# Bulletin No. 2020–51 > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3A94c606845a43f2b5 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text HIGHLIGHTS OF THIS ISSUE   Bulletin No. 2020–51 December 14, 2020 These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations. ADMINISTRATIVE REG-123652-18, page 1652. This notice of proposed rulemaking contains proposed regulations that implement the special enforcement provisions described in section 6241(11) of the centralized partnership audit regime enacted by the BBA in November 2015. The Tax Technical Corrections Act of 2018 (TTCA), which was enacted into law on March 23, 2018 as part of the Consolidated Appropriations Act, 2018, added, among other things, section 6241(11) to the Code. Section 6241(11) provides authority for the Secretary to issue regulations that determine that the centralized partnership audit regime, or portions of it, do not apply to certain items if such items involve special enforcement matters. Section 6241(11) also authorizes the IRS to prescribe regulations adopting special rules related to such items. This notice of proposed rulemaking adds proposed §301.6241-7, provides rules regarding special enforcement matters under section 6241(11). In addition, this notice of proposed rulemaking includes some amendments to some of the final regulations under BBA to conform to the addition of the regulations implementing section 6241(11), to account the addition of section 6232(f) in the TTCA, to implement one of the items in Notice 2019-06, and to make some clarifying amendments to the previously finalized rules. EMPLOYEE PLANS NOTICE 2020-85, page 1645. This notice sets forth the updated mortality improvement rates and static mortality tables that are used for purposes of determining minimum funding requirements under § 430(h) (3) for 2022 and minimum present value under § 417(e)(3) Finding Lists begin on page ii. for distributions with annuity starting dates that occur during stability periods beginning in the 2022 calendar year. EXCISE TAX NOTICE 2020-84, page 1645. Sections 4375 and 4376, added to the Code by the Affordable Care Act, impose a fee on issuers of specified health insurance policies and plan sponsors of applicable self-insured health plans to help fund the Patient-Centered Outcomes Research Trust Fund (PCORTF). The fee originally expired on October 1, 2019, but was extended by the Further Consolidated Appropriations Act, 2020, Pub. L. 116-94, 133 Stat. 2534 (2019). This notice provides that the adjusted applicable dollar amount that applies for determining the PCORTF fee for policy years and plan years ending on or after October 1, 2020 and before October 1, 2021 is equal to $2.66. This adjusted applicable dollar amount has been determined using the percentage increase in the projected per capita amount of the National Health Expenditures published by HHS in March 2020. INCOME TAX T.D. 9926, page 1602. This document contains final regulations implementing certain sections of the Internal Revenue Code, including sections added to the Internal Revenue Code by the Tax Cuts and Jobs Act, that relate to the withholding of tax and information reporting with respect to certain dispositions of interests in partnerships engaged in the conduct of 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 such conduct. TD 9926. Published November 30, 2020. The IRS Mission Provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all. Introduction The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published weekly. It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published. Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements. Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same. The Bulletin is divided into four parts as follows: Part I.—1986 Code. This part includes rulings and decisions based on provisions of the Internal Revenue Code of 1986. Part II.—Treaties and Tax Legislation. This part is divided into two subparts as follows: Subpart A, Tax Conventions and Other Related Items, and Subpart B, Legislation and Related Committee Reports. Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury’s Office of the Assistant Secretary (Enforcement). Part IV.—Items of General Interest. This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements. The last Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the last Bulletin of each semiannual period. The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate. December 14, 2020  Bulletin No. 2020–51 Part I T.D. 9926 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 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. 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 §§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; con- December 14, 2020 cerning §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. 1602 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 (REG113604-18) 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 agree- Bulletin No. 2020–51 ment and that are not included in these final regulations.1 II. Reporting Requirements for Foreign Transferors and Partnerships with Foreign Transferors Proposed §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 §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 §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 §1.864(c)(8)-2(b). 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. §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 §1.864(c)(8)-1(c)(2)) was determined under the material change in circumstances rule provided in §1.864(c)(8)-1(c)(2) (ii)(E). §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 §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 §§1.1446(f)-2(a) and 1.1446(f)-4(a). Comments suggested that proposed §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 §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 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. 1 Bulletin No. 2020–51 1603 December 14, 2020 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, §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 §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 §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 §1.1446(f)-3 or a broker that fails to comply with its withholding obligation under §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 NonPTP Interest In general, section 1446(f)(1) provides that a transferee of a partnership interest must withhold a tax equal to 10 percent December 14, 2020 of the amount realized on any disposition that results in effectively connected gain under section 864(c)(8). Proposed §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 §1.1446(f)-2(b) or (c), respectively. Proposed §1.1446(f)-2(d)(1) provided rules for reporting and paying the amount of any tax withheld and proposed §1.1446(f)-2(e) provided rules regarding the effect of withholding on a transferor. For a discussion of the 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 §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 §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 §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 §§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. 1604 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 §§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, §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 §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 §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 §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 §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 §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 Bulletin No. 2020–51 741 (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 §§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 §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). 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, §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 §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 §1.7511. 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 §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 §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 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 de- termine 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 §1.864(c)(8)-1. With respect to treaty benefits, however, the comment acknowledged that the maximum tax liability certification provided in §1.1446(f)2(c)(4) could provide the same result. The final regulations adopt this comment in part. Specifically, §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 §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 §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. §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 §1.1446(f)-2(b)(4)(i)(A) and (B) into a single rule; this simplification is intended to be non-substantive. Under §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. 2 Bulletin No. 2020–51 1605 December 14, 2020 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., §1.1446(f)-2(b)(7) (exception to withholding when a treaty claim covers all of the gain from the transfer); §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 §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 §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 §1.864(c)(8)-1(c) take into account any U.S. real property interests held by the partnership. §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), §1.864(c)(8)-1(d) provides that the rules of section 864(c)(8) and §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 §1.864(c)(8)-1(d) by clarifying that, for a partnership that is not described in §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 December 14, 2020 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, §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 §1.1446(f)-2(b) (4)(i)(A). Finally, for partnerships that are described in §1.1445-11T(d)(1), see §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 §1.1446(f)-4(b)(3). 4. 10-percent ECI Exception Proposed §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 1606 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 §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 §1.1446(f)-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 §1.1446(f)-2(b)(5)(iii). As a result, the exception provided in proposed §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 §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 §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 §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 §1.1446(f)-2(b)(5) Bulletin No. 2020–51 because it would not receive a Form 8805 nor have an effectively connected loss for each of the taxable years described in proposed §1.1446(f)-2(b)(5)(i)(A). To address this issue, one of the comments suggested that the final regulations modify proposed §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 §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 §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 §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 Bulletin No. 2020–51 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 §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. §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 ad- 1607 justment 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 §§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 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 §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 December 14, 2020 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 December 14, 2020 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 §§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 §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 §1.1446(f)-2(b) does not apply, proposed §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 §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 1608 to withhold, therefore, employ the same self-certification procedure provided in proposed §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 §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 §§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 §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 §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 §1.1446(f)-2(c)(2)(iv) provided that the transferee of the interest may rely on a certification 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 deter- Bulletin No. 2020–51 mined under proposed §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 §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 §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 §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 §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. §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 §1.1446(f)-4(c) (2)(ii). Bulletin No. 2020–51 3. Certification of Maximum Tax Liability Proposed §1.1446(f)-2(c)(4) provided a procedure to determine the amount to withhold under section 1446(f)(1) and proposed §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 §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 §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 §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, includ- 1609 ing computational issues, that are outside the scope of these final regulations. Finally, the Treasury Department and the IRS have determined that the modifications to §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 §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 §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 §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 §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 December 14, 2020 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 §§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 §1.1446(f)-2(b)(3) similarly allows the transferor to make the relevant determinations as of the determination date. 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 §1.1446(f)-1(b)(4) defined a foreign person as a person that is not a United States person. Proposed §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 §§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 §§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. December 14, 2020 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 §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, §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 §1.1462- 1610 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 §1.1446(f)-4(e)(2)(ii). 5. Certifications Provided by Grantor Trusts Under proposed §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 §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 §1.1446(f)-3 also pro- Bulletin No. 2020–51 vided 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 §1.1446(f)-3 Proposed §1.1446(f)-3(a)(1) provided that if a transferee fails to withhold any amount required to be withheld under proposed §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 §1.1446(f)-3. To determine its withholding obligation under proposed §1.1446(f)-3, if any, a partnership may rely on information provided in a certification received from the transferee described in proposed §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 §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 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 §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 §1.1446(f)-3(c). Bulletin No. 2020–51 1. Partnership’s Review of a Certification of Withholding A comment stated that the rule in proposed §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 §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 §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 gen- 1611 erally 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 §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 §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 §1.1446(f)-2(d)(2). See §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. December 14, 2020 2. Partnership’s Discretion to Withhold A comment also questioned the application of proposed §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 §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., §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 would have an incentive to review and accept valid certifications of withholding provided by transferees, rather than withhold December 14, 2020 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 §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). 1612 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 §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 §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 re- Bulletin No. 2020–51 quested 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 §1.1446(f)-3 and add instead provisions imposing liability for underwithholding under section 1461 on the partnership that issued the qualified notice. See §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 Bulletin No. 2020–51 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 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 §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 §1.1446(f)-3(e)(2) provides that a transferee may not obtain a refund if the amount of tax withheld under proposed §1.1446(f)-3 exceeds the transferee’s withholding tax liability under proposed §1.1446(f)-2; instead, only the partnership may claim a refund on behalf of the transferee for the excess amount withheld under proposed §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 §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 partner- 1613 ship 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 §1.1446(f)-3(e)(2) measures the excess of the amount of tax withheld under §1.1446(f)-3 over the transferee’s withholding tax liability under §1.1446(f)-2. The comment suggested, for example, computing the excess amount as the difference between the sum of any withholding under §§1.1446(f)-2 and 1.1446(f)-3, plus any tax on gain paid by reason of §1.864(c)(8)-1, and the total tax liability of the foreign transferor (as defined in §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 §§1.1446(f)-2 and 1.1446(f)-3 and the tax liability of the foreign transferor under §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 §1.1446(f)-3. Specifically, these final regulations modify §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 §1.1446(f)-3. The final regulations also clarify that the excess amount withheld under §1.1446(f)-3 is the amount of tax and interest withheld under §1.1446(f)-3 that exceeds the transferee’s withholding tax liability under §1.1446(f)-2 and any interest owed by the transferee with respect to such liability. §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 §1.1446(f)-3 and the transferee’s withholding tax liability under §1.1446(f)-2, but clarifies that both amounts are computed by including inter- December 14, 2020 est, 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 §1.1446(f)-2 based on the amount of tax due by the foreign transferor on gain subject to §1.864(c)(8)-1, or that tax has already been paid by the foreign transferor. See §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 §1.1446(f)2(d)(2) to provide that a transferee’s withholding tax liability under §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 §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 December 14, 2020 the transferee is liable under §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 §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 §1.1446(f)-4(b) provided certain exceptions to this requirement, and proposed §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 §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 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 §1.1446(f)-4. Additionally, section VII of this Summary of 1614 Comments and Explanation of Revisions describes certain requirements included in §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 §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 §1.1446(f)-4(a). Bulletin No. 2020–51 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 §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 §§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 bro- Bulletin No. 2020–51 ker 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 §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 1615 to “fail” (in other words, the trade would not be settled with respect to the transferor holding the PTP interest through the 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 with- December 14, 2020 holding 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 December 14, 2020 such documentation. See §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 §1.1446(f)-4(a)(2)(iv). One comment requested that the presumption rules under §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 §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 §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 sec- 1616 tion 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 onetime 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 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 §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 §1.1441-1(c)(2)(i). 4. QIs Assuming Section 1446(f) Withholding Responsibility Under proposed §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 §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 Bulletin No. 2020–51 acting as a nominee for the distribution. See proposed §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 respon- Bulletin No. 2020–51 sibilities 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 §§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 §1.1446(f)4(a)(2)(i)(B) that the requirements for a U.S. branch withholding certificate under §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 1617 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 §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 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 §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 §1.1446(f)-4(b), and, to the extent permitted under chapter 4, U.S. transfer- December 14, 2020 ors 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 §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 §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 §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 §1.6031(c)-1T December 14, 2020 will be incorporated into the QI agreement. See §§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 1042S 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 §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 1618 (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 §1.1446(f)-4(e)(2). 7. Broker’s Determination of Prior Broker Withholding under Section 1446(f) Under proposed §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 §1.1441-1(b)(6). In the case of a QI receiving the payment, however, §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 com- Bulletin No. 2020–51 ment regarding the difficulty for a broker to show that withholding was applied by another broker, these final regulations amend that requirement by incorporating a standard generally similar to that in §1.1441-1(b)(6). See §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 §31.3406(a)- [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A94c606845a43f2b5. Public record. Not legal advice.