On Tuesday, May 7, the Internal Revenue Service (IRS) released proposed regulations under Section 1446(f) of the Internal Revenue Code of 1986, as amended (the Code),1 and certain related Sections (the Proposed Regulations). The Proposed Regulations would supersede existing interim guidance provided by Notice 2018-08 and Notice 2018-29.2
Section 1446(f) was added to the Code, together with Section 864(c)(8), as part of the 2017 Tax Cuts and Jobs Act. Section 864(c)(8) represents a legislative reversal of the Tax Court’s decision in Grecian Magnesite and provides that if a foreign partner recognizes any gain on the transfer of an interest in a partnership that is engaged in a U.S. trade or business, the portion of such gain attributable to U.S. trade or business assets is treated as effectively connected with the conduct of a U.S. trade or business (ECI) and thus generally subject to U.S. federal income tax. Similar to the Foreign Investment in Real Property Tax Act (FIRPTA) withholding provisions under Section 1445, Section 1446(f) acts as a collection mechanism for this tax by generally requiring a transferee of a partnership interest to withhold a tax equal to 10 percent of the amount realized on the transfer by a foreign person of a partnership interest if any portion of the gain would be treated as ECI under Section 864(c)(8).3 The withheld tax generally may be credited against the transferring partner’s U.S. federal income tax liability (and refunded to the extent it exceeds such tax liability).
The Proposed Regulations:
i. impose certain notification and reporting rules necessary for partners to comply with Section 864(c)(8),
ii. adopt, with various modifications, rules included in Notice 2018-29 for transfers of nonpublicly traded interests in partnerships,
iii. address the application of Section 1446(f) to transfers of interests in publicly traded partnerships (PTPs), and
iv. provide rules relating to the collection, payment and reporting of taxes required to be withheld under Section 1446(f).4
The Proposed Regulations affect partnerships, their partners and persons who acquire interests in partnerships from existing partners.
Set forth below is a summary of some of the key provisions included in the Proposed Regulations. The provisions of the Proposed Regulations relating to Section 1446(f) generally would apply to transfers that occur 60 days after final regulations are issued, or later. Until then, taxpayers generally may apply the rules of Notice 2018-08 and Notice 2018-29 or, for transfers of non-PTP interests, may instead choose to apply the rules of the Proposed Regulations.