
trusts (WTs) if they assume withholding under section 1446(f). WPs and 
WTs are foreign partnerships and trusts that enter into agreements with 
the IRS to assume primary withholding and reporting responsibilities on 
payments subject to withholding under chapters 3 and 4 with respect to 
their partners, owners, or beneficiaries (as applicable). One of the 
comments suggested that without such a rule, partners of a WP would be 
subject to duplicative withholding.
    The final regulations do not adopt the suggestions contained in 
these comments. First, a rule allowing WPs and WTs to assume 
withholding under section 1446(f) would create complexity and require 
extensive coordination with the existing provisions for withholding and 
reporting in the agreements that WPs and WTs have entered into with the 
IRS. The comments do not provide any suggestions on how to address the 
many issues that would arise if such a rule were adopted. Further, the 
comments do not indicate that such a rule would have a material impact 
on taxpayers that would justify the allocation of resources necessary 
to provide guidance to these taxpayers. Second, any concerns regarding 
duplicative withholding were already addressed under the proposed 
regulations, which allow a foreign partnership to credit any 
withholding under section 1446(f) against its own section 1446(a) 
withholding liability. See Sec. Sec.  1.1446(f)-2(e)(2)(ii) and 
1.1446(f)-4(e)(2)(ii).
iii. Earnout Payments
    A comment noted that a transfer of a partnership interest may be 
subject to an earnout provision that entitles the transferor to future 
payments based on the achievement of specific goals. The comment 
requested guidance clarifying that these future payments will be 
subject to an exception to withholding to the extent that the original 
transfer qualified for an exception to withholding. Under the proposed 
regulations, an exception to withholding in Sec.  1.1446(f)-2 
eliminates any requirement to withhold on the amount realized from the 
transfer of a partnership interest. Thus, if an exception to 
withholding applies at the time of the transfer of a partnership 
interest, it will also apply to any future payments made to the 
transferor that are treated as an amount realized from such transfer. 
As a result, no change is needed in response to this comment.

B. Determining the Amount To Withhold

    If an exception to withholding under proposed Sec.  1.1446(f)-2(b) 
does not apply, proposed Sec.  1.1446(f)-2(c)(1) provided that a 
transferee is required to withhold 10 percent of the amount realized on 
the transfer of the partnership interest. Proposed Sec.  1.1446(f)-2(c) 
provided guidance for determining the amount to withhold and provided 
certain procedures that allow for adjustments to the amount to withhold 
that are intended to better reflect the transferor's tax liability on 
gain under section 864(c)(8). A transferee may use these adjustment 
procedures when it relies on a certification from the transferor (or, 
if applicable, from the partnership). The procedures for determining 
the amount to withhold, therefore, employ the same self-certification 
procedure provided in proposed Sec.  1.1446(f)-2(b). See generally 
section IV.A of this Summary of Comments and Explanation of Revisions.
1. Definition of Amount Realized
    Proposed Sec.  1.1446(f)-2(c)(2)(i) provided generally that the 
amount realized on a transfer of a partnership interest is determined, 
in part, under section 752 (including Sec. Sec.  1.752-1 through 1.752-
7); accordingly, the amount realized includes any reduction in the 
transferor's share of partnership liabilities. One comment requested 
that the final regulations modify the amount realized definition to 
exclude any reduction to the transferor's share of partnership 
liabilities. The comment pointed to the potential liquidity concerns 
that could occur when the amount of liabilities assumed exceeds the 
cash or other property exchanged in the transfer. The Treasury 
Department and the IRS have determined that it is inappropriate to 
exclude a reduction in a transferor's share of partnership liabilities 
from amount realized. Further, proposed Sec.  1.1446(f)-2(c)(3), which 
is retained in these final regulations, addresses the liquidity 
concerns raised in this comment. That provision determines the amount 
to withhold without regard to any decrease in the transferor's share of 
partnership liabilities, but only if the amount otherwise required to 
be withheld would exceed the amount realized (determined without regard 
to any decrease in the transferor's share of partnership liabilities).
2. Modified Amount Realized for Transfers by Foreign Partnerships
    Proposed Sec.  1.1446(f)-2(c)(2)(iv) provided a procedure to 
determine the amount realized when the transferor of a partnership 
interest is a foreign partnership. Specifically, when a foreign 
partnership transfers an interest in a partnership, proposed Sec.  
1.1446(f)-2(c)(2)(iv) provided that the transferee of the interest may 
rely on a certification

[[Page 76916]]

provided by the transferor partnership that provides a modified amount 
realized. The modified amount realized is determined by multiplying the 
amount realized on the transfer (as determined under proposed Sec.  
1.1446(f)-2(c)(2)) by the percentage of the gain from the transfer that 
would be allocated to presumed foreign taxable persons, which include 
any direct or indirect partners of the transferor partnership that have 
not provided a certification of non-foreign status. Proposed Sec.  
1.1446(f)-2(c)(2)(iv)(B). To make the certification, the transferor 
partnership must provide to the transferee a Form W-8IMY, Certificate 
of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. 
Branches for United States Tax Withholding and Reporting, a withholding 
statement allocating the gain to each partner, and a certification of 
non-foreign status for each partner that is treated as a U.S. person. 
See proposed Sec.  1.1446(f)-2(c)(2)(iv)(C). If the transferee may rely 
on the certification, the modified amount realized is treated as the 
amount realized on the transfer.
    One comment recommended that the final regulations expand this 
approach for determining the modified amount realized on a transfer to 
take into account situations in which a foreign partner (direct or 
indirect) in the transferor partnership is eligible for treaty 
benefits. These final regulations adopt this recommendation. 
Accordingly, these final regulations modify proposed Sec.  1.1446(f)-
2(c)(2)(iv) to allow for a reduction of the amount realized when a 
transferor that is a foreign partnership has a direct or indirect 
partner that is not subject to tax on gain from a transfer pursuant to 
an applicable U.S. income tax treaty. Specifically, this modification 
provides that a treaty-eligible partner is not a presumed foreign 
taxable person for purposes of determining the modified amount realized 
under Sec.  1.1446(f)-2(c)(2)(iv). A foreign partnership that provides 
a certification of modified amount realized must include, in addition 
to the Form W-8IMY and a withholding statement, the certification of 
treaty benefits (on a Form W-8BEN or Form W-8BEN-E) from each direct or 
indirect partner that is not a presumed foreign taxable person. Sec.  
1.1446(f)-2(c)(2)(iv)(C).
    Similar changes are made to the modified amount realized procedure 
for transfers of PTP interests. See section VI.C.1 of this Summary of 
Comments and Explanation of Revisions and Sec.  1.1446(f)-4(c)(2)(ii).
3. Certification of Maximum Tax Liability
    Proposed Sec.  1.1446(f)-2(c)(4) provided a procedure to determine 
the amount to withhold under section 1446(f)(1) and proposed Sec.  
1.1446(f)-2(a) that is intended to estimate the amount of tax that the 
transferor is required to pay on gain under section 864(c)(8). 
Specifically, the procedure allows a transferee to withhold based on a 
certification received from the transferor containing certain 
information relating to the transferor and the transfer, including the 
transferor's maximum tax liability (as determined under proposed Sec.  
1.1446(f)-2(c)(4)(ii)) on the transfer. A transferee may rely on a 
certification received from a transferor that is a foreign corporation, 
a nonresident alien individual, or a foreign partnership regarding the 
transferor's maximum tax liability. Proposed Sec.  1.1446(f)-
2(c)(4)(i). A transferor that is a foreign partnership is treated as a 
nonresident alien individual for purposes of determining the 
transferor's maximum tax liability. Id. A comment pointed out that this 
rule adopts an entity approach with respect to determining a foreign 
partnership's maximum tax liability that presumes the partnership is 
liable for tax on its full distributive share of the effectively 
connected items from the transfer at individual tax rates, regardless 
of whether any partners in the partnership are United States persons. 
The comment suggested that the final regulations modify this rule for 
determining a foreign partnership's maximum tax liability based on the 
look-through principles used in proposed Sec.  1.1446(f)-2(c)(2)(iv); 
that is, this modification would allow a foreign partnership to be 
treated as a United States person to the extent that its partners 
provide certifications of non-foreign status or to the extent that its 
partners would be eligible for treaty benefits.
    These final regulations do not adopt the suggestion contained in 
this comment. The Treasury Department and the IRS have determined that 
adopting this suggestion could result in significant complexity and 
would increase the administrative burden on a transferee that receives 
a certification of maximum tax liability. The approach suggested in the 
comment also raises potentially broader issues, including computational 
issues, that are outside the scope of these final regulations. Finally, 
the Treasury Department and the IRS have determined that the 
modifications to Sec.  1.1446(f)-2(c)(2)(iv), which allows claims for 
treaty benefits to be taken into account for purposes of determining 
the modified amount realized, provide sufficient relief in many of the 
cases in which the concerns raised in this comment would arise. See 
section IV.B.2 of this Summary of Comments and Explanation of 
Revisions.
    In response to informal comments, these final regulations modify 
the proposed regulations to allow transferors that are foreign trusts 
to use the maximum tax liability procedure in Sec.  1.1446(f)-2(c)(4) 
to reduce the amount to withhold. Similar to the approach taken with 
respect to foreign partnerships, these rules treat the foreign trust as 
a nonresident alien individual for purposes of computing its maximum 
tax liability under Sec.  1.1446(f)-2(c)(4).

C. Other Comments and Changes to the Proposed Regulations

1. Determining Basis
    A comment asserted that it is often difficult for the transferor of 
a partnership interest to know its basis in the transferred interest at 
the time of transfer; that is, regardless of the Sec.  1.706-4 method 
used, a transferor usually has to wait to receive its Schedule K-1 
(Form 1065) for the taxable year of the transfer before determining its 
basis accurately. As a result, the comment recommended a rule that 
would allow transferors and transferees to calculate the basis of a 
transferred partnership interest (solely for purposes of section 
1446(f)) by reference to reasonable assumptions that can be made with 
certainty at the time of the transfer.
    The Treasury Department and the IRS have determined that the 
concern raised by the comment was already sufficiently addressed in the 
proposed regulations. Specifically, the determination date rules of 
Sec.  1.1446(f)-1(c)(4), which appeared in the proposed regulations and 
are retained in the final regulations, provide substantial flexibility 
with respect to making certain determinations under section 1446(f)(1). 
For example, a transferor (other than a controlling partner) could 
determine its adjusted basis in the transferred partnership interest as 
of the first day of the partnership's taxable year in which the 
transfer occurs. See Sec. Sec.  1.1446(f)-1(c)(4)(i)(C)(1) and 
1.1446(f)-2(c)(4)(iii)(B). Additionally, the No Realized Gain exception 
provided in Sec.  1.1446(f)-2(b)(3) similarly allows the transferor to 
make the relevant determinations as of the determination date.

[[Page 76917]]

2. Qualified Foreign Pension Funds
    Section 1446(f)(5) provides that any term used in both section 
1446(f) and section 1445 will have the meaning provided in section 
1445. Section 1445(f)(3) defines a foreign person as any person other 
than (i) a United States person and (ii) except as otherwise provided 
by the Secretary, an entity with respect to which section 897 does not 
apply due to section 897(l). Section 897(l), in turn, excludes 
qualified foreign pension funds (QFPFs) from the application of section 
897. Accordingly, QFPFs are not treated as foreign persons under 
section 1445.
    Section 1446(f)(6) provides the Secretary of the Treasury authority 
to prescribe regulations that are necessary to carry out the purposes 
of section 1446(f). Pursuant to this authority, the proposed 
regulations provided a definition of foreign person that applies for 
purposes of the regulations under section 1446(f). Specifically, 
proposed Sec.  1.1446(f)-1(b)(4) defined a foreign person as a person 
that is not a United States person. Proposed Sec.  1.1446(f)-1(b)(13) 
defined a United States person as a person described in section 
7701(a)(30). Because QFPFs are not persons described in section 
7701(a)(30), they are foreign persons for purposes of Sec. Sec.  
1.1446(f)-1 through 1.1446(f)-5.
    One comment requested that these final regulations clarify that 
QFPFs are foreign persons for purposes of section 1446(f). The Treasury 
Department and the IRS have determined that the proposed regulations 
provided sufficient clarity regarding the treatment of QFPFs by 
specifically defining the term foreign person for purposes of 
Sec. Sec.  1.1446(f)-1 through 1.1446(f)-5. The final regulations, 
therefore, adopt the relevant definitions provided in the proposed 
regulations with respect to QFPFs.
3. Valuation of Partnership Property
    One comment described a situation in which the transferor and 
transferee of a partnership interest value partnership assets 
differently than the partnership does. The comment recommended, where 
relevant, a clarification to the final regulations allowing for a 
valuation of partnership assets based on the transferor's amount 
realized on a per transfer basis, provided that any valuation is 
supported by an arm's length price on which the transferor and 
transferee have agreed to execute the transaction. The final 
regulations do not adopt this recommendation. Valuation issues are not 
unique to the application of these final regulations; therefore, 
providing an explicit valuation rule in these final regulations that 
would take into account the situation described in the comment goes 
beyond the scope of this rulemaking.
4. Credit for Amounts Withheld on Partnerships, Trusts, or Estates
    The proposed regulations provided rules prescribing the manner in 
which a credit for an amount withheld under section 1446(f) may be 
claimed by a foreign individual, corporation, or partnership. The 
proposed regulations provided in Sec.  1.1446-3(c)(4) that a foreign 
partnership that was withheld upon under section 1446(f) could credit 
the amount withheld against its tax liability under section 1446(a) to 
the extent the amount is allocable to foreign partners. The Treasury 
Department and the IRS intend to amend the instructions to Forms 8804, 
8805, and 8813 to provide that to obtain a credit against its section 
1446(a) liability, a foreign partnership withheld upon under section 
1446(f) on the sale of its non-PTP interest must attach to its Form 
8804, Annual Return for Partnership Withholding Tax (Section 1446), a 
stamped copy of Form 8288-A, Statement of Withholding on Dispositions 
by Foreign Persons of U.S. Real Property Interests.
    These final regulations provide guidance for foreign trusts or 
estates that are withheld upon under section 1446(f). Specifically, 
Sec.  1.1446(f)-2(e)(2)(ii) provides that a foreign trust or estate may 
claim a credit for an amount withheld under section 1446(f) in 
accordance with Sec.  1.1462-1. Thus, the trust or estate may claim a 
credit to the extent it is ultimately liable for tax on the gain under 
section 864(c)(8). Similar guidance is provided for foreign trusts or 
estates claiming credit for amounts withheld on transfers of PTP 
interests. See Sec.  1.1446(f)-4(e)(2)(ii).
5. Certifications Provided by Grantor Trusts
    Under proposed Sec.  1.1446(f)-1(c)(2)(vii), a certification 
provided by a transferor that is a grantor or other owner of a grantor 
trust was required to identify the portion of the amount realized 
attributable to the grantor or owner. These final regulations retain 
this rule, but also include a mechanism for the grantor trust to 
provide the certification on behalf of the transferor to a transferee. 
Under this allowance, a foreign grantor trust may provide to the 
transferee a Form W-8IMY, 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. 
A domestic grantor trust that has a foreign grantor or other owner may 
provide a similar statement in lieu of Form W-8IMY. The allowance 
described in this paragraph may also be applied in the context of a 
grantor or other owner of a grantor trust transferring a PTP interest.

V. Partnership's Requirement To Withhold Under Section 1446(f)(4) on 
Distributions to Transferee

    Section 1446(f)(4) provides that if a transferee fails to withhold 
any amount required to be withheld under section 1446(f)(1), the 
partnership must deduct and withhold from distributions to the 
transferee a tax in an amount equal to the amount the transferee failed 
to withhold (plus interest). Proposed Sec.  1.1446(f)-3 provided rules 
that implement a partnership's requirement to withhold under section 
1446(f)(4), including rules for determining when a partnership is 
required to withhold and report under section 1446(f)(4), rules for 
determining if an exception to withholding applies, and rules for 
determining the amount required to be withheld (including the 
computation of interest). Proposed Sec.  1.1446(f)-3 also provided 
rules regarding the effect of section 1446(f)(4) withholding on the 
transferee and transferor, including procedures that require the 
partnership to make any claim (on behalf of the transferee) for credit 
or refund for amounts overwithheld under section 1446(f)(4).

A. Scope of Withholding Obligation Under Sec.  1.1446(f)-3

    Proposed Sec.  1.1446(f)-3(a)(1) provided that if a transferee 
fails to withhold any amount required to be withheld under proposed 
Sec.  1.1446(f)-2, the partnership whose interest was transferred must 
withhold from any distributions made to the transferee in accordance 
with the rules provided in proposed Sec.  1.1446(f)-3. To determine its 
withholding obligation under proposed Sec.  1.1446(f)-3, if any, a 
partnership may rely on information provided in a certification 
received from the transferee described in proposed Sec.  1.1446(f)-
2(d)(2) (a certification of withholding) unless it knows, or has reason 
to know, that the certification is incorrect or unreliable. Proposed 
Sec.  1.1446(f)-3(a)(1). The proposed regulations, therefore, required 
the partnership to review any certification of withholding received 
from the transferee, including any underlying certification from a 
transferor claiming an exception or adjustment to withholding, because 
the partnership could have information suggesting that the 
certification is

[[Page 76918]]

incorrect or unreliable, and that information may not be available to 
the transferee (for example, if the information was contained in the 
partnership's books and records). See generally section IV.B of the 
Explanation of Provisions section of the preamble to the proposed 
regulations. The transferee must provide the certification of 
withholding to the partnership within 10 days after the date of the 
transfer and deposit any tax due under section 1446(f)(1) within 20 
days after the date of the transfer. Proposed Sec.  1.1446(f)-2(d). If 
a partnership does not receive, or cannot rely on, a certification of 
withholding, it must withhold on the entire amount of each distribution 
made to the transferee until it may rely on a certification of 
withholding to determine that it has satisfied its section 1446(f)(4) 
liability. Proposed Sec.  1.1446(f)-3(c).
1. Partnership's Review of a Certification of Withholding
    A comment stated that the rule in proposed Sec.  1.1446(f)-3(a)(1) 
is problematic as it may require a partnership to withhold under 
section 1446(f)(4) on a transferee that has fully complied with its 
withholding obligations under section 1446(f)(1) by properly relying on 
a certification from the transferor to reduce or eliminate withholding. 
This situation could occur, for example, if the partnership receives an 
underlying certification that a transferee has properly relied on, and 
the partnership has information in its possession indicating that the 
information contained in the certification is incorrect or unreliable. 
The comment therefore asserted that this rule is inconsistent with the 
statute, which imposes section 1446(f)(4) withholding when a transferee 
fails to withhold any amount required to be withheld under section 
1446(f)(1). The comment also stated that the rule in proposed Sec.  
1.1446(f)-3(a)(1) essentially holds the transferee strictly liable for 
any underwithholding, which is inconsistent with the approaches taken 
in other withholding regimes, such as those provided under sections 
1441 through 1443 and section 1445. Therefore, the comment recommended 
that the final regulations eliminate a partnership's requirement to 
withhold under section 1446(f)(4) when a transferee properly relies on 
a certification to reduce or eliminate the withholding tax.
    The Treasury Department and the IRS have determined that the 
approach provided in proposed Sec.  1.1446(f)-3(a)(1) is consistent 
with the language and purpose of section 1446(f), and thus the approach 
is retained in the final regulations. Unlike the withholding regimes 
under sections 1441 through 1443 and 1445, section 1446(f) explicitly 
provides a withholding obligation on a secondary party to the transfer, 
the partnership. Section 1446(f)(4) states that if a transferee fails 
to withhold any amount required to be withheld under section 
1446(f)(1), the partnership must withhold from distributions to the 
transferee in an amount equal to the amount the transferee failed to 
withhold (plus any interest). Under section 1446(f)(1), a transferee is 
generally required to withhold 10 percent of the amount realized on a 
transfer subject to section 864(c)(8). While the proposed regulations 
allow the amount required to be withheld under section 1446(f)(1) to be 
reduced when a transferee relies on a claim for an exception or 
adjustment to withholding, this allowance is conditioned on proper 
review and acceptance of the claim by the partnership. If the 
conditions of the proposed regulations are not met, a transferee is 
required to withhold at the statutory rate under section 1446(f)(1) or 
will be subject to withholding under section 1446(f)(4).
    To limit when withholding under section 1446(f)(4) is imposed on a 
transferee that properly relied on a certification from a transferor, 
the proposed regulations provided sufficient time for a transferee to 
consult with the partnership regarding the accuracy of the 
certification. Specifically, the proposed regulations require the 
transferee to provide a certification of withholding to the partnership 
within 10 days after the transfer and to deposit any withheld tax with 
the IRS within 20 days of the transfer. Therefore, a transferee may 
choose to withhold 10 percent of the amount realized on the transfer, 
and depending on the outcome of its consultation with the partnership, 
either repay the withheld amount to the transferor or deposit it with 
the IRS.
    The final regulations adopt these rules from the proposed 
regulations and add a rule to limit the instances of withholding under 
section 1446(f)(4) on certain transferees, and to reduce the compliance 
burden on such transferees. This rule allows a partnership to determine 
that it does not have a withholding obligation under Sec.  1.1446(f)-3 
if it already possesses a Form W-9, Request for Taxpayer Identification 
Number and Certification, for the transferor that meets the 
requirements provided in Sec.  1.1446(f)-2(b)(2) to establish non-
foreign status, even if the transferee does not provide a certification 
of withholding to the partnership under Sec.  1.1446(f)-2(d)(2). See 
Sec.  1.1446(f)-3(a)(1). Consistent with the general rules for 
partnerships that rely on information in their books and records, a 
partnership may not apply this rule when it knows, or has reason to 
know, that the Form W-9 that it possesses is incorrect or unreliable.
2. Partnership's Discretion To Withhold
    A comment also questioned the application of proposed Sec.  
1.1446(f)-3(a)(1) if the partnership receives a certification from the 
transferee and the partnership does not know or have reason to believe 
that the certification is incorrect or unreliable. Specifically, the 
comment noted that proposed Sec.  1.1446(f)-3(a) states that a 
partnership may rely on a certification of withholding, which suggests 
that reliance on the certification is permissive and not mandatory. The 
comment suggested that, as a result, a partnership may choose to 
disregard a certification received from a transferee, and thus withhold 
on distributions to the transferee, even if the partnership does not 
know, and has no reason to believe, that the information contained in 
the statement is incorrect or unreliable. The comment noted that the 
resulting burden on the transferee is exacerbated because only the 
partnership, rather than the transferee, can directly obtain a refund 
of amounts withheld on distributions to the transferee under section 
1446(f)(4). The comment recommended, therefore, that the final 
regulations clarify that a partnership must (rather than may) rely on a 
certification received from a transferee if the partnership does not 
know or have reason to know that the information contained in the 
certification is incorrect or unreliable.
    The final regulations do not adopt this comment. The approach taken 
in the proposed regulations is consistent with other withholding 
regimes, which allow a withholding agent discretion in determining 
whether to rely on documentation that supports a claim for a reduced 
amount of withholding or an exception to withholding. See, e.g., Sec.  
1.1441-1(b)(1). This discretion is afforded to the withholding agent 
because it is generally the party liable for any failure to withhold 
under section 1461. Further, because a withholding agent is liable 
under section 1461 only for underwithholding, it is unclear how a 
withholding agent that failed to reduce (or eliminate) the amount of 
withholding under such a rule could be held liable. Finally, because 
transferees are partners in the partnership, partnerships generally

[[Page 76919]]

would have an incentive to review and accept valid certifications of 
withholding provided by transferees, rather than withhold unnecessarily 
on them. For these reasons, the final regulations allow the partnership 
to determine whether to rely on a certification of withholding for 
purposes of section 1446(f)(4).
    These final regulations do, however, modify the proposed 
regulations to allow the transferee, rather than the partnership, to 
obtain a refund of overwithholding for amounts withheld under section 
1446(f)(4). As suggested by the comment, this modification mitigates 
some of the effect of any overwithholding. See section V.C of this 
Summary of Comments and Explanation of Revisions.

B. Removal of Withholding Under Section 1446(f)(4) by Publicly Traded 
Partnerships

    Under proposed Sec.  1.1446(f)-4(b)(3) and (4), a broker was not 
required to withhold on a transfer of a PTP interest when the publicly 
traded partnership claims on a qualified notice that an exception 
applies based on either of the following statements: (i) A statement 
that less than 10 percent of the total gain on a deemed sale of the 
publicly traded partnership's assets would be effectively connected 
gain, or no gain would have been effectively connected gain (the 10-
percent exception); or (ii) a statement that the entire amount of a 
distribution is a qualified current income distribution, defined as a 
distribution that does not exceed the net income of the publicly traded 
partnership since the date of the last distribution (the qualified 
current income exception). Under the proposed regulations, a publicly 
traded partnership was required to withhold under section 1446(f)(4) 
only if the partnership posted a qualified notice that falsely stated 
that one of those exceptions to withholding under section 1446(f)(1) 
applied to a transfer (including a transfer that is a distribution), 
and a broker underwithheld in reliance on the qualified notice. The 
requirement for a publicly traded partnership to withhold under section 
1446(f)(4) was included to ensure that publicly traded partnerships 
exercise due diligence when representing information on a qualified 
notice related to either exception given that a broker may rely on the 
notice to apply an exception to withholding under section 1446(f)(1).
    Comments suggested that publicly traded partnerships would be 
unlikely to claim the exceptions to withholding on a qualified notice 
due to the consequences of issuing a false qualified notice, and that 
this would result in overwithholding on transfers of PTP interests. 
Further, comments pointed out that it would be difficult for publicly 
traded partnerships to determine the amount of underwithholding by 
brokers relying on a false qualified notice because publicly traded 
partnerships generally do not have information on transfers effected 
through brokers. A comment noted that a false qualified notice may 
result in a large amount of underwithholding because a broker may rely 
on the qualified notice for all transfers made between the time the 
notice is issued and the date of the next qualified notice (which is 
usually provided quarterly).
    A comment also noted concerns with the rule in proposed Sec.  
1.1446(f)-3(c)(1)(ii)(C), which requires publicly traded partnerships 
to continue withholding on distributions under section 1446(f)(4) even 
when the transferee no longer owns an interest in the partnership. The 
comment noted that this rule could negatively affect market values of 
PTP interests because every person acquiring a PTP interest would be 
subject to the risk that future distributions may be reduced or even 
eliminated, even if the qualified notice has not yet been declared 
false. The comment suggested taking the approach in the proposed 
regulations that applied to transfers of non-PTP interests, which would 
allow the partnership to stop withholding on distributions when the 
transferee no longer owns an interest in the partnership, unless the 
partnership has actual knowledge that any successor to the transferee 
is related to the transferee or transferor.
    In addition, a comment raised a practical concern about the timing 
of the withholding required under proposed Sec.  1.1446(f)-3(c)(1)(i), 
which requires withholding to begin on the later of the date that is 30 
days after the date of transfer, or 15 days after the date on which the 
partnership acquires actual knowledge that the transfer has occurred. 
The comment noted that a publicly traded partnership would be unable to 
withhold until it knows that it has issued a false qualified notice, 
and the comment therefore requested that any withholding obligation 
begin after the publicly traded partnership acquires knowledge that the 
qualified notice is incorrect.
    The comments regarding the application of section 1446(f)(4) to 
publicly traded partnerships also included suggestions to address the 
concerns raised with respect to the withholding requirement. Several 
comments suggested removing the requirement for a publicly traded 
partnership to withhold under section 1446(f)(4) entirely. One comment 
suggested replacing the withholding requirement for a false qualified 
notice with an information reporting penalty (or other quantifiable 
penalty). Another comment suggested instead imposing a penalty on a 
preparer of a qualified notice if the preparer acts in bad faith or 
without a requisite standard of care. Other comments requested 
clarification on whether a ``false'' qualified notice is limited to a 
willfully false notice rather than any erroneous qualified notice.
    The Treasury Department and the IRS have determined that a publicly 
traded partnership should not be required to withhold under section 
1446(f)(4). This withholding would have necessarily impacted the 
distributions made to a transferee (or subsequent transferee) who bears 
no responsibility for the underwithholding resulting from an erroneous 
qualified notice (unlike the case of a transfer of a non-PTP interest). 
Rather, as it is the partnership that determines the contents of its 
qualified notice, the partnership should bear the consequences 
resulting from its representations on the notice rather than any 
specific transferee. As a result, these final regulations remove the 
requirement in the proposed regulations that a publicly traded 
partnership withhold on a transferee under Sec.  1.1446(f)-3 and add 
instead provisions imposing liability for underwithholding under 
section 1461 on the partnership that issued the qualified notice. See 
Sec.  1.1446(f)-4(b)(3)(i) and (c)(2)(iii) and sections VI.B.2 and 
VI.C.2 of this Summary of Comments and Explanation of Revisions. By 
removing the requirement for the partnership to withhold under section 
1446(f)(4) on any transferees, this modification also addresses the 
comments noting concerns that withholding on specific transferees could 
negatively affect the market values of PTP interests. This modification 
also alleviates the need to address those comments concerning when 
withholding under section 1446(f)(4) would begin to apply.
    These final regulations do not apply information reporting 
penalties in lieu of imposing a section 1461 liability on a publicly 
traded partnership. The comment to impose an information reporting 
penalty in lieu of a withholding requirement was not adopted in these 
final regulations due to concerns that a qualified notice may not be 
treated as an information return or a payee statement under section 
6724(d) for purposes of applying penalties under section 6721 or 6722.
    With respect to the comments suggesting that a publicly traded

[[Page 76920]]

partnership would be unable to obtain the information necessary to 
determine the underwithholding resulting from a broker's reliance on a 
qualified notice, for this determination, the Treasury Department and 
the IRS note that a publicly traded partnership should be able to 
obtain information on transfers of PTP interests from nominees holding 
interests in the partnership under Sec.  1.6031(c)-1T (generally 
requiring a nominee to provide certain information about persons for 
whom it holds interests in the partnership, including information on 
transfers of partnership interests).

C. Credits and Refunds for Amounts Withheld Under Section 1446(f)(4)

    Proposed Sec.  1.1446(f)-3(e)(2) provides that a transferee may not 
obtain a refund if the amount of tax withheld under proposed Sec.  
1.1446(f)-3 exceeds the transferee's withholding tax liability under 
proposed Sec.  1.1446(f)-2; instead, only the partnership may claim a 
refund on behalf of the transferee for the excess amount withheld under 
proposed Sec.  1.1446(f)-3. The preamble to the proposed regulations 
provided that the purpose of this rule is to make the refund process 
more administrable and requested comments on this issue.
    Comments requested that the transferee be allowed to directly claim 
a refund for the excess amount withheld under Sec.  1.1446(f)-3. The 
comments explained that it would be neither practical, nor reasonable, 
to expect the partnership to claim the refund on behalf of the 
transferee in most circumstances. Thus, if the partnership does not 
seek a refund on behalf of the transferee for the excess amount 
withheld, the transferee may have no way to obtain the overwithheld 
amounts from the IRS.
    One comment requested clarification regarding the manner in which 
proposed Sec.  1.1446(f)-3(e)(2) measures the excess of the amount of 
tax withheld under Sec.  1.1446(f)-3 over the transferee's withholding 
tax liability under Sec.  1.1446(f)-2. The comment suggested, for 
example, computing the excess amount as the difference between the sum 
of any withholding under Sec. Sec.  1.1446(f)-2 and 1.1446(f)-3, plus 
any tax on gain paid by reason of Sec.  1.864(c)(8)-1, and the total 
tax liability of the foreign transferor (as defined in Sec.  
1.864(c)(8)-1(g)(3)) for the year in which the transfer occurred. 
Alternatively, the comment suggested computing the excess amount as the 
difference between the sum of any withholding under Sec. Sec.  
1.1446(f)-2 and 1.1446(f)-3 and the tax liability of the foreign 
transferor under Sec.  1.864(c)(8)-1 on the transfer.
    The Treasury Department and the IRS agree with these comments and 
modify these final regulations to allow a transferee to directly claim 
and obtain a refund for the excess amount withheld under Sec.  
1.1446(f)-3. Specifically, these final regulations modify Sec.  
1.1446(f)-3, in relevant part, to provide that a transferee may obtain 
a refund of the excess amount if it has made payments in excess of the 
tax which is properly due by the transferee for the tax period. 
Accordingly, under these final regulations, the partnership is not 
permitted to claim a refund on behalf of the transferee for the excess 
amount withheld under Sec.  1.1446(f)-3.
    The final regulations also clarify that the excess amount withheld 
under Sec.  1.1446(f)-3 is the amount of tax and interest withheld 
under Sec.  1.1446(f)-3 that exceeds the transferee's withholding tax 
liability under Sec.  1.1446(f)-2 and any interest owed by the 
transferee with respect to such liability. Sec.  1.1446(f)-3(e)(2). 
This rule retains the general approach in the proposed regulations that 
computes the excess amount as the difference between the amount 
withheld under Sec.  1.1446(f)-3 and the transferee's withholding tax 
liability under Sec.  1.1446(f)-2, but clarifies that both amounts are 
computed by including interest, and a refund may be claimed only to the 
extent that the excess amount produces an overpayment. While the final 
regulations do not explicitly adopt either of the specific suggestions 
made in the comment, this approach is generally consistent with the 
alternative suggestion described in the comment as the final 
regulations also allow a transferee to establish that it has a reduced 
withholding tax liability under Sec.  1.1446(f)-2 based on the amount 
of tax due by the foreign transferor on gain subject to Sec.  
1.864(c)(8)-1, or that tax has already been paid by the foreign 
transferor. See Sec.  1.1446(f)-5(b) and section IV.A of this Summary 
of Comments and Explanation of Revisions. In order to coordinate a 
partnership's obligation to withhold with the transferee's withholding 
liability, these final regulations modify Sec.  1.1446(f)-2(d)(2) to 
provide that a transferee's withholding tax liability under Sec.  
1.1446(f)-2 is not satisfied if a partnership knows or has reason to 
know that a certification relied on by the transferee to reduce or 
eliminate withholding is incorrect or unreliable. See section V.A.1 of 
this Summary of Comments and Explanation of Revisions.

D. Liability of a Related Person to the Transferee

    The proposed regulations generally did not require a partnership to 
continue withholding under section 1446(f)(4) on distributions made 
after the transferee disposed of its interest. However, if the interest 
were transferred to a person that is related to the transferee or the 
transferor from which the transferee acquired its interest (that is, a 
subsequent transferee that bears a relationship described in sections 
267(b) or 707(b)(1) with respect to the relevant party), and if the 
partnership had actual knowledge of the subsequent transferee's 
relationship to the relevant party, proposed Sec.  1.1446(f)-
3(c)(1)(ii)(C) required the partnership to withhold on distributions 
made to the subsequent transferee. This rule was intended to prevent a 
transferee (or any subsequent transferee) from avoiding withholding 
under section 1446(f)(4) by transferring its interest to a related 
person. Consistent with this intent, the final regulations clarify that 
a related person is treated as liable for tax under section 1461 to the 
same extent to which the transferee is liable under Sec.  1.1446(f)-2. 
This clarification is meant to prevent the related person that is 
withheld upon under section 1446(f)(4) from making a claim for a credit 
or refund of the withheld amount. These final regulations, therefore, 
ensure that a credit or refund is permitted only for an amount that 
exceeds the amount that the transferee failed to withhold.

VI. Withholding on the Transfer of a PTP Interest by a Foreign Person

    Proposed Sec.  1.1446(f)-4(a) implemented the withholding 
requirement under section 1446(f) on transfers of PTP interests. Under 
this rule, any broker that effects a transfer of a PTP interest on 
behalf of a foreign partner and receives the amount realized on behalf 
of the transferor is generally required to withhold a tax equal to 10 
percent of the amount realized. Proposed Sec.  1.1446(f)-4(b) provided 
certain exceptions to this requirement, and proposed Sec.  1.1446(f)-
4(c) provided rules for determining the amount realized for purposes of 
withholding on a transfer of a PTP interest. Proposed revisions to 
Sec.  1.1461-1 provided rules for a broker to report the amount 
realized and tax withheld from a transfer of a PTP interest.

A. Scope of Withholding Obligation

1. Qualified Intermediary Agreement
    The preamble to the proposed regulations stated that the Treasury 
Department and the IRS intend to

[[Page 76921]]

modify the qualified intermediary agreement (QI agreement) set forth in 
Revenue Procedure 2017-15, 2017-3 I.R.B. 437, to allow qualified 
intermediaries (QIs) to assume primary withholding responsibilities on 
amounts realized under section 1446(f) and on distributions by publicly 
traded partnerships under section 1446(a). Comments requested that the 
revisions to the QI agreement be set forth in proposed form before the 
modified QI agreement is published. In response to those comments, this 
section VI of this Summary of Comments and Explanation of Revisions 
describes certain requirements specific to QIs to preview several 
intended revisions to the QI agreement that relate to Sec.  1.1446(f)-
4. Additionally, section VII of this Summary of Comments and 
Explanation of Revisions describes certain requirements included in 
Sec.  1.1446-4 of these final regulations that apply to QIs that 
receive distributions made by publicly traded partnerships. Since the 
QI agreement expires at the end of the 2022 calendar year, provisions 
related to these final regulations applicable to QIs will be 
incorporated into a revised QI agreement effective for the 2023 
calendar year. As the provisions of these final regulations that relate 
to withholding with respect to transfers of PTP interests and 
distributions by publicly traded partnerships apply to QIs starting 
January 1, 2022, the requirements for QIs related to section 1446(a) 
and (f) for the 2022 calendar year will be set forth in a rider to the 
QI agreement. See section VIII of this Summary of Comments and 
Explanation of Revisions for a discussion of the applicability dates of 
these final regulations. A QI will not be required to include in a 
periodic review for the 2022 calendar year any review procedures with 
respect to the QI's compliance with sections 1446(a) and (f); 
therefore, the rider will not include any review procedures related to 
those sections, nor will the rider include any new certifications or 
information for purposes of Appendix I of the QI agreement for a QI 
with a certification period ending December 31, 2022.
2. Transfers of PTP Interests That Are Cleared and Settled at a 
Clearing Organization
    The proposed regulations generally defined a broker as any person 
that, in the ordinary course of business, 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. Proposed Sec.  1.1446(f)-1(b)(1). The proposed 
regulations provided that the term broker includes a clearing 
organization that effects the transfer of a PTP interest on behalf of 
the transferor. Id. In addition, the proposed regulations generally 
provided that a broker that pays the amount realized to a foreign 
broker is required to withhold unless the foreign broker is a QI that 
assumes primary withholding responsibility or is a U.S. branch treated 
as a U.S. person. Proposed Sec.  1.1446(f)-4(a).
    The Treasury Department and the IRS received comments requesting 
various exclusions and special rules for brokers effecting trades that 
are cleared and settled at a clearing organization. One comment 
requested that U.S. clearing organizations be excluded from the 
definition of broker in Sec.  1.1446(f)-1(b)(1) in connection with 
their roles in the clearance and settlement of sales of PTP interests. 
The comment noted that U.S. clearing organizations perform a critical 
role in ensuring the functioning of the U.S. capital markets, and that 
imposing withholding requirements on U.S. clearing organizations may be 
disruptive to the market for trading PTP interests.
    The comment also explained that within U.S. clearing organizations, 
trades of securities (including PTP interests) are frequently processed 
through a netting system, whereby each security and related money 
settlement obligation is netted to one net security and payment 
position per broker, with the clearing organization as the central 
counterparty. The netting system creates efficiencies that ensure the 
prompt clearance and settlement of securities transactions and 
increases liquidity in the market. The comment noted that this netting 
process is critical to orderly and efficient trading in the capital 
markets, and that withholding under section 1446(f) on a gross basis 
may cause netting to be impacted with respect to the clearance and 
settlement of PTP interests. The comment also noted that the Treasury 
Department and the IRS have historically recognized this issue by 
creating exceptions or special rules for clearing organizations in 
similar contexts. See Sec. Sec.  1.1473-1(a)(3)(i)(C) and 1.6045-1(b), 
Example 2(vii).
    The comment further explained that a U.S. clearing organization may 
also process bilateral transactions between members of the clearing 
organization for which the cash and securities exchanged are not netted 
by the clearing organization as described in the preceding paragraph. 
These transactions may include, among others, the transfer of cash and 
securities between a seller's broker and custodian in order to settle a 
trade. For example, a member broker effecting a sale of a PTP interest 
for a seller may make a payment of the gross proceeds to the custodian 
for the seller when the seller engages a broker that is not its 
custodian to effect the sale of the PTP interest through a clearing 
organization. The comment requested that withholding on such 
transactions be the responsibility of the member making the gross 
payment and not the clearing organization. The comment stated that the 
members of a U.S. clearing organization are in the better position to 
withhold on such transactions because they possess the information 
about the transaction necessary to determine whether withholding is 
required, whereas the role of the clearing organization in such cases 
is generally limited to transferring securities and cash based on 
instructions provided by the members.
    Another comment requested a special rule for so-called ``delivery 
versus payment'' transactions. The comment noted that regulations under 
section 6045 (which require reporting by brokers of gross proceeds from 
sales of securities by U.S. nonexempt recipients) provide that in the 
case of a sale of securities through a ``cash on delivery'' or 
``delivery versus payment'' account (or other similar account or 
transaction), only the broker that receives the gross proceeds from the 
sale against delivery of the securities sold is required to report the 
sale. See Sec.  1.6045-1(c)(3)(iv). The comment requested that in the 
case of a ``delivery versus payment'' transaction, for purposes of 
section 1446(f), only the custodian for the seller should report and 
withhold on the sale, and not the broker paying the gross proceeds to 
the custodian. The comment noted that without such a rule for section 
1446(f), certain brokers that are not currently documenting and 
reporting payments of gross proceeds for purposes of section 6045 would 
be required to create systems to document and, if necessary, withhold 
on and report payments to a custodian holding a PTP interest on behalf 
of a transferor and receiving the amount realized for purposes of 
section 1446(f).
    The comment also noted that because brokers are not currently 
required to obtain documentation on custodians to which they make 
payments in connection with ``delivery versus payment'' transactions, a 
custodian may not be willing to provide documentation to the broker or 
accept less than the entire amount of gross proceeds from the sale, 
causing the trade to ``fail'' (in other words, the trade would not be 
settled with respect to the transferor holding the PTP interest through 
the

[[Page 76922]]

custodian). However, the comment acknowledged that if the withholding 
responsibility is only on the custodian, there is a risk that a 
custodian would be a nonqualified intermediary (NQI) and would not 
document or withhold on the transferor under section 1446(f). The 
comment suggested that this risk could be mitigated by requiring a 
clearing organization to withhold on these sales, and noted that U.S. 
clearing organizations already collect documentation on their members 
that are custodians for purposes of meeting other withholding 
requirements.
    These final regulations retain the rule in the proposed regulations 
that a broker includes a clearing organization. However, the final 
regulations provide that a broker that is a U.S. clearing organization 
is not required to withhold on an amount realized on trades of PTP 
interests that are netted and that have a U.S. clearing organization as 
the central counterparty. The Treasury Department and the IRS have 
determined a U.S. clearing organization should not be required to 
withhold on such transactions under section 1446(f) at this time. The 
Treasury Department and the IRS understand that withholding by a U.S. 
clearing organization on a gross basis on such trades may be disruptive 
to the efficiency and liquidity of the trading of PTP interests in the 
capital markets. The Treasury Department and the IRS also understand 
that there are no NQI direct clearing members that participate directly 
in the net settlement system at a U.S. clearing organization at the 
present time. Therefore, there is no risk of underwithholding due to 
this exception based on current market practice. Further, the Treasury 
Department and the IRS understand that it is highly unlikely that a NQI 
would become such a member in the future because of restrictions in 
U.S. securities and banking laws on foreign banks and brokers, as well 
as the practical barriers to becoming a direct clearing member at a 
U.S. clearing organization. After carefully weighing the burdens and 
benefits of the possible approaches, the Treasury Department and the 
IRS have determined that the risk of any possible market disruption 
outweighs any benefit of imposing a withholding requirement on a U.S. 
clearing organization in these final regulations at the present time on 
trades settled through a net settlement system at the U.S. clearing 
organization.
    However, in order to ensure that withholding on sales of PTP 
interests that have undergone a netting process at a U.S. clearing 
organization is satisfied by the member brokers and that there are no 
NQI direct clearing members participating in the net settlement system 
with respect to PTP interests, a U.S. clearing organization is required 
in these final regulations to report such sales (on a non-netted basis) 
for each direct clearing member on Form 1042-S, Foreign Person's U.S. 
Source Income Subject to Withholding (unless an exception applies). If 
this reporting on Form 1042-S indicates that an NQI is a direct 
clearing member of a U.S. clearing organization, the Treasury 
Department and the IRS will issue proposed guidance that would revise 
these final regulations to require withholding by the U.S. clearing 
organization on such NQIs.
    With respect to transfers of cash and securities on a gross basis 
by a U.S. clearing organization at the instruction of its members in 
order to settle a trade of a PTP interest, these final regulations do 
not require withholding and reporting by the U.S. clearing 
organization. However, the Treasury Department and the IRS decline to 
adopt an exclusion from withholding and reporting with respect to 
brokers (other than U.S. clearing organizations) for ``delivery versus 
payment'' transactions. Therefore, under these final regulations, a 
broker paying an amount realized to a foreign custodian is required to 
withhold and report on the amount realized (unless an exception 
applies). This determination follows from concerns with cases in which 
brokers may pay amounts realized to custodians that are NQIs. To 
address the concerns raised in the comments about the difficulty of 
obtaining documentation on custodians in order to determine whether 
withholding or reporting applies, these final regulations permit a U.S. 
clearing organization to provide documentation on a member custodian to 
a member broker paying an amount realized to such custodian, subject to 
the notification and opt-out requirements described in the final 
regulations, and a broker may rely on such documentation. See Sec.  
1.1446(f)-4(a)(4). The Treasury Department and the IRS understand that 
it is possible for brokers to create a mechanism for imposing 
withholding on amounts realized paid to custodians that are NQIs (and 
thus avoiding failed trades).
3. Documentation of Non-Foreign Status of Broker
    The proposed regulations provided that a broker must treat another 
broker as a foreign person unless it obtains documentation (including a 
certification of non-foreign status) establishing that the other broker 
is a U.S. person. See proposed Sec.  1.1446(f)-4(a)(2)(iv).
    One comment requested that the presumption rules under Sec.  
1.1441-1(b)(3)(iii) that apply to a payment subject to withholding 
under sections 1441 and 1442 also apply for purposes of section 1446(f) 
when a broker does not obtain documentation on another broker. In 
certain cases, this change would allow a broker to treat another 
broker, including a custodian, to which it pays an amount realized as a 
non-foreign person even when it does not obtain the documentation of 
non-foreign status required under the proposed regulations. This 
suggestion is not adopted in these final regulations. The presumption 
rules in Sec.  1.1441-1(b)(3)(iii) are generally aimed at withholding 
agents that have an ongoing relationship with the payee and make 
periodic payments to the payee and, therefore, are likely to have some 
information on the payee in the withholding agent's account files or in 
documentation associated with a payment. Furthermore, many withholding 
agents that are required to withhold under sections 1441 and 1442 are 
generally subject to anti-money laundering/know your customer (AML/KYC) 
obligations that require the collection of customer information on 
account opening. Therefore, in most instances where the presumption 
rules in Sec.  1.1441-1(b)(3)(iii) apply, the presumption would be 
foreign status. Those rules would not be appropriate in a transactional 
context where a broker may not have an ongoing relationship with 
another broker to which it pays an amount realized. The application of 
such rules to brokers required to withhold on sales of PTP interests 
under section 1446(f) in those cases would generally result in a 
presumption of U.S. status, which would disincentivize brokers from 
collecting tax documentation on another broker to which it pays an 
amount realized. Further, the Treasury Department and the IRS 
understand that there are a limited number of custodians for which a 
broker would need to obtain documentation. Accordingly, documenting a 
broker as a U.S. person would generally be a one-time event because a 
Form W-9 generally has indefinite validity (absent a change in 
circumstances).
    However, in order to provide additional flexibility in cases in 
which a broker may have an existing relationship with another broker, 
these final regulations permit a broker to rely on documentation that 
it already possesses from the payee broker (rather than requiring new 
documentation for each transaction when the same payee

[[Page 76923]]

broker is used). Additionally, these final regulations provide a 
further allowance for a broker to rely on documentation required for 
transfers of PTP interests that is collected by a clearing 
organization. See section VI.A.2 of this Summary of Comments and 
Explanation of Revisions.
    These final regulations also include a technical correction to the 
definition of foreign person to account for certain QIs that are not 
foreign entities. The term foreign person is defined in these final 
regulations to include QI branches of U.S. financial institutions. See 
Sec.  1.1446(f)-1(b)(4). This definition is consistent with the 
definition of foreign person for purposes of sections 1441 through 
1443, 1461, and the regulations under those sections. See Sec.  1.1441-
1(c)(2)(i).
4. QIs Assuming Section 1446(f) Withholding Responsibility
    Under proposed Sec.  1.1446(f)-4, a broker was not required to 
withhold on an amount realized paid to another broker that is a QI that 
represents on its withholding certificate (as described in Sec.  
1.1441-1(e)(3)(ii)) its assumption of primary withholding 
responsibility for chapter 3 withholding. With respect to a 
distribution made by a publicly traded partnership, the proposed 
regulations provided a similar allowance for a QI to assume primary 
withholding responsibility under section 1446(a) by acting as a nominee 
for the distribution. See proposed Sec.  1.1446-4(b)(3).
    The QI agreement generally permits a QI to assume primary 
withholding responsibilities on an account-by-account basis rather than 
on all payments made by a withholding agent to a QI. Comments requested 
generally similar flexibility for QIs assuming withholding 
responsibilities under sections 1446(a) and 1446(f), noting that the 
proposed regulations do not clearly state whether a QI would need to 
assume section 1446 withholding responsibilities as part of its overall 
withholding responsibilities. One comment noted the different system-
related considerations in withholding on sale proceeds as opposed to 
withholding on payments of periodic income. To better match systems 
capabilities of withholding agents and QIs and provide for a more 
efficient withholding process, comments therefore requested that the 
regulations be clarified to permit a QI to assume primary withholding 
responsibilities under section 1446(a) and (f) regardless of whether 
the QI assumes primary withholding responsibilities for other payments 
subject to withholding under chapters 3 and 4. A comment requested that 
a QI be permitted to assume withholding responsibility under section 
1446(a) but not section 1446(f), and vice versa. Another comment 
requested that a QI be permitted to assume withholding responsibility 
under section 1446(f) resulting from a sale of a PTP interest 
independent of whether the QI assumes primary withholding 
responsibility under section 1446(f) on distributions made by the 
publicly traded partnership.
    The Treasury Department and the IRS agree that QIs should be 
permitted appropriate flexibility to make appropriate arrangements to 
assume, or not assume, certain withholding responsibilities. These 
final regulations allow a QI to assume primary withholding 
responsibility under section 1446(f) on a payment-by-payment basis. For 
example, a QI may assume primary withholding responsibility under 
section 1446(f) for a sale of a PTP interest but not a distribution, 
and vice versa. Further, a QI is permitted to assume (or not assume) 
primary withholding responsibility under section 1446(f) on a sale of a 
PTP interest regardless of whether the QI assumes primary withholding 
responsibilities under sections 1441 and 1442. However, under these 
final regulations a QI that assumes withholding responsibilities on any 
portion of a distribution from a publicly traded partnership will be 
required to assume withholding responsibilities for the entire 
distribution (in other words, a QI must either assume withholding 
responsibilities on the distribution for purposes of chapter 3 
(including section 1446(a) and (f)) and chapter 4, or not assume 
withholding responsibilities for any of those purposes). See Sec. Sec.  
1.1446(f)-4(a)(8) and 1.1446-4(b)(3). This requirement will make 
withholding and reporting on distributions with respect to PTP 
interests more efficient because one party will perform the withholding 
and reporting on a distribution. The Treasury Department and the IRS 
intend for the revised QI agreement to incorporate the requirements for 
a QI that assumes primary withholding responsibility under section 
1446(a) or (f).
    Similar changes to those described above for QIs are included in 
these final regulations with respect to payments of amounts realized 
made to U.S. branches that agree to act as U.S. persons under section 
1446(a) or (f). Additionally, these final regulations clarify in Sec.  
1.1446(f)-4(a)(2)(i)(B) that the requirements for a U.S. branch 
withholding certificate under Sec.  1.1441-1(e)(3)(v) apply without 
regard to the requirement that the certificate include a representation 
that the income is not effectively connected with the conduct of a 
trade or business within the United States.
5. QIs Not Assuming Section 1446 Withholding Responsibility
    Under the current QI agreement, a QI is not required to assume 
primary withholding responsibilities under chapters 3 and 4. In such 
cases, a QI provides withholding rate pool information on its account 
holders that are foreign persons (rather than specific information 
about each such account holder) to the withholding agent sufficient for 
the withholding agent to determine the amounts to withhold. The 
proposed regulations permitted an exception to withholding on an amount 
realized paid to a QI only when the QI assumes primary withholding 
responsibility, but provided no special rules for when a QI does not 
assume withholding responsibility under section 1446(f). Comments 
requested that a QI be permitted to not assume primary withholding 
responsibility under section 1446(f) if it provides to the broker 
paying an amount realized a withholding statement that allocates the 
amount realized to account holders of the QI selling their PTP 
interests in withholding rate pools, similar to the allowance for a QI 
to pass up withholding rate pools for purposes of section 1441. See 
Sec.  1.1441-1(b)(2)(vii)(C) and (e)(5)(v)(C). In addition, for 
accounts not designated by a QI as accounts for which it acts under the 
QI agreement, a comment requested that the final regulations also 
permit a QI not assuming primary withholding responsibility under 
section 1446(f) to represent its status as a QI and provide to the 
broker a withholding statement allocating the amount realized to each 
account holder of the QI selling its PTP interest in the same 
transaction, along with specific account holder documentation, 
sufficient for the broker to determine the amount to withhold. This 
allowance would avoid any additional withholding that might apply were 
the QI instead required to represent its status as an NQI in those 
cases, as described in section VI.A.6 of this Summary of Comments and 
Explanation of Revisions, and would relieve a QI from filing a Form 
1042-S in such a case. Comments also requested that a QI be permitted 
to report on Form 1042-S on a pooled basis (rather than to specific 
recipients) for section 1446(f) purposes to the same extent permitted 
for other payments covered by the QI agreement.
    In response to these comments, the final regulations provide that a 
broker

[[Page 76924]]

may determine the amount to withhold under section 1446(f) on an amount 
realized paid to a QI that does not assume primary withholding 
responsibility under section 1446(f) based on aggregate information (in 
other words, in withholding rate pools) about the account holders of 
the QI that are transferring PTP interests. See Sec.  1.1446(f)-
4(a)(7). Under these final regulations, a broker may rely on a QI's 
allocation of an amount realized to a pool of foreign transferors 
subject to 10-percent withholding, a pool of foreign transferors that 
are excepted from withholding under Sec.  1.1446(f)-4(b), and, to the 
extent permitted under chapter 4, U.S. transferors included in a 
chapter 4 withholding rate pool of U.S. payees. This allowance provides 
parity with sections 1441 and 1442 with respect to a QI's requirements 
for its withholding statements (and associated documentation) and will 
provide QIs and brokers making payments of amounts realized to QIs 
greater flexibility in meeting their section 1446(f) requirements. 
Additionally, under these final regulations a broker may also rely on 
specific payee information provided by a QI with respect to foreign 
transferors (rather than pooled information), thereby permitting the 
broker to withhold based on this information rather than treating the 
QI as an NQI in such a case (as would generally be the case for other 
amounts subject to withholding under chapter 3). See Sec.  1.1446(f)-
4(a)(7)(iii). A broker may also withhold as described in the preceding 
sentence for purposes of section 1446(a) under these final regulations 
in order to coordinate the rules applicable to QIs under both sections 
1446(a) and (f). See Sec.  1.1446-4(e) and section VII.C of this 
Summary of Comments and Explanation of Revisions. These final 
regulations also provide that in cases where a QI passes up specific 
payee information for a partner receiving a distribution or an amount 
realized, the nominee or broker shall treat the partner (that is, the 
QI's account holder) as the recipient for purposes of reporting on Form 
1042-S. See Sec.  1.1461-1(c)(1)(ii)(A)(8).
    The revised QI agreement incorporates the allowances described in 
the preceding paragraph, including an allowance relieving a QI from 
filing a Form 1042-S to the extent that it has provided specific payee 
information to a broker that has issued a Form 1042-S to one or more 
account holders of the QI (although such a case will be within the 
scope of a QI's activities under the QI agreement). In addition, as 
requested by comments, the revised QI agreement will permit a QI to 
report on Form 1042-S on a pooled basis (rather than to specific 
recipients) for amounts subject to withholding under section 1446(a) or 
(f) to the same extent generally permitted for other payments to 
foreign account holders under the QI agreement. To ensure that account 
holders that are foreign partners will have the information necessary 
to satisfy their own U.S. income tax reporting requirements, the 
requirements of Sec.  1.6031(c)-1T will be incorporated into the QI 
agreement. See Sec. Sec.  1.6012-1(b)(1), 1.6012-2(g)(1), and 
1.6031(a)-1. Since foreign partners are required to file U.S. income 
tax returns to report their effectively connected income and may 
request Forms 1042-S from QIs to support amounts withheld that are 
reported on their returns, these partners are able to obtain refunds of 
taxes overwithheld under section 1446(f) when making their required 
filings. Therefore, the revised QI agreement will not allow a QI to use 
the collective refund procedures for amounts withheld under section 
1446(a) or (f) with respect to its account holders that are foreign 
partners.
6. Withholding Under Section 1446(f) on Payments to NQIs
    As discussed in section VI.A.5 of this Summary of Comments and 
Explanation of Revisions, these final regulations permit a broker to 
determine its withholding obligation under section 1446(f) by relying 
on certain account holder information provided by a QI that does not 
assume primary withholding responsibility. One comment requested a 
similar allowance that would permit a broker to rely on a certification 
from an NQI for calculating the broker's withholding under section 
1446(f) in a case in which the NQI provides specific partner 
information to the broker (thus avoiding withholding on the full amount 
paid to the NQI in certain cases). The comment noted that requiring 
withholding on amounts realized allocable to U.S. partners that are NQI 
account holders would result in excessive withholding. Another comment 
noted that the requested allowance would relieve an NQI from reporting 
on Form 1042-S as its broker would have the information to report the 
amount realized that is allocated to each foreign partner in the 
publicly traded partnership. See Sec.  1.1461-1(c)(1)(ii)(A)(8) 
(requiring reporting of amounts realized paid to foreign partners of 
publicly traded partnerships).
    Even though overwithholding could occur in certain cases absent the 
requested change, the Treasury Department and the IRS have determined 
that a broker should not be relieved of withholding at the full amount 
under section 1446(f) on amounts realized that are paid to NQIs (except 
when the NQI maintains a U.S. branch that assumes the withholding). 
This determination reflects the view that in general NQIs are not 
required to account to the IRS with respect to their compliance with 
the withholding and reporting requirements of section 1446(f). As in 
the proposed regulations, therefore, a broker will be required to 
withhold at the full 10-percent rate on an amount realized paid to an 
NQI when no exception to withholding applies under these final 
regulations. However, a partner that is an account holder of an NQI 
that is subject to withholding under section 1446(f) will be entitled 
to claim a credit under section 33 for the amount withheld when the 
partner is provided a Form 1042-S supporting the claim from the NQI (or 
as otherwise provided in IRS forms or instructions). See Sec.  
1.1446(f)-4(e)(2).
7. Broker's Determination of Prior Broker Withholding Under Section 
1446(f)
    Under proposed Sec.  1.1446(f)-4(a)(2)(iii), a broker is not 
required to withhold on an amount realized from the sale of a PTP 
interest when it knows that the withholding obligation has been 
satisfied by another broker. A comment requested a specific 
documentation rule (such as a certification from the paying broker) to 
provide more certainty to the receiving broker that the withholding 
requirement has been satisfied with respect to the payment.
    The regulations under section 1441 provide a standard different 
than that included in the proposed regulations for when a withholding 
agent may treat a payment as already subjected to withholding (thus 
avoiding duplicative withholding). That rule provides that an NQI 
receiving a payment from a withholding agent is not required to 
withhold when the NQI has provided a Form W-8IMY, withholding 
statement, and attached documentation to the withholding agent and does 
not know or have reason to know that another withholding agent failed 
to withhold the correct amount. See Sec.  1.1441-1(b)(6). In the case 
of a QI receiving the payment, however, Sec.  1.1441-1(b)(6) provides 
that a QI determines its withholding requirement in accordance with the 
QI agreement. To address the concern raised in the comment regarding 
the difficulty for a broker to show that withholding was applied by 
another broker, these final regulations amend

[[Page 76925]]

that requirement by incorporating a standard generally similar to that 
in Sec.  1.1441-1(b)(6). See Sec.  1.1446(f)-4(a)(4). Therefore, a 
broker acting as an intermediary for an amount realized is not required 
to withhold when it receives the amount from another broker unless it 
knows, or has reason to know, that the paying broker did not withhold 
on the full amount required (or, in the case of a QI receiving the 
amount realized, as required in accordance with the QI agreement).
8. Withholding Date for Sales of PTP Interests
    A comment requested that the date for withholding with respect to a 
sale of a PTP interest should be the settlement date (as opposed to the 
trade date), consistent with the rule in Sec.  31.3406(a)-4(b)(1) for 
when backup withholding under section 3406 is required on certain 
payments of amounts reportable under section 6045. In response to this 
comment, these final regulations include a cross-reference to Sec.  
31.3406(a)-4(b)(1) to clarify the date of withholding under section 
1446(f) for a transfer of a PTP interest other than a distribution.

B. Exceptions to Withholding

    Proposed Sec.  1.1446(f)-4(b) provided exceptions to the 
withholding requirement that applies to a broker paying an amount 
realized from the transfer of a PTP interest, including exceptions that 
apply to distributions by publicly traded partnerships and exceptions 
dependent on certifications obtained from transferors. These final 
regulations modify certain of these exceptions and add an exception for 
certain transferors (the ECI exception). These final regulations also 
remove the exception to withholding for a qualified current income 
distribution in proposed Sec.  1.1446(f)-4(b)(4), and replace that 
exception with a provision for determining the amount realized in the 
case of a distribution by a publicly traded partnership such that 
withholding is required only to the extent a distribution is not 
attributable to net income. A QI will be permitted to apply these same 
exceptions to withholding under the revised QI agreement.
1. ECI Exception
    Comments requested an exception to withholding if a valid Form W-
8ECI, Certificate of Foreign Person's Claim that Income is Effectively 
Connected with the Conduct of Trade or Business in the United States, 
is provided under certain new conditions. The comments explained that 
certain foreign persons not eligible for the section 864(b) trading 
safe harbor, such as dealers in securities, buy and sell PTP interests 
as part of their trade or business in the United States, such that gain 
or loss on the transfer of the PTP interests would be effectively 
connected with the conduct of a trade or business within the United 
States without regard to section 864(c)(8). The comments requested a 
limited exception for non-U.S. persons that provide a Form W-8ECI and 
specify on the form that the gain from the sale, exchange, or other 
disposition of the PTP interest is effectively connected with the 
conduct of a trade or business within the United States without regard 
to the application of section 864(c)(8).
    The Treasury Department and the IRS have determined that it is 
appropriate to provide relief from withholding for transferors that 
certify on a Form W-8ECI that the transferor is a dealer in securities 
(as defined in section 475(c)(1)) and that any gain from the transfer 
of a PTP interest is effectively connected with the conduct of a trade 
or business within the United States without regard to section 
864(c)(8). The final regulations add this exception in Sec.  1.1446(f)-
4(b)(6).
2. 10-Percent Exception
    The proposed regulations provided that a broker may rely on a 
qualified notice stating that the exception to withholding described in 
proposed Sec.  1.1446(f)-4(b)(3) (the 10-percent exception) applies. 
The proposed regulations required that this exception apply as of the 
PTP designated date for a transfer of a PTP interest. The PTP 
designated date was defined as the date for a deemed sale determination 
that is designated by a publicly traded partnership in a qualified 
notice, provided that the date is not earlier than 92 days before the 
date that the publicly traded partnership posts the qualified notice. 
In addition, the proposed regulations limited reliance on a qualified 
notice depending on the date of posting. Specifically, a broker may in 
general only rely on the most recent qualified notice that is posted by 
the publicly traded partnership within the 92-day period ending on the 
date of the transfer.
    One comment requested that, for purposes of the exception, a broker 
be permitted to rely on the qualified notice for 183 days from the date 
of posting by the publicly traded partnership instead of the 92-day 
period provided in the proposed regulations. This comment noted that 
qualified notices issued with respect to distributions that are made 
late in the year complicate the withholding and reporting process.
    As noted in the preamble to the proposed regulations, the 92-day 
period was provided to limit the availability of the 10-percent 
exception to situations in which a publicly traded partnership has 
designated a deemed sale date occurring within the most recent calendar 
quarter given that publicly traded partnerships are in a position to 
determine the value of their assets quarterly. The proposed regulations 
limit reliance on a qualified notice to a notice posted within the 92-
day period ending on the date of transfer in order to ensure that the 
broker is using the most recent information available. Therefore, these 
final regulations retain the 92-day period for purposes of the 10-
percent exception.
    A comment stated that the 10-percent exception should only account 
for the publicly traded partnership's effectively connected gain under 
section 864(c)(8), without taking into account any effectively 
connected gain under section 897. According to the comment, this would 
ensure that the transfer of an interest in a partnership that is not 
engaged in a trade or business within the United States, but that holds 
U.S. real property interests, is not subject to withholding under 
section 1446(f). This comment is not adopted because it is appropriate 
to account for effectively connected gain under section 897 when 
applying the 10-percent exception. However, to address the concern 
raised in the comment, these final regulations add an exception to 
withholding similar to the one described in section IV.A.3.ii of this 
Summary of Comments and Explanation of Revisions that applies when a 
non-publicly traded partnership certifies that it is not engaged in a 
trade or business within the United States (including when the 
partnership is not engaged in a trade or business within the United 
States and only holds U.S. real property interests that are not part of 
a trade or business). A publicly traded partnership states that this 
exception applies by providing on a qualified notice that it is not 
engaged in a trade or business within the United States.
    Finally, these final regulations add a provision for certain cases 
in which a publicly traded partnership is liable under section 1461 for 
underwithholding by a broker on a transfer when the partnership issues 
a qualified notice that incorrectly states the applicability of the 10-
percent exception. However, this liability applies only when the 
publicly traded partnership fails to make a reasonable estimate of the 
amounts required for

[[Page 76926]]

determining the applicability of the 10-percent exception. See Sec.  
1.1446(f)-4(b)(3)(i); see also section V.B of this Summary of Comments 
and Explanation of Revisions.

C. Determining the Amount To Withhold

    If an exception to withholding under proposed Sec.  1.1446(f)-4(b) 
does not apply, proposed Sec.  1.1446(f)-4(c) provided rules for a 
broker to determine the amount realized for purposes of computing the 
amount to withhold on the transfer of a PTP interest. Proposed Sec.  
1.1446(f)-4(c) included a general rule for determining the amount 
realized based on the amount of gross proceeds paid on the transfer (as 
defined in Sec.  1.6045-1(d)(5)) and a procedure for modifying the 
amount realized when the transferor is a foreign partnership that has 
domestic partners.
1. Modified Amount Realized for Transfers by Foreign Partnerships
    Proposed Sec.  1.1446(f)-4(c)(2) provided, in the event of a 
transfer of a PTP interest by a foreign partnership, a procedure that 
allows a broker to reduce the amount realized on the transfer to the 
extent the amount realized is allocable to partners that are U.S. 
persons. A foreign partnership may claim this modified amount realized 
by providing a Form W-8IMY, a withholding statement allocating the 
percentage of gain from the transfer allocable to each direct or 
indirect partner that is a U.S. person or a presumed foreign person, 
and a certification of non-foreign status for each partner that is a 
U.S. person. As described in section IV.B.2 of this Summary of Comments 
and Explanation of Revisions, these final regulations expand the 
analogous procedure under Sec.  1.1446(f)-2(c)(2)(iv) that applies to 
transfers of non-PTP interests to take into account situations in which 
a foreign partner (direct or indirect) in the transferor partnership is 
eligible for treaty benefits. In response to a comment, the same 
modification is made in these final regulations for transfers of PTP 
interests.
    Another comment requested an allowance for the transferor 
partnership to provide to the broker the aggregate percentage of gain 
allocable to its partners that are U.S. persons as opposed to the 
requirement to include on the withholding statement the percentage of 
gain allocable to each partner that is a U.S. person. The comment 
reflects a concern that a broker using the procedure under the proposed 
regulations may be considered to have actual knowledge of the extent to 
which proceeds from the transfer are paid to each partner that is a 
U.S. person, thereby resulting in a requirement for the broker to 
report these gross proceeds under section 6045. See Sec. Sec.  1.6045-
1(g)(1)(i) and 1.6049-5(d)(3)(i).
    The Treasury Department and the IRS have determined that any 
additional reporting under section 6045 that results from this 
requirement is an appropriate consequence of the rule. Additionally, 
this rule provides information useful to the IRS. See, however, 
Sec. Sec.  1.6049-4(c)(4) and 1.6045-1(g)(1)(iv) (providing 
coordination of chapter 61 reporting with reporting by certain foreign 
financial institutions under chapter 4).
    Under the revised QI agreement, a QI will be permitted to adjust an 
amount realized in accordance with the procedures described in this 
section VI.C.1 of this Summary of Comments and Explanation of Revisions 
with respect to any direct account holder of the QI that is a foreign 
partnership or a direct account holder of another QI that is a foreign 
partnership to which the first-mentioned QI pays the amount realized.
2. Determining Amount Realized With Respect to Distributions
    Under the proposed regulations, in the event of a distribution by a 
publicly traded partnership that is treated as a transfer for purposes 
of section 1446(f), the entire amount of a distribution was treated as 
the amount realized. Proposed Sec.  1.1446(f)-4(c)(2). In general, 
under section 731(a), a partner recognizes gain on a distribution from 
a partnership to the extent that any money distributed exceeds the 
partner's basis in its interest in the partnership. Under section 
705(a)(1), a partner's basis in its interest is increased by its 
distributive share of income for the taxable year. Proposed Sec.  
1.1446(f)-4(b)(4) provided an exception to a broker's requirement to 
withhold on a distribution by a publicly traded partnership if the 
entire amount of the distribution is designated on the publicly traded 
partnership's qualified notice (as defined in Sec.  1.1446-4(b)(4)) as 
a qualified current income distribution. The proposed regulations 
defined a qualified current income distribution as a distribution that 
does not exceed the net income that the publicly traded partnership 
earned since the record date of the publicly traded partnership's last 
distribution. This exception was intended to eliminate withholding 
under section 1446(f)(1) on a distribution by a publicly traded 
partnership when the partner would not likely recognize gain from the 
distribution under section 731(a) due to the basis increase under 
section 705(a)(1) for partnership income allocable to a partner.
    Comments suggested various alternatives to the qualified current 
income distribution exception. Two comments requested that withholding 
under section 1446(f) not apply to any distributions by a publicly 
traded partnership. One of those comments asserted that any unrealized 
effectively connected gain attributable to assets of the publicly 
traded partnership would eventually be taxed through withholding under 
either section 1446(a) when the publicly traded partnership disposes of 
those assets or section 1446(f) when the partner sells its PTP 
interest. Certain comments suggested modifying the requirements for the 
exception. One comment suggested that, for purposes of applying the 
exception, a broker should be permitted to treat a distribution as made 
out of current net income unless the qualified notice states otherwise. 
This comment noted that publicly traded partnerships may not publish 
qualified notices designating the distribution as a qualified current 
income distribution due to concerns about liability under proposed 
Sec.  1.1446(f)-3(b)(2)(ii) if the qualified notice is false. Another 
comment suggested modifying the qualified current income distribution 
exception so that withholding under section 1446(f)(1) would not apply 
to the extent that cumulative distributions by a publicly traded 
partnership do not exceed its cumulative net income earned over time.
    Other comments focused on alternatives for coordinating withholding 
under section 1446(f) on distributions by publicly traded partnerships 
with withholding under other sections of the Code, noting that a 
distribution by a publicly traded partnership would be subject to 
withholding under section 1446(f) as well as withholding under sections 
1441, 1442, 1443, and 1446(a) (to the extent applicable) when the 
qualified current income distribution exception would not apply. For 
example, a comment suggested reducing the tax liability under section 
1446(a) by amounts withheld under section 1446(f) dollar-for-dollar, or 
exempting distributions from withholding under section 1446(f) to the 
extent those distributions are subject to withholding under section 
1446(a) (or vice versa). Another comment requested more broadly that 
withholding under section 1446(f) not apply to a distribution made by a 
publicly traded partnership when withholding under section 1441, 1442, 
1443, or 1446(a) applies to the payment.

[[Page 76927]]

    Section 1446(f)(1) requires withholding if any portion of the gain 
on a disposition of an interest in a partnership would be treated under 
section 864(c)(8) as effectively connected gain. Section 1446(f) 
ensures that tax is collected on gain under section 864(c)(8). The 
Treasury Department and IRS have determined that eliminating 
withholding entirely on distributions by publicly traded partnerships 
would undermine the purpose of section 1446(f) in certain cases. For 
example, there may not be a subsequent sale of the PTP interest subject 
to withholding under section 1446(f), particularly if the distribution 
is in redemption of the PTP interest. Alternatively, the value of a 
publicly traded partnership's assets (or the amount of unrealized 
effectively connected gain) may change between the date of a 
distribution and either the date on which the partnership sells the 
assets or the date on which the partner sells its PTP interest.
    The Treasury Department and the IRS do not agree with the comments 
requesting an offset against section 1446(f) withholding for amounts 
withheld under section 1446(a). Section 1446(a) withholding applies to 
effectively connected taxable income earned by the partnership that is 
allocated and distributed to its partners. In contrast, section 1446(f) 
withholding applies to ensure the collection of tax on the built-in 
gain of the partnership's assets under section 864(c)(8). Thus, each 
withholding regime applies to a separate item of taxable income.
    For these reasons, the final regulations continue to require 
withholding under section 1446(f) on a distribution made with respect 
to a PTP interest. However, because the exception for a qualified 
current income distribution provided relief only when a publicly traded 
partnership made a distribution entirely out of current net income, 
these final regulations replace this exception with a procedure in 
Sec.  1.1446(f)-4(c)(2)(iii) for adjusting the amount realized to the 
amount of a distribution in excess of cumulative net income. Thus, if a 
portion of a distribution made by a publicly traded partnership is 
attributable to an amount in excess of cumulative net income, a broker 
is required to withhold only on this portion for purposes of section 
1446(f), rather than on the entire amount of the distribution. Also, in 
response to a comment, this rule looks to the amount in excess of the 
cumulative net income, rather than the current net income (as was 
required under the proposed regulations). The cumulative net income is 
the net income earned by the partnership since the formation of the 
partnership that has not been previously distributed by the 
partnership. As a result of this change, these final regulations remove 
the general rule included in the proposed regulations that defined the 
amount realized from a PTP distribution as the amount of cash and the 
fair market value of property distributed or to be distributed.
    Under the final regulations, the publicly traded partnership 
identifies the portion of a distribution attributable to an amount in 
excess of cumulative net income on a qualified notice. If a broker 
properly withholds based on the qualified notice (applying the rules of 
Sec.  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. Instead, if a publicly traded partnership 
issues a qualified notice that causes a broker to underwithhold with 
respect to an amount in excess of cumulative net income, the 
partnership is liable under section 1461 for any underwithholding on 
such amount.

D. Form 1042-S Reporting Under Section 1446(f)

    The proposed regulations included requirements for reporting with 
respect to transfers of PTP interests on Form 1042-S. As part of these 
requirements, a broker is generally required to report on Form 1042-S a 
payment of an amount realized from the transfer of a PTP interest made 
to a foreign transferor or broker.
    One comment requested clarification that reporting on Form 1042-S 
is performed on an aggregate basis (that is, a broker reports on a 
single Form 1042-S all transfers of PTP interests with respect to a 
customer for a calendar year). The proposed regulations added to Sec.  
1.1461-1(c)(1)(i) the general requirement that a broker report on Form 
1042-S amounts realized as determined under section 1446(f). Section 
1.1461-1(c)(1)(i) generally provides that a Form 1042-S shall be 
prepared for each recipient of an amount subject to reporting and for 
each single type of income payment, in such manner as the form and 
accompanying instructions prescribe. The IRS intends to amend the 
instructions to Form 1042-S to clarify that aggregate reporting is used 
with respect to amounts realized by a transferor on transfers of PTP 
interests.
    As described in section VI.A.6 of this Summary of Comments and 
Explanation of Revisions, these final regulations require a broker to 
withhold on an amount realized paid to an NQI effecting a transfer of a 
PTP interest for an account holder. A comment requested that the 
regulations clarify how a broker reports the payment to the NQI, and 
suggested that the broker report the amount as paid to an unknown 
account holder, with the NQI reported as an intermediary for the amount 
(rather than as the recipient). The Treasury Department and the IRS 
agree with the manner of reporting noted in this comment, which is 
already generally reflected in Sec.  1.1461-1(c)(1)(ii)(B)(1) and 
(c)(4)(ii)(A) (addressing payments to persons that are not recipients, 
including NQIs) and Sec.  1.1461-1(c)(1)(ii)(B)(5) (excluding as a 
recipient a broker withheld upon under Sec.  1.1446(f)-4(a)(2)(i)). In 
response to this comment, the IRS also intends to amend the 
instructions to Form 1042-S to indicate the reporting that applies in 
this case.
    A comment requested clarification that a foreign partnership 
subject to withholding under Sec.  1.1446(f)-4 may use the Form 1042-S 
that it receives from the broker to substantiate the foreign 
partnership's credit of such withholding against its tax liability 
under section 1446(a). In response to this comment, the Treasury 
Department and the IRS intend to amend the instructions to Forms 8804, 
8805 and 8813 to provide that a foreign partnership withheld upon under 
section 1446(f) on the transfer of a PTP interest must attach Form 
1042-S in order to credit such amount against its liability under 
section 1446(a).
    As discussed in section VI.A.2 of this Summary of Comments and 
Explanation of Revisions, under these final regulations a U.S. clearing 
organization will be required to report on Form 1042-S the non-netted 
amounts realized by a foreign broker with respect to sales of PTP 
interests that are cleared and settled on a net basis through the 
clearing organization.
    Finally, under Sec.  1.1461-1(a)(1), a withholding agent that 
withholds tax pursuant to chapter 3 is required to deposit the tax as 
provided in Sec.  1.6302-2(a). Consistent with the proposed 
regulations, these final regulations amend Sec.  1.1461-1(a)(1) to 
incorporate the requirement to deposit tax withheld under section 
1446(f). These final regulations include a conforming change to Sec.  
1.6302-2(a)(1)(i) to provide that the requirement to deposit tax under 
Sec.  1.6302-2 applies to a broker or publicly traded partnership for 
purposes of section 1446(f), and to a nominee or publicly traded 
partnership for purposes of section 1446(a).

[[Page 76928]]

E. Synthetic Interests

    A comment requested clarification that the proposed regulations 
apply only to physical interests in publicly traded partnerships and 
not synthetic interests. A subsequent comment submitted by the same 
commenter suggested that the final regulations clarify this point by 
explicitly defining the term ``interest'' as ``an interest as a partner 
in the partnership.'' The question of when a contract or other 
financial instrument denominated as a synthetic interest in a 
partnership interest may be treated as ownership of a partnership 
interest is beyond the scope of these regulations.

VII. Amendments to Existing Section 1446 Regulations Relating to 
Distributions by Publicly Traded Partnerships

A. Method of Providing a Qualified Notice

    The proposed regulations contained changes to the existing 
qualified notice rules and rules for nominees that apply to 
distributions of effectively connected income, gain, or loss made by 
publicly traded partnerships to foreign partners. Proposed Sec.  
1.1446-4(b)(4) revised the method for a publicly traded partnership to 
provide a qualified notice to a nominee by requiring that the notice be 
posted in a readily accessible format in an area of the primary public 
website of the publicly traded partnership that is dedicated to this 
purpose. Two comments requested that a requirement be added to require 
the publicly traded partnership to furnish a copy of the qualified 
notice to the publicly traded partnership's registered holders that are 
nominees. PTP interests are generally immobilized at a central 
depository and registered in the name of the depository's nominee. The 
comments state that furnishing the qualified notice to the publicly 
traded partnership's registered holders that are nominees would 
facilitate the dissemination of information provided on the qualified 
notice to relevant market participants. Another comment noted the 
burden on brokers to find qualified notices posted on publicly traded 
partnerships' websites and suggested requiring all qualified notices to 
be posted on a central public website.
    The Treasury Department and the IRS have determined that the 
delivery requirements for qualified notices should be aimed at ensuring 
that all relevant market participants receive the information necessary 
to comply with their withholding and reporting obligations. Therefore, 
these final regulations include a requirement for a publicly traded 
partnership to provide a qualified notice to any registered holder that 
is a nominee for a distribution. Because the requirements provided will 
generally ensure that brokers receive the information necessary to meet 
their withholding obligations under Sec.  1.1446(f)-4, these final 
regulations do not adopt the comment to require publicly traded 
partnerships to post their qualified notices to a central website.

B. Default Withholding Rule

    The proposed regulations also added a default withholding rule (the 
default withholding rule) for cases in which a qualified notice fails 
to provide sufficient detail for a nominee to determine the amounts 
subject to withholding on a publicly traded partnership distribution (a 
deficient qualified notice). Under this rule, to the extent that a 
deficient qualified notice fails to specify the type of income from 
which a distribution is made, the nominee must withhold at the highest 
rate specified in section 11(b) or 881 for a partner that is a foreign 
corporation, or the highest rate specified in section 1 or 871 for a 
foreign partner that is not a corporation. See proposed Sec.  1.1446-
4(d). One comment requested that a broker be permitted to adjust the 
rate of withholding under the default withholding rule by considering 
the status of a partner for purposes of taking into account a lower 
treaty rate.
    The Treasury Department and the IRS have concluded that a nominee 
applying the default withholding rule should withhold based on the 
statutory withholding rates determined under the proposed regulations, 
without regard to any lower rate that might apply under an applicable 
income tax treaty. Determinations by nominees of lower rates that might 
otherwise apply under a treaty would depend on information from 
publicly traded partnerships about the characterization of the income 
attributable to the distribution. Because this information would not be 
provided to the nominee on a qualified notice, these final regulations 
clarify that a lower treaty rate is not considered for purposes of 
determining the amount to withhold under the default withholding rule.
    The comment also requested that the final regulations clarify that 
a nominee is required to apply the default withholding rule to a 
distribution for which no qualified notice is issued. Proposed Sec.  
1.1446-4(d) modified the existing rule to provide that a nominee is a 
withholding agent for the entire distribution that it receives from a 
publicly traded partnership (rather than only to the extent of the 
amount specified on a qualified notice). These final regulations add 
language to clarify that a nominee must apply the default withholding 
rule when a publicly traded partnership fails to issue a qualified 
notice for a distribution under Sec.  1.1446-4(b)(4) of these final 
regulations.
    The default withholding rule in the proposed regulations did not 
address a case in which a nominee has no information about the status 
of a partner, including whether the partner is a corporation for 
determining the withholding rate on effectively connected income paid 
to the partner. As a result, these final regulations add that if a 
nominee cannot determine the status of a partner as a corporation, for 
purposes of the default withholding rule the nominee is required to use 
the higher of the following rates: (1) The rate of withholding 
applicable to a foreign person that is a corporation, and (2) the rate 
of withholding applicable to a foreign person that is not a 
corporation.

C. Modifications Related to QIs

    The proposed regulations expanded the definition of a nominee to 
include a QI that assumes primary withholding responsibility for a 
distribution and a U.S. branch of a foreign person that agrees to be 
treated as a U.S. person for withholding on a distribution from a 
publicly traded partnership. To address cases in which a distribution 
by a publicly traded partnership is paid through multiple nominees that 
might each be required to withhold under proposed Sec.  1.1446-4(d), 
these final regulations add an exception to withholding for a nominee 
paying the distribution to a QI or U.S. branch that is also a nominee 
for the distribution.
    Under the QI agreement, a QI may choose not to assume primary 
withholding responsibilities and in certain of those cases may provide 
withholding rate pools, rather than specific payee documentation, to 
the withholding agent that makes a payment to the QI. Because the QI 
agreement applies only to amounts subject to withholding under chapter 
3 (defined as sections 1441 through 1443), chapter 4 (sections 1471 
through 1474), or section 3406, the IRS intends to update the QI 
agreement to extend this treatment to amounts subject to withholding 
under section 1446(a) to the same extent generally permitted for 
payments received by QIs on behalf of their foreign account holders 
under the QI agreement. To coordinate with the intended updates to the 
QI agreement, these final regulations allow a publicly traded 
partnership or nominee paying a

[[Page 76929]]

distribution under section 1446(a) to a QI that does not assume primary 
withholding responsibilities to rely on an allocation of the 
distribution to an applicable withholding rate pool provided by the QI 
by specifying the withholding rate pools permitted for withholding 
under section 1446(a).
    In addition, these final regulations allow a broker to withhold 
under section 1446(a) based on specific payee documentation provided by 
a QI. See Sec.  1.1446-4(e) and section VI.A.5 of this Summary of 
Comments and Explanations of Revisions. Additionally, as discussed in 
section VI.A.4 of this Summary of Comments and Explanations of 
Revisions, these final regulations require a QI or U.S. branch that 
acts as a nominee under section 1446(a) for a distribution made by a 
publicly traded partnership to assume all other required withholding 
responsibilities with respect to the distribution. These provisions (as 
applicable to QIs) will be incorporated into the revised QI agreement.

VIII. Applicability Dates

    The proposed regulations generally provided that the regulations 
would apply 60 days after final regulations are issued. Comments 
requested additional time before withholding on transfers of PTP 
interests is required, noting that the rules in the proposed 
regulations would require brokers to update systems, processes, and 
procedures. The comments generally requested an extension of the 
applicability date to 18 months following the finalization of all 
guidance with respect to this requirement. Another comment requested 
that the same extension apply to QIs, noting the time required for QIs 
to review the regulations and anticipated revisions to the QI 
agreement, and to implement the necessary updates to their systems and 
procedures.
    The provisions in these final regulations relating to transfers of 
PTP interests apply to transfers that occur on or after January 1, 
2022. See Sec. Sec.  1.1446(f)-4(f), 1.1461-1(i), 1.1461-2(d), and 
1.1464-1(c). Similarly, Sec.  1.6302-2(g) applies to tax required to be 
withheld on or after January 1, 2022 with respect to section 1446(f). 
The provisions included in these final regulations that are applicable 
to QIs will apply beginning January 1, 2022. See section VI.A.1 of this 
Summary of Comments and Explanations of Revisions. The Treasury 
Department and the IRS have determined that this applicability date 
should provide sufficient time for taxpayers to prepare to implement 
the regulations relating to transfers of PTP interests. Additionally, 
certain allowances in the final regulations, such as the allowances for 
brokers to rely on documentation from clearing organizations in certain 
cases and documentation already in the broker's possession, should 
reduce the time needed for brokers to update their systems. See section 
VI.A.3 of this Summary of Comments and Explanation of Revisions.
    Other provisions in the final regulations that require systems 
adjustments by publicly traded partnerships, such as the procedures for 
qualified notices, are similarly applicable on January 1, 2022. 
Specifically, the requirements with respect to publicly traded 
partnership distributions under Sec.  1.1446-4 of these final 
regulations apply to distributions made on or after January 1, 2022. 
See Sec.  1.1446-7. In addition, the requirements with respect to 
distributions that are attributable to dispositions of U.S. real 
property interests under Sec.  1.1445-8(f) apply to distributions made 
on or after January 1, 2022. See Sec.  1.1445-8(j).
    Further, in order to provide partnerships with time to implement 
withholding under section 1446(f)(4), Sec.  1.1446(f)-3 applies to 
transfers that occur on or after January 1, 2022. See Sec.  1.1446(f)-
3(f).
    As contemplated in the proposed regulations, Sec.  1.864(c)(8)-2(a) 
applies to transfers that occur on or after November 30, 2020, 
Sec. Sec.  1.864(c)(8)-2(b) and (c) and 1.6050K-1(c)(2) and (3) apply 
to returns filed on or after November 30, 2020, and Sec.  1.864(c)(8)-
2(d) applies beginning on November 30, 2020. See Sec. Sec.  
1.864(c)(8)-2(e) and 1.6050K-1(h). Sections 1.1445-2(b)(2)(v) and 
1.1445-5(b)(3)(iv) apply to the use of Forms W-9 for certifications of 
non-foreign status provided on or after May 7, 2019, except that a 
taxpayer may choose to apply those provisions with respect to 
certifications provided before that date. See Sec. Sec.  1.1445-2(e) 
and 1.1445-5(h).
    The conforming changes in Sec. Sec.  1.1445-5 and 1.1445-8 
resulting from the rate changes made by the Act apply to distributions 
on or after November 30, 2020. The conforming changes in Sec. Sec.  
1.1446-3 and 1.1446-4 resulting from the rate changes made by the Act 
and the change to the due date of Form 8804 made by the Surface 
Transportation Act apply to partnership taxable years beginning on or 
after November 30, 2020. Although the applicability date of the changes 
to the regulations described in this paragraph is based on the date of 
publication of this document in the Federal Register, the same results 
apply before that date as of the relevant effective dates of the Act 
and the Surface Transportation Act.
    The remaining provisions in these final regulations are generally 
applicable to transfers that occur on or after January 29, 2021, as 
contemplated in the proposed regulations. See Sec. Sec.  1.1446(f)-
1(e), 1.1446(f)-2(f), 1.1446(f)-5(d), 1.1461-3, and 1.1463-1(a).

Effect on Other Documents

    Notice 2018-08 (2018-7 I.R.B. 352) is obsolete as of January 1, 
2022. Notice 2018-29 (2018-16 I.R.B. 495), other than section 11, is 
obsolete as of January 29, 2021. Section 11 of Notice 2018-29 is 
obsolete as of January 1, 2022. Accordingly, the withholding 
requirements for transfers of PTP interests and withholding under 
section 1446(f)(4) remain suspended for transfers occurring before 
January 1, 2022.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, notices, and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin and are available from the Superintendent of Documents, U.S. 
Government Publishing Office, Washington, DC 20402, or by visiting the 
IRS website at https://www.irs.gov.

Special Analyses

I. Regulatory Planning and Review

    These regulations are not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget regarding review of tax regulations.

II. Paperwork Reduction Act

    The collections of information in these final regulations are in 
Sec.  1.864(c)(8)-2 regarding reporting for transactions described in 
section 864(c)(8) and Sec.  1.864(c)(8)-1; Sec. Sec.  1.1446(f)-1 
through 1.1446(f)-4 regarding the withholding, reporting, and paying of 
tax under section 1446(f) following the transfer of an interest 
described in section 864(c)(8) and Sec.  1.864(c)(8)-1; and Sec.  
1.6050K-1(c) regarding reporting of section 751(a) exchanges. Section 
II.A of this Special Analyses describes the changes made in these final 
regulations to the collections of information in the proposed 
regulations that will be conducted using IRS forms. Section II.B of 
this Special Analyses describes the changes made in

[[Page 76930]]

these final regulations to the collections of information in the 
proposed regulations that will not be conducted using IRS forms.

A. Collections of Information Conducted Using IRS Forms

    These final regulations include an exception from withholding for 
amounts realized paid to certain foreign banks and securities dealers. 
Sec.  1.1446(f)-4(b)(6). The collection of information in Sec.  
1.1446(f)-4(b)(6) is provided by the transferor by submitting a 
certification as part of Form W-8ECI, Certificate of Foreign Person's 
Claim that Income is Effectively Connected with the Conduct of Trade or 
Business in the United States, to the broker and is optional. The 
information will be used by the broker to determine whether an 
exception to withholding applies if the gain from the transfer of a PTP 
interest is effectively connected with the conduct of a trade or 
business within the United States without regard to section 864(c)(8).
    The Treasury Department and the IRS intend that the information 
collection requirement described in this section II.A will be set forth 
on Form W-8ECI. As a result, for purposes of the Paperwork Reduction 
Act, 44 U.S.C. 3501 et seq. (PRA), the reporting burden associated with 
the collection of information in this form will be reflected in the PRA 
submission associated with the form. The current status of the PRA 
submission for Form W-8ECI is provided in the Current Status of PRA 
Submissions table.

                                        Current Status of PRA Submissions
----------------------------------------------------------------------------------------------------------------
                                                 Type of filer          OMB No(s).              Status
----------------------------------------------------------------------------------------------------------------
Form W-8ECI.............................  Business (NEW Model)......       1545-0123  Approved 01/30/2019 until
                                                                                       01/30/21.
                                         -----------------------------------------------------------------------
                                          https://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=1545-0123#.
                                         -----------------------------------------------------------------------
                                          All other filers (Legacy         1545-1621  Approved 12/19/2018 until
                                           system).                                    12/31/2021.
                                         -----------------------------------------------------------------------
                                          Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201708-1545-002 002.
----------------------------------------------------------------------------------------------------------------

B. Collections of Information Not Included on IRS Forms

    These final regulations contain collections of information that are 
not on existing or new IRS forms, and include minor modifications to 
the collections of information in the proposed regulations relating to 
certain certifications that may be provided to obtain an exception to 
withholding or an adjustment to the amount to withhold. See Sec.  
1.1446(f)-2(b)(4) and (5) and (c)(2). See sections IV.A.3, VI.A.4, and 
IV.B.2 of the Summary of Comments and Explanation of Revisions for 
explanations of the changes to these certifications.
    Section II.B of the Special Analyses of the proposed regulations 
provided estimates of the cost of certain collections of information 
contained in the proposed regulations. A comment suggested that the 
cost of collections of information for a broker was too high. However, 
the comment misinterpreted the data provided in section II.B of the 
Special Analyses of the proposed regulations. The estimated total 
annual monetized cost provided in section II.B of the Special Analyses 
of the proposed regulations was the estimated cost of all collections 
of information not on existing or new IRS forms for all respondents 
(generally transferors of partnership interests), not the estimated 
cost of compliance for a broker.
    The collections of information contained in these final regulations 
have been reviewed and approved by the Office of Management and Budget 
in accordance with the PRA under control number 1545-2292.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    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.

III. Regulatory Flexibility Act

    It is hereby certified that these final regulations will not have a 
significant economic impact on a substantial number of small entities 
within the meaning of section 601(6) of the Regulatory Flexibility Act 
(5 U.S.C. chapter 6).
    The final regulations affect (i) foreign persons that recognize 
gain or loss from the sale or exchange of an interest in a partnership 
that is engaged in a trade or business within the United States (who 
are not subject to the Regulatory Flexibility Act), (ii) U.S. persons 
that are transferors providing Forms W-9 to transferees to certify that 
they are not foreign persons, (iii) persons who acquire interests in 
partnerships engaged in a trade or business within the United States, 
(iv) partnerships that, directly or indirectly, have foreign persons as 
partners, and (v) brokers that effect transfers of interests in 
publicly traded partnerships.
    The Treasury Department and the IRS do not have data readily 
available to assess the number of small entities potentially affected 
by the final regulations. However, entities potentially affected by 
these final regulations are generally not small entities, because of 
the resources and investment necessary to acquire a partnership 
interest from a foreign person or, in the case of a partnership, to, 
directly or indirectly, have foreign persons as partners. Therefore, 
the Treasury Department and the IRS have determined that there will not 
be a substantial number of domestic small entities affected by the 
final regulations. Consequently, the Treasury Department and the IRS 
certify that the final regulations will not have a significant economic 
impact on a substantial number of small entities.
    Pursuant to section 7805(f) of the Code, the proposed regulations 
preceding these final regulations were submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on their 
impact on small businesses, and no comments were received.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
state, local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated

[[Page 76931]]

annually for inflation. This rule does not include any Federal mandate 
that may result in expenditures by state, local, or tribal governments, 
or by the private sector in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (titled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. This final rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive order.

Drafting Information

    The principal authors of these regulations are Chadwick Rowland, 
Subin Seth, Ronald M. Gootzeit, and Charles Rioux, Office of the 
Associate Chief Counsel (International). However, other personnel from 
the Treasury Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    For the reasons set out in the preamble, 26 CFR part 1 is amended 
as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by:
0
1. Adding a sectional authority for Sec.  1.864(c)(8)-2 in numerical 
order.
0
2. Revising the sectional authorities for Sec. Sec.  1.1445-5 and 
1.1445-8.
0
3. Adding sectional authorities for Sec. Sec.  1.1446-3, 1.1446-4, and 
1.1446(f)-1 through 1.1446(f)-5 in numerical order.
0
4. Revising the sectional authority for Sec.  1.6050K-1.
    The additions and revisions read in part as follows:

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

    Section 1.864(c)(8)-2 also issued under 26 U.S.C. 864(c)(8)(E), 
6001 and 6031(b).
* * * * *
    Section 1.1445-5 also issued under 26 U.S.C. 1445(e)(7).
    Section 1.1445-8 also issued under 26 U.S.C. 1445(e)(7).
    Section 1.1446-3 also issued under 26 U.S.C. 1446(g).
    Section 1.1446-4 also issued under 26 U.S.C. 1446(g).
    Section 1.1446(f)-1 also issued under 26 U.S.C. 1446(f)(6) and 
1446(g).
    Section 1.1446(f)-2 also issued under 26 U.S.C. 1446(f)(6) and 
1446(g).
    Section 1.1446(f)-3 also issued under 26 U.S.C. 1446(f)(6) and 
1446(g).
    Section 1.1446(f)-4 also issued under 26 U.S.C. 1446(f)(6) and 
1446(g).
    Section 1.1446(f)-5 also issued under 26 U.S.C. 1446(f)(6) and 
1446(g).
* * * * *
    Section 1.6050K-1 also issued under 26 U.S.C. 6050K(a).
* * * * *

0
Par. 2. Section 1.864(c)(8)-2 is added to read as follows:


Sec.  1.864(c)(8)-2  Notification and reporting requirements.

    (a) Notification by foreign transferor--(1) In general. Except as 
provided in paragraph (a)(2) of this section, a notifying transferor 
that transfers an interest in a specified partnership must notify the 
partnership of the transfer in writing within 30 days after the 
transfer. The notification must include--
    (i) The names and addresses of the notifying transferor and the 
transferee or transferees;
    (ii) The U.S. taxpayer identification number (TIN) of the notifying 
transferor and, if known, of the transferee or transferees; and
    (iii) The date of the transfer.
    (2) Exceptions--(i) Certain interests in publicly traded 
partnerships. Paragraph (a)(1) of this section does not apply to a 
notifying transferor that transfers 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).
    (ii) Certain distributions. Paragraph (a)(1) of this section does 
not apply to a notifying transferor that is treated as transferring an 
interest in a specified partnership because it received a distribution 
from that specified partnership.
    (3) Section 6050K. The notification described in paragraph (a)(1) 
of this section may be combined with or provided at the same time as 
the notification described in Sec.  1.6050K-1(d), provided that it 
satisfies the requirements of both sections.
    (4) Other guidance. The notification described in paragraph (a)(1) 
of this section must also include any information prescribed by the 
Commissioner in forms or instructions or in publications or guidance 
published in the Internal Revenue Bulletin (see Sec. Sec.  
601.601(d)(2) and 601.602 of this chapter).
    (b) Reporting by specified partnerships with notifying transferor--
(1) In general--(i) Requirement to provide statement. A specified 
partnership must provide to a notifying transferor the statement 
described in paragraph (b)(2) of this section if--
    (A) The partnership receives the notice described in paragraph (a) 
of this section, or otherwise has actual knowledge that there has been 
a transfer of an interest in the partnership by a notifying transferor; 
and
    (B) At the time of the transfer, the notifying transferor would 
have had a distributive share of deemed sale EC gain or deemed sale EC 
loss within the meaning of Sec.  1.864(c)(8)-1(c).
    (ii) Distributions. For purposes of paragraph (b)(1)(i)(B) of this 
section, a specified partnership that is a transferee because it makes 
a distribution is treated as having actual knowledge of that transfer.
    (2) Contents of statement. The statement required to be furnished 
by the specified partnership under paragraph (b)(1) of this section 
must include--
    (i) The items described in Sec.  1.864(c)(8)-1(c)(3)(ii) (foreign 
transferor's aggregate deemed sale EC items, which includes items 
derived from lower-tier partnerships);
    (ii) Whether the items described in paragraph (b)(2)(i) of this 
section were determined (in whole or in part) under Sec.  1.864(c)(8)-
1(c)(2)(ii)(E) (material change in circumstances rule for determining 
deemed sale EC gain or deemed sale EC loss from a deemed sale of the 
partnership's inventory property or intangibles); and
    (iii) Any other information as may be prescribed by the 
Commissioner in forms, instructions, publications, or guidance 
published in the Internal Revenue Bulletin (see Sec. Sec.  
601.601(d)(2) and 601.602 of this chapter).
    (3) Time for furnishing statement. The specified partnership must 
furnish the required information on or before the due date (with 
extensions) for issuing Schedule K-1 (Form 1065), Partner's Share of 
Income, Deductions, Credits, etc., or other statement required to be 
furnished under Sec.  1.6031(b)-1T, to the notifying transferor for the 
year of the transfer. See Sec.  1.6031(b)-1T(b).
    (4) Manner of furnishing statement. The statement required to be 
furnished under paragraph (b)(1) of this section must be provided on 
Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, 
Credits, etc., or other statement required to be furnished under Sec.  
1.6031(b)-1T.
    (5) Partnership notifying transferor. For purposes of this 
paragraph (b), a

[[Page 76932]]

specified partnership must treat a notifying transferor that is a 
partnership as a nonresident alien individual.
    (c) Statement may be provided to agent. A specified partnership may 
provide a statement required under paragraph (b)(2) of this section to 
a person other than the notifying transferor if the person is described 
in Sec.  1.6031(b)-1T(c).
    (d) Definitions. The following definitions apply for purposes of 
this section.
    (1) Notifying transferor. The term notifying transferor means any 
foreign person, any domestic partnership that has a foreign person as a 
direct partner, and any domestic partnership that has actual knowledge 
that a foreign person indirectly holds, through one or more 
partnerships, an interest in the domestic partnership.
    (2) Specified partnership. The term specified partnership means a 
partnership that is engaged in a trade or business within the United 
States or that owns (directly or indirectly) an interest in a 
partnership that is engaged in a trade or business within the United 
States.
    (3) Transfer. The term transfer has the meaning provided in Sec.  
1.864(c)(8)-1(g)(5).
    (e) Applicability dates. Paragraph (a) of this section applies to 
transfers that occur on or after November 30, 2020. Paragraphs (b) and 
(c) of this section apply to returns filed on or after November 30, 
2020. Paragraph (d) of this section applies beginning on November 30, 
2020.

0
Par. 3. Section 1.1445-2 is amended by adding paragraph (b)(2)(v) and a 
sentence to the end of paragraph (e) to read as follows:


Sec.  1.1445-2  Situations in which withholding is not required under 
section 1445(a).

* * * * *
    (b) * * *
    (2) * * *
    (v) Form W-9. For purposes of paragraph (b)(2)(i) of this section, 
a certification of non-foreign status includes a valid Form W-9, 
Request for Taxpayer Identification Number and Certification, or its 
successor, submitted to the transferee by the transferor.
* * * * *
    (e) * * * Paragraph (b)(2)(v) of this section applies to 
certifications provided on or after May 7, 2019, except that a taxpayer 
may choose to apply paragraph (b)(2)(v) of this section with respect to 
certifications provided before May 7, 2019.

0
Par. 4. Section 1.1445-5 is amended by:
0
1. Adding paragraph (b)(3)(iv).
0
2. In each paragraph listed in the first column in the table, removing 
the language in the second column and adding in its place the language 
in the third column as set forth below:

------------------------------------------------------------------------
          Paragraph                  Remove                  Add
------------------------------------------------------------------------
(c)(1)(ii) first sentence...  A partnership must    A partnership must
                               withhold a tax        withhold a tax
                               equal to 35 percent   equal to the rate
                               (or the highest       specified in
                               rate specified in     section 1445(e)(1)
                               section 1445(e)(1)).  multiplied by the
                                                     amount.
(c)(1)(iii)(A) third          The fiduciary must    The fiduciary must
 sentence.                     withhold 35 percent   withhold a tax
                               (or the highest       equal to the rate
                               rate specified in     specified in
                               section 1445(e)(1)).  section 1445(e)(1)
                                                     multiplied by the
                                                     amount.
(c)(1)(iv)..................  The trustee or        The trustee or
                               equivalent            equivalent
                               fiduciary of a        fiduciary of a
                               trust that is         trust that is
                               subject to the        subject to the
                               provisions of         provisions of
                               subpart E of part 1   subpart E of part 1
                               of subchapter J       of subchapter J
                               (sections 671         (sections 671
                               through 679) must     through 679) must
                               withhold a tax        withhold a tax
                               equal to 35 percent   equal to the rate
                               (or the highest       specified in
                               rate specified in     section 1445(e)(1)
                               section 1445(e)(1)).  multiplied by the
                                                     amount.
(c)(3)(ii)..................  A partnership or      A partnership or
                               trust electing to     trust electing to
                               withhold under this   withhold under this
                               Sec.   1.1445-        paragraph (c)(3)
                               5(c)(3) shall         shall withhold from
                               withhold from each    each distribution
                               distribution to a     to a foreign person
                               foreign person an     an amount equal to
                               amount equal to 35    the rate specified
                               percent (or the       in section
                               highest rate          1445(e)(1)
                               specified in          multiplied by.
                               section 1445(e)(1)).
(d)(1) first sentence.......  A foreign             A foreign
                               corporation that      corporation that
                               distributes a U.S.    distributes a U.S.
                               real property         real property
                               interest must         interest must
                               deduct and withhold   deduct and withhold
                               a tax equal to 35     a tax equal to the
                               percent (or the       rate specified in
                               rate specified in     section 1445(e)(2)
                               section 1445(e)(2)).  multiplied by.
------------------------------------------------------------------------

0
3. Adding a sentence to the end of paragraph (c)(1)(iii)(B) 
introductory text.
0
4. Adding two sentences to the end of paragraph (h).
    The additions read as follows:


Sec.  1.1445-5  Special rules concerning distributions and other 
transactions by corporations, partnerships, trusts, and estates.

* * * * *
    (b) * * *
    (3) * * *
    (iv) Form W-9. For purposes of paragraph (b)(3)(i) of this section, 
a certification of non-foreign status includes a valid Form W-9, 
Request for Taxpayer Identification Number and Certification, or its 
successor, submitted to the transferee by the transferor.
* * * * *
    (c) * * *
    (1) * * *
    (iii) * * *
    (B) * * * In 1994, the relevant rate of withholding (that is, the 
rate specified in section 1445(e)(1)) was 35%.
* * * * *
    (h) * * * Paragraph (b)(3)(iv) of this section applies to 
certifications provided on or after May 7, 2019, except that a taxpayer 
may choose to apply paragraph (b)(3)(iv) of this section with respect 
to certifications provided before May 7, 2019. Paragraphs (c) and (d) 
of this section apply to distributions on or after November 30, 2020.

0
Par. 5. Section 1.1445-8 is amended by revising paragraphs (c)(2)(i) 
and (f) and adding paragraph (j) to read as follows:


Sec.  1.1445-8  Special rules regarding publicly traded partnerships, 
publicly traded trusts and real estate investment trusts (REITs).

* * * * *
    (c) * * *
    (2) * * *
    (i) In general. The amount to be withheld with respect to a 
distribution by a REIT, under this section shall be equal to the 
highest rate specified in section 1445(e)(1) multiplied by the amount 
described in paragraph (c)(2)(ii) of this section.
* * * * *
    (f) Qualified notice. A qualified notice for purposes of paragraph 
(b)(3)(iv) of this section is a notice provided in the manner described 
in Sec.  1.1446-4(b)(4) by a partnership, trust, or REIT regarding a 
distribution that is attributable to the disposition of a United States 
real

[[Page 76933]]

property interest. In the case of a REIT, a qualified notice is only a 
notice of a distribution, all or any portion of which the REIT actually 
designates, or characterizes in accordance with paragraph (c)(2)(ii)(C) 
of this section, as a capital gain dividend in the manner described in 
Sec.  1.1446-4(b)(4), with respect to each share or certificate of 
beneficial interest. A deemed designation under paragraph (c)(2)(ii)(A) 
of this section may not be the subject of a qualified notice under this 
paragraph (f). A person described in paragraph (b)(3) of this section 
is treated as receiving a qualified notice when the notice is provided 
in accordance with Sec.  1.1446-4(b)(4).
* * * * *
    (j) Applicability dates. Paragraph (c)(2)(i) of this section 
applies to distributions on or after November 30, 2020. Paragraph (f) 
of this section applies to distributions made on or after January 1, 
2022. For distributions made before January 1, 2022, see Sec.  1.1445-
8(f) as contained in 26 CFR part 1, revised as of April 1, 2020.

0
Par. 6. Section 1.1446-0 is amended by:
0
1. Adding an entry for Sec.  1.1446-3(c)(4).
0
2. Revising the entry Sec.  1.1446-4(d).
0
3. Adding entries for Sec.  1.1446-4(d)(1) and (2).
0
4. Revising the entry Sec.  1.1446-7.
    The additions and revisions read as follows:


Sec.  1.1446-0  Table of contents.

* * * * *


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

* * * * *
    (c) * * *
    (4) Coordination with section 1446(f).
* * * * *


Sec.  1.1446-4  Publicly traded partnerships.

* * * * *
    (d) Rules for nominees required to withhold tax under section 1446.
    (1) In general.
    (2) Exception to nominee's withholding.
* * * * *


Sec.  1.1446-7  Applicability dates.

0
Par. 7. Section 1.1446-3 is amended:
0
1. In the first sentence of paragraph (a)(2)(i), by removing ``section 
11(b)(1)'' and adding in its place ``section 11(b)''.
0
2. By adding paragraph (c)(4).
0
3. In paragraph (d)(2)(vi), by designating Examples 1 through 3 as 
paragraphs (d)(2)(vi)(A) through (C), respectively.
0
4. In each newly designated paragraph listed in the first column in the 
table, by removing the language in the second column and adding in its 
place the language in the third column as set forth below:

------------------------------------------------------------------------
          Paragraph                  Remove                  Add
------------------------------------------------------------------------
(d)(2)(vi)(A) tenth, twelth,  $35.................  $37.
 and thirteenth sentences.
(d)(2)(vi)(B) first sentence  Example 1...........  paragraph
                                                     (d)(2)(vi)(A) of
                                                     this section
                                                     (Example 1).
(d)(2)(vi)(C) first sentence  Example 1...........  paragraph
                                                     (d)(2)(vi)(A) of
                                                     this section
                                                     (Example 1).
(d)(2)(vi)(C) fifth sentence  $35.................  $37.
------------------------------------------------------------------------

0
5. In newly designated paragraph (d)(2)(vi)(A), by revising the eighth 
sentence.
0
6. In newly designated paragraph (d)(2)(vi)(B), by revising the third 
and fourth sentences.
0
7. In newly designated paragraph (d)(2)(vi)(C), by revising the sixth 
sentence.
0
8. In paragraph (e)(4), by designating Examples 1 through 3 as 
paragraphs (e)(4)(i) through (iii), respectively.
0
9. In newly designated paragraphs (e)(4)(i) through (iii), by further 
redesignating the paragraphs in the first column in this table as the 
paragraphs in the second column as set forth below:

------------------------------------------------------------------------
              Old paragraphs                       New paragraphs
------------------------------------------------------------------------
(e)(4)(i)(i) through (viii)...............  (e)(4)(i)(A) through (H)
(e)(4)(ii)(i) through (v).................  (e)(4)(ii)(A) through (E)
(e)(4)(iii)(i) through (v)................  (e)(4)(iii)(A) through (E)
------------------------------------------------------------------------

0
10. In each newly redesignated paragraph listed in the first column in 
this table, by removing the language in the second column and adding in 
its place the language in the third column as set forth below:

------------------------------------------------------------------------
          Paragraph                  Remove                  Add
------------------------------------------------------------------------
(e)(4)(i)(B) second sentence  $8.75 (.25 x ($100 x  $9.25 (.25 x ($100 x
                               .35)).                .37))
(e)(4)(i)(B) fifth sentence.  $35.................  $37
(e)(4)(i)(E) third sentence.  $8.75...............  $9.25
(e)(4)(i)(F) first sentence.  $35.................  $37
(e)(4)(i)(G) second sentence  $35.................  $37
(e)(4)(ii) introductory text  Example 1...........  paragraph
                                                     (e)(4)(i)(A) of
                                                     this section
                                                     (Example 1)
(e)(4)(iii) introductory      Example 2...........  paragraph (e)(4)(ii)
 text.                                               introductory text
                                                     of this section
                                                     (Example 2)
(e)(4)(iii) introductory      April...............  March
 text.
(e)(4)(iii)(A)..............  April...............  March
(e)(4)(iii)(B) first          Example 1 and         paragraphs (e)(4)(i)
 sentence.                     Example 2.            and (ii) of this
                                                     section (Examples 1
                                                     and 2),
                                                     respectively
(e)(4)(iii)(B) second         April...............  March
 sentence.
(e)(4)(iii)(C) first and      April...............  March
 second sentences.
(e)(4)(iii)(D) first through  April...............  March
 third sentences.
(e)(4)(iii)(D) first          $35.................  $37
 sentence.
------------------------------------------------------------------------


[[Page 76934]]

0
11. By removing paragraph (g).
    The addition reads as follows:


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

* * * * *
    (c) * * *
    (4) Coordination with section 1446(f). A partnership that is 
directly or indirectly subject to withholding under section 1446(f)(1) 
during its taxable year may credit the amount withheld under section 
1446(f)(1) against its section 1446 tax liability for that taxable year 
only to the extent the amount is allocable to foreign partners.
    (d) * * *
    (2) * * *
    (vi) * * *
    (A) * * * PRS pays installments of 1446 tax based upon its 
estimates and timely pays a total of $37 of 1446 tax over the course of 
the partnership's taxable year ($100 ECTI x .37). * * *
    (B) * * * Pursuant to paragraph (d)(2)(iii) of this section, FT may 
claim a $14.8 credit under section 33 for the 1446 tax PRS paid ($40/
$100 multiplied by $37). NRA is required to include the $60 of the ECTI 
in gross income under section 652 (as ECTI) and may claim a $22.2 
credit under section 33 for the 1446 tax PRS paid ($37 less $14.8 or 
$60/$100 multiplied by $37).
    (C) * * * NRA is required to include $100 of the ECTI in gross 
income under section 662 (as ECTI) and may claim a $37 credit under 
section 33 for the 1446 tax paid by PRS ($37 less $0).
* * * * *

0
Par. 8. Section 1.1446-4 is amended by:
0
1. Revising paragraphs (b)(3) and (4).
0
2. Removing the second sentence of paragraph (c).
0
3. Revising paragraphs (d) and (e).
0
4. Adding a sentence after the fourth sentence and revising the last 
five sentences of paragraph (f)(1).
0
5. Revising paragraph (f)(3).
    The revisions and addition read as follows:


Sec.  1.1446-4  Publicly traded partnerships.

* * * * *
    (b) * * *
    (3) Nominee. For purposes of this section, the term nominee means a 
person that holds an interest in a publicly traded partnership on 
behalf of a foreign person and that is either a U.S. person, a 
qualified intermediary (as defined in Sec.  1.1441-1(e)(5)(ii)) that 
assumes primary withholding responsibility for the distribution, or a 
U.S. branch of a foreign person that agrees to be treated as a U.S. 
person (as described in Sec.  1.1441-1(b)(2)(iv)) with respect to the 
distribution. For purposes of this paragraph (b)(3), a U.S. branch or a 
qualified intermediary is a nominee only if it assumes primary 
withholding responsibility for the distribution for all purposes of 
chapters 3 and 4 of subtitle A of the Code.
    (4) Qualified notice. For purposes of this section, a qualified 
notice is a notice from a publicly traded partnership that states the 
amount of a distribution that is attributable to each type of income 
described in paragraphs (f)(3)(i) through (v) of this section. A 
qualified notice may also include the information described in Sec.  
1.1446(f)-4(b)(3) (relating to the 10-percent exception to withholding 
under section 1446(f)(1)) and the information described in Sec.  
1.1446(f)-4(c)(2)(iii) (relating to an adjustment to the amount 
realized for withholding under section 1446(f)(1)). The notice must be 
posted in a readily accessible format in an area of the primary public 
website of the publicly traded partnership that is dedicated to this 
purpose, and a copy of the notice must be delivered to any registered 
holder that is a nominee. A qualified notice must be posted and 
delivered to the registered holder by the date required for providing 
notice with respect to distributions described in 17 CFR 240.10b-
17(b)(1) or (3) issued pursuant to the Securities Exchange Act of 1934 
(15 U.S.C. 78a) and contain the information described therein as it 
would relate to the distribution. The publicly traded partnership must 
keep the notice accessible to the public for ten years on its primary 
public website or the primary public website of any successor 
organization. No specific format is required unless otherwise 
prescribed by the Commissioner in forms or instructions or in 
publications or guidance published in the Internal Revenue Bulletin 
(see Sec. Sec.  601.601(d)(2) and 601.602 of this chapter). See 
paragraph (d) of this section regarding when a nominee is considered to 
have received a qualified notice.
* * * * *
    (d) Rules for nominees required to withhold tax under section 
1446--(1) In general. A nominee that receives a distribution from a 
publicly traded partnership (or another nominee) that is to be paid to 
(or for the account of) any foreign person is treated as a withholding 
agent under this section. A nominee that fails to withhold pursuant to 
this section is subject to liability under section 1461, as well as 
applicable penalties and interest, as if the nominee were the 
partnership responsible for withholding. A nominee that receives a 
qualified notice that meets the requirements in paragraph (b)(4) of 
this section must withhold based on the amounts specified on the 
qualified notice. A nominee is treated as receiving a qualified notice 
on the date that the notice is posted to the publicly traded 
partnership's website or is received by the nominee in accordance with 
paragraph (b)(4) of this section. If a nominee properly withholds based 
on the amounts specified on a qualified notice, the nominee is not 
liable for any underwithholding on amounts that are effectively 
connected income, gain, or loss. Rather, the publicly traded 
partnership that issued the qualified notice is liable under section 
1461 for underwithholding on such amounts. If a nominee does not 
receive a qualified notice that meets the requirements in paragraph 
(b)(4) of this section, or to the extent the qualified notice does not 
specify an amount, the nominee must withhold on the full amount of the 
distribution with respect to--
    (i) A foreign partner that is a corporation, at the greater of the 
highest rate of tax specified in section 11(b) or 881 (without regard 
to any reduction in the rate of tax permitted under an applicable 
income tax treaty);
    (ii) A foreign partner that is not a corporation, at the greater of 
the highest rate of tax specified in section 1 or 871 (without regard 
to any reduction in the rate of tax permitted under an applicable 
income tax treaty); or
    (iii) A foreign partner whose classification cannot be determined, 
at the higher of the rate determined under paragraph (d)(1)(i) or (ii) 
of this section.
    (2) Exception to nominee's withholding. A nominee is not required 
to withhold under paragraph (d)(1) of this section to the extent that 
it makes a payment of a distribution to a qualified intermediary or 
U.S. branch that is also a nominee for the distribution under paragraph 
(b)(3) of this section. For purposes of the preceding sentence, a 
nominee may treat a qualified intermediary or U.S. branch as a nominee 
for a distribution based on, respectively, a valid qualified 
intermediary withholding certificate described in Sec.  1.1441-
1(e)(3)(ii) or a valid U.S. branch withholding certificate described in 
Sec.  1.1446(f)-4(a)(2)(ii)(B) on which the qualified intermediary or 
U.S. branch represents that it assumes primary withholding 
responsibility with respect to the distribution.
    (e) Determining foreign status of partners. Except as provided in 
this paragraph (e), the rules of Sec.  1.1446-1 shall apply in 
determining whether a partner of a publicly traded partnership is a 
foreign partner for purposes of the 1446 tax. A partnership or nominee

[[Page 76935]]

obligated to withhold under this section shall be entitled to rely on 
any of the forms acceptable under Sec.  1.1446-1 that it receives from 
persons on whose behalf it holds interests in the partnership to the 
same extent a partnership is entitled to rely on such forms under those 
rules. If a partnership or nominee pays a distribution to an entity 
that provides a valid qualified intermediary withholding certificate 
described in Sec.  1.1441-1(e)(3)(ii) indicating that the entity does 
not assume primary withholding responsibility for the distribution, for 
withholding under this section the partnership or nominee may instead 
rely on a withholding statement that allocates the distribution to--
    (1) A chapter 3 withholding rate pool (as described in Sec.  
1.1441-1(e)(5)(v)(C)) consisting of account holders that are foreign 
persons subject to withholding at the highest rate of tax specified in 
section 1;
    (2) A chapter 3 withholding rate pool (as described in Sec.  
1.1441-1(e)(5)(v)(C)) consisting of account holders that are foreign 
persons subject to withholding at the highest rate of tax specified in 
section 11(b);
    (3) A chapter 3 withholding rate pool (as described in Sec.  
1.1441-1(e)(5)(v)(C)) consisting of account holders that are foreign 
persons not subject to withholding; or
    (4) Each account holder for which a form acceptable under Sec.  
1.1446-1 is provided.
    (f) * * *
    (1) * * * LTP makes a distribution subject to section 1446 of $100 
to UTP during its taxable year beginning January 1, 2020, and withholds 
37 percent (the highest rate in section 1) ($37) of that distribution 
under section 1446. UTP receives a net distribution of $63 which it 
immediately redistributes to its partners. UTP has a liability to pay 
37 percent of the total actual and deemed distribution it makes to its 
foreign partners as a section 1446 withholding tax. UTP may credit the 
$37 withheld by LTP against this liability as if it were paid by UTP. 
See Sec. Sec.  1.1462-1(b) and 1.1446-5(b)(1). When UTP distributes the 
$63 it actually receives from LTP to its partners, UTP is treated for 
purposes of section 1446 as if it made a distribution of $100 to its 
partners ($63 actual distribution and $37 deemed distribution). UTP's 
partners (U.S. and foreign) may claim a credit against their U.S. 
income tax liability for their allocable share of the $37 of 1446 tax 
paid on their behalf.
* * * * *
    (3) Ordering rule relating to distributions. Distributions from 
publicly traded partnerships are deemed to be paid out of the following 
types of income in the order indicated--
    (i) Amounts attributable to income described in section 1441 or 
1442 that are not effectively connected with the conduct of a trade or 
business in the United States and are subject to withholding under 
Sec.  1.1441-2(a);
    (ii) Amounts attributable to income described in section 1441 or 
1442 that are not effectively connected with the conduct of a trade or 
business in the United States and are not subject to withholding under 
Sec.  1.1441-2(a);
    (iii) Amounts attributable to income effectively connected with the 
conduct of a trade or business in the United States that are not 
subject to withholding under Sec. Sec.  1.1446-1 through 1.1446-6;
    (iv) Amounts subject to withholding under Sec. Sec.  1.1446-1 
through 1.1446-6; and
    (v) Amounts not listed in paragraphs (f)(3)(i) through (iv) of this 
section.
* * * * *

0
Par. 9. Section 1.1446-6 is amended by adding a sentence after the 
first sentence of paragraph (e)(1) 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.

* * * * *
    (e) * * *
    (1) * * * 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 Sec.  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 Sec.  1.1446-3(d)(1)(iii)) was April 15. * * 
*
* * * * *

0
Par. 10. Section 1.1446-7 is amended by revising the section heading 
and adding six sentences at the end of the paragraph to read as 
follows:


Sec.  1.1446-7  Applicability dates.

    * * * Section 1.1446-3 generally applies to returns filed on or 
after January 30, 2020 and Sec.  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 Sec.  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 Sec.  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 
Sec. Sec.  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.

0
Par. 11. Sections 1.1446(f)-1 through 1.1446(f)-5 are added to read as 
follows:


Sec.  1.1446(f)-1  General rules.

    (a) Overview. This section and Sec. Sec.  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 Sec. Sec.  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 Sec.  1.1471-1(b)(21)). In the 
case of a U.S. clearing organization clearing or settling sales of PTP 
interests, however, see Sec.  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

[[Page 76936]]

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 Sec.  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 Sec.  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 Sec. Sec.  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 Sec.  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 
Sec. Sec.  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 Sec. Sec.  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 Sec. Sec.  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 
Sec.  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 Sec. Sec.  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 Sec.  
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 Sec. Sec.  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 Sec. Sec.  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 Sec. Sec.  1.1446(f)-2 
through 1.1446(f)-5

[[Page 76937]]

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 Sec.  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 Sec.  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 Sec. Sec.  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 Sec.  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 Sec.  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.


Sec.  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 Sec.  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 Sec.  1.751-1) to the transferor as of 
the determination date (see Sec.  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 Sec.  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 Sec.  
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.

[[Page 76938]]

    (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 Sec.  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 Sec.  
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 Sec.  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 
Sec.  1.1446-1(c)(2)(iv) (or an applicable substitute form that meets 
the requirements under Sec.  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 Sec.  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.

[[Page 76939]]

    (2) Amount realized--(i) In general. The amount realized on the 
transfer of the partnership interest is determined under section 1001 
(including Sec. Sec.  1.1001-1 through 1.1001-5) and section 752 
(including Sec. Sec.  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

[[Page 76940]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec. Sec.  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 Sec.  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 Sec.  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

[[Page 76941]]

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.


Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  1.1446(f)-2(d)(2) received from the transferee 
(within the time prescribed in Sec.  1.1446(f)-2(d)(2)) that states 
that an exception to withholding described in Sec.  1.1446(f)-2(b) 
applies or that the transferee withheld the full amount required to be 
withheld (taking into account any adjustments under Sec.  1.1446(f)-
2(c)) under Sec.  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 Sec.  1.1446(f)-2(d)(2) 
(without regard to whether the certification is received by the time 
prescribed in Sec.  1.1446(f)-2(d)(2)) that claims an exception to 
withholding under Sec.  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 Sec.  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 Sec.  
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 Sec.  
1.1446(f)-2(d)(2), without regard to whether the certification is 
received by the time prescribed in Sec.  1.1446(f)-2(d)(2). A 
partnership that does not receive or cannot rely on a certification 
from the transferee described in Sec.  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.

[[Page 76942]]

    (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 Sec. Sec.  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, Sec. Sec.  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 Sec.  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 Sec.  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 Sec.  
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.


Sec.  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 Sec.  1.1446(f)-1(b)(1)), the transferee is 
not required to withhold under section 1446(f)(1) and Sec.  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 Sec.  1.1441-1(e)(5)(ii)) that 
provides a valid qualified intermediary withholding certificate (as 
described in Sec.  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 Sec.  1.1441-
1(b)(2)(iv)) that provides a valid U.S. branch withholding certificate 
(as described in Sec.  1.1441-1(e)(3)(v), but without regard to the 
requirement in Sec.  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 Sec.  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 Sec.  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 Sec.  
31.3406(a)-4(b)(1) of this chapter to determine the

[[Page 76943]]

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 Sec.  
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 Sec.  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 Sec.  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 Sec.  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 
Sec.  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 Sec.  
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 Sec.  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 Sec.  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 
Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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

[[Page 76944]]

(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 Sec.  1.1446-1(c)(2)(iv) (or 
an applicable substitute form that meets the requirements under Sec.  
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 Sec.  1.1446-1(c)(2)(iv) 
(or an applicable substitute form that meets the requirements under 
Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  1.1461-1(c). A 
Form 1042-S issued

[[Page 76945]]

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 
Sec. Sec.  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 Sec.  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 Sec.  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.


Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec. Sec.  
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 Sec.  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.

0
Par. 12. Section 1.1461-1 is amended:
0
1. By revising the fourth and fifth sentences of paragraph (a)(1) and 
removing the sixth sentence.
0
2. By revising the second sentence and removing the third sentence of 
paragraph (c)(1)(i).
0
3. By revising paragraph (c)(1)(ii)(A)(8).
0
4. By removing the word ``and'' at the end of paragraph 
(c)(1)(ii)(B)(3).
0
5. By removing the period at the end of paragraph (c)(1)(ii)(B)(4) and 
adding ``; and'' in its place.
0
6. By adding paragraph (c)(1)(ii)(B)(5).
0
7. In paragraph (c)(2)(i) introductory text, by revising the first 
sentence and removing the second sentence.
0
8. In paragraph (c)(2)(i)(N), by removing the word ``and'' from the end 
of the paragraph.
0
9. In paragraph (c)(2)(i)(O), by removing the period at the end of the 
paragraph and adding a semicolon in its place.
0
10. By adding paragraphs (c)(2)(i)(P), (Q), and (R).
0
11. By adding a sentence at the end of paragraph (c)(4)(ii)(A).
0
12. Revising paragraph (i).
    The revisions and additions read as follows:


Sec.  1.1461-1  Payment and returns of tax withheld.

    (a) * * *
    (1) * * * With respect to withholding under section 1446, this 
section shall

[[Page 76946]]

apply only to publicly traded partnerships and nominees that withhold 
under Sec.  1.1446-4 and brokers and publicly traded partnerships that 
withhold (or are otherwise liable for underwithholding) under Sec.  
1.1446(f)-4 on transfers of publicly traded partnership interests. See 
Sec.  1.1461-3 regarding withholding tax liabilities under sections 
1446(a) and 1446(f) and penalties that apply for failure to withhold 
under either of those sections.
* * * * *
    (c) * * *
    (1) * * *
    (i) * * * Notwithstanding the preceding sentence, any person that 
withholds or is required to withhold an amount under section 1441, 
1442, or 1443 or Sec.  1.1446-4(a) (applicable to publicly traded 
partnerships required to pay tax under section 1446(a) on 
distributions) or Sec.  1.1446(f)-4(a) (applicable to brokers required 
to withhold on transfers of publicly traded partnership interests) must 
file a Form 1042-S for the payment withheld upon whether or not that 
person is engaged in a trade or business and whether or not the payment 
is an amount subject to reporting. * * *
    (ii) * * *
    (A) * * *
    (8) A partner (including a foreign partnership or a partner for 
which a qualified intermediary provides partner-specific documentation 
under Sec.  1.1446-4(e)) receiving a distribution from a publicly 
traded partnership subject to withholding under section 1446(a) and 
Sec.  1.1446-4 on distributions of effectively connected income, and a 
partner (including a foreign partnership or a partner for which a 
qualified intermediary provides partner-specific documentation under 
Sec.  1.1446(f)-4(a)(7)) receiving an amount realized from a transfer 
of a publicly traded partnership interest under section 1446(f)(1) and 
Sec.  1.1446(f)-4.
* * * * *
    (B) * * *
    (5) A foreign broker withheld upon under Sec.  1.1446(f)-
4(a)(2)(ii) by another broker paying an amount realized from the 
transfer of a PTP interest.
* * * * *
    (2) * * *
    (i) * * * Subject to the exceptions described in paragraph 
(c)(2)(ii) of this section, amounts subject to reporting on Form 1042-S 
are amounts paid to a foreign payee or partner (including persons 
presumed to be foreign) that are amounts subject to withholding as 
defined in Sec.  1.1441-2(a), distributions of effectively connected 
income under Sec.  1.1446-4, or amounts realized from transfers of PTP 
interests under Sec.  1.1446(f)-4. * * *
    (P) The amount of any distribution made by a publicly traded 
partnership that is an amount subject to withholding under Sec.  
1.1446-4, or that is paid to a qualified intermediary or a U.S. branch 
of a foreign person that agrees to be treated as a U.S. person;
    (Q) Except with respect to a broker that is a U.S. clearing 
organization, an amount realized on the transfer of a PTP interest 
under Sec.  1.1446(f)-4 (unless an exception to withholding applies 
under Sec.  1.1446(f)-4(b)(2) through (4)); and
    (R) In the case of a broker that is a U.S. clearing organization--
    (1) An amount realized (as determined under Sec.  1.1446(f)-
4(c)(2)(iii)) on a distribution made by a publicly traded partnership 
for which withholding is required under Sec.  1.1446(f)-4(a); and
    (2) An amount realized on the sale of a PTP interest cleared and 
settled through a net settlement system maintained by the clearing 
organization acting as a central counterparty in the sale (with the 
reporting on the non-netted amount), unless an exception to withholding 
would apply under Sec.  1.1446(f)-4(b)(2) or (3).
* * * * *
    (4) * * *
    (ii) * * *
    (A) * * * For a payment to a foreign partnership on the transfer of 
a publicly traded partnership interest subject to Sec.  1.1446(f)-4(a), 
see paragraph (c)(1)(ii)(A)(8) of this section (treating the foreign 
partnership as a recipient).
* * * * *
    (i) Applicability date. This section applies to payments made on or 
after January 1, 2022. For payments made before January 1, 2022, see 
this section as in effect and contained in 26 CFR part 1, as revised 
April 1, 2020.

0
Par. 13. Section 1.1461-2 is amended by:
0
1. Revising paragraph (a)(1).
0
2. Revising the first sentence and removing the last sentence of 
paragraph (b).
0
3. Revising paragraph (d).
    The revisions read as follows:


Sec.  1.1461-2  Adjustments for overwithholding or underwithholding of 
tax.

    (a) * * *
    (1) In general. Except as otherwise provided in this paragraph 
(a)(1), a withholding agent that has overwithheld under chapter 3 of 
the Internal Revenue Code, and made a deposit of the tax as provided in 
Sec.  1.6302-2(a), may adjust the overwithheld amount either pursuant 
to the reimbursement procedure described in paragraph (a)(2) of this 
section or pursuant to the set-off procedure described in paragraph 
(a)(3) of this section. The rules in the preceding sentence do not 
apply to partnerships or nominees required to withhold under section 
1446(a), other than on a distribution by a publicly traded partnership 
subject to withholding under Sec.  1.1446-4(a) and a payment of an 
amount realized on the transfer of an interest in a publicly traded 
partnership subject to Sec.  1.1446(f)-4.
* * * * *
    (b) * * * A withholding agent may withhold from future payments 
(including distributions of effectively connected income subject to 
withholding under Sec.  1.1446-4 and the amount realized from the 
transfer of an interest in a publicly traded partnership subject to 
Sec.  1.1446(f)-4) made to a beneficial owner the tax that should have 
been withheld from previous payments to that beneficial owner under 
chapter 3 of the Code. * * *
    (d) Applicability date. This section applies to payments made on or 
after January 1, 2022. For payments made before January 1, 2022, see 
this section as in effect and contained in 26 CFR part 1, as revised 
April 1, 2020.

0
Par. 14. Section 1.1461-3 is amended by revising the first sentence and 
last sentence of the paragraph to read as follows:


Sec.  1.1461-3  Withholding under section 1446.

    For rules relating to the withholding tax liability of a 
partnership, nominee, or transferee under section 1446, see Sec. Sec.  
1.1446-1 through 1.1446-7 and 1.1446(f)-1 through 1.1446(f)-5. * * * 
The references in this section to Sec. Sec.  1.1446-1 through 1.1446-7 
apply to partnership taxable years beginning after May 18, 2005, or 
such earlier time as the regulations under Sec. Sec.  1.1446-1 through 
1.1446-5 apply by reason of an election under Sec.  1.1446-7, and the 
references in this section to Sec. Sec.  1.1446(f)-1 through 1.1446(f)-
5 shall apply with respect to returns for transfers that occur on or 
after January 29, 2021.

0
Par. 15. Section 1.1463-1 is amended by revising the fourth and fifth 
sentences of paragraph (a) to read as follows:


Sec.  1.1463-1  Tax paid by recipient of income.

    (a) * * * See Sec. Sec.  1.1446-3(e) and (f) and 1.1446(f)-5(a) for 
application of the rule of this paragraph (a), and for additional 
rules, in which the withholding tax was required to be paid

[[Page 76947]]

under section 1446. The references in the previous sentence to Sec.  
1.1446-3(e) and (f) apply to partnership taxable years beginning after 
May 18, 2005, or such earlier time as the regulations under Sec. Sec.  
1.1446-1 through 1.1446-5 apply by reason of an election under Sec.  
1.1446-7, and the reference in the previous sentence to Sec.  
1.1446(f)-5(a) shall apply to the tax required to be withheld under 
section 1446(f) for transfers that occur on or after January 29, 2021.
* * * * *

0
Par. 16. Section 1.1464-1 is amended by revising the last sentence of 
paragraph (a) and paragraph (c) to read as follows:


Sec.  1.1464-1  Refunds or credits.

    (a) * * * With respect to section 1446(a), this section applies 
only to a publicly traded partnership or nominee described in Sec.  
1.1446-4 and, with respect to section 1446(f), only to a publicly 
traded partnership or broker described in Sec.  1.1446(f)-4.
* * * * *
    (c) Applicability date. The last sentence of paragraph (a) of this 
section applies to nominees and publicly traded partnerships described 
in Sec.  1.1446-4 for partnership taxable years beginning after April 
29, 2008, and to brokers required to withhold and publicly traded 
partnerships liable for underwithholding under Sec.  1.1446(f)-4 on 
transfers that occur on or after January 1, 2022.

0
Par. 17. Section 1.6050K-1 is amended by:
0
1. Redesignating paragraphs (c) introductory text and (c)(1) through 
(3) as the paragraphs (c)(1) introductory text and (c)(1)(i) through 
(iii), respectively.
0
2. Adding a heading to newly redesignated paragraph (c)(1).
0
3. Adding paragraphs (c)(2) and (3), (d)(3), and (h).
    The additions read as follows:


Sec.  1.6050K-1  Returns relating to sales or exchanges of certain 
partnership interests.

* * * * *
    (c) * * *
    (1) In general. * * *
    (2) Information to be provided to transferors. The statement a 
partnership must provide to a transferor partner pursuant to paragraph 
(c)(1) of this section must also include the information necessary for 
the transferor to make the transferor's required statement under Sec.  
1.751-1(a)(3).
    (3) Transfers of partnership interests by foreign persons. For 
additional information required to be provided by the partnership if 
section 864(c)(8) applies to the transfer of a partnership interest by 
a foreign person, see Sec.  1.864(c)(8)-2(b).
    (d) * * *
    (3) Transfers of partnership interests by foreign persons. For 
notifications required by foreign transferors of partnership interests, 
see Sec.  1.864(c)(8)-2(a).
* * * * *
    (h) Applicability date. Paragraphs (c)(2) and (3) of this section 
apply to returns filed on or after November 30, 2020. Paragraph (d)(3) 
of this section applies to transfers that occur on or after November 
30, 2020.

0
Par. 18. Section 1.6302-2 is amended by:
0
1. Revising the last sentence of paragraph (a)(1)(i).
0
2. Revising the heading and second sentence of paragraph (g).
    The revisions read as follows:


Sec.  1.6302-2  Deposit rules for tax withheld on nonresident aliens 
and foreign corporations.

    (a) * * *
    (1) * * *
    (i) * * * With respect to section 1446(a), this section applies 
only to a publicly traded partnership or nominee described in Sec.  
1.1446-4 and, with respect to section 1446(f), only to a publicly 
traded partnership or broker described in Sec.  1.1446(f)-4.
* * * * *
    (g) Applicability dates. * * * In the last sentence of paragraph 
(a)(1)(i) of this section, the reference to Sec.  1.1446-4 shall apply 
to partnership taxable years beginning after April 29, 2008, and the 
reference to Sec.  1.1446(f)-4 shall apply to tax required to be 
withheld on or after January 1, 2022.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.

Approved: October 1, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-22619 Filed 11-27-20; 8:45 am]
BILLING CODE 4830-01-P