Additional Guidance Related to Transfers of Publicly Traded Partnership Interests under Section 1446(f)

Additional Guidance Related to Transfers of Publicly Traded Partnership Interests under

Section 1446(f)

Notice 2023-8

I.

PURPOSE

This notice provides additional guidance for brokers to comply with the provisions

of the final regulations under section 1446(f) (and certain provisions of the final

regulations that apply to section 1446(a)) (final regulations) that relate to withholding on

the transfer of an interest in a publicly traded partnership (PTP interest). The

Department of the Treasury (Treasury Department) and the Internal Revenue Service

(IRS) intend to issue proposed regulations that would amend the final regulations to

implement this additional guidance.

II.

BACKGROUND

Sections 864(c)(8) and 1446(f) were added to the Code by the Tax Cuts and

Jobs Act, Pub. L. 115-97, on December 22, 2017. Section 864(c)(8) generally provides

that gain or loss of a foreign person on the sale or exchange of an interest in a

partnership engaged in a U.S. trade or business is treated as effectively connected gain

or loss and, therefore, is subject to U.S. tax. Section 1446(f)(1) requires a transferee of

an interest in a partnership to withhold 10 percent of the amount realized if any portion

of the gain on the disposition would be treated under section 864(c)(8) as effectively

connected with the conduct of a trade or business within the United States (unless an

exception applies).

On November 30, 2020, the Treasury Department and the IRS published the final

regulations (TD 9926) in the Federal Register (85 FR 76910, as corrected at 86 FR

13191), primarily relating to withholding and information reporting under section 1446(f).

The final regulations include withholding requirements under section 1446(f)(1) that

generally require a broker that effects a transfer of a PTP interest on behalf of a

transferor to withhold on the payment of an amount realized made to the transferor

Federal Register (85 FR 76910, as corrected at 86 FR

13191), primarily relating to withholding and information reporting under section 1446(f).

The final regulations include withholding requirements under section 1446(f)(1) that

generally require a broker that effects a transfer of a PTP interest on behalf of a

transferor to withhold on the payment of an amount realized made to the transferor.

However, a broker is not required to withhold, or may withhold at a reduced rate, if it can

rely on (i) a certification from the transferor that claims an exception or reduction to

withholding (generally provided on a valid Form W-8 or W-9) or (ii) a representation

made by the publicly traded partnership (PTP) on a qualified notice indicating that the

exception under §1.1446(f)-4(b)(3)(ii) applies (ten-percent exception). A broker is also

not required to withhold when it makes the payment of an amount realized to a qualified

intermediary (QI), or a U.S. branch treated as a U.S. person, that assumes primary

withholding responsibility under section 1446(f)(1).

The provisions of the final regulations that relate to a broker’s obligation to

withhold on the transfer of a PTP interest apply to transfers that occur on or after

January 1, 2022. However, on September 7, 2021, the Treasury Department and the

IRS released Notice 2021-51, 2021-36 I.R.B. 361, deferring the applicability date of

these provisions to transfers that occur on or after January 1, 2023. On May 16, 2022,

the Treasury Department and the IRS released Notice 2022-23, 2022-20 I.R.B. 1062,

proposing changes to the qualified intermediary agreement (QI agreement), including

rules that will apply to QIs required to withhold on the transfer of a PTP interest under

section 1446(f) starting January 1, 2023. Subsequently, the Treasury Department and

the IRS released Revenue Procedure 2022-43, 2022-52 I.R.B. 570, which provides the

final QI agreement effective as of January 1, 2023.

III

oposing changes to the qualified intermediary agreement (QI agreement), including

rules that will apply to QIs required to withhold on the transfer of a PTP interest under

section 1446(f) starting January 1, 2023. Subsequently, the Treasury Department and

the IRS released Revenue Procedure 2022-43, 2022-52 I.R.B. 570, which provides the

final QI agreement effective as of January 1, 2023.

III.

SALES OF INTERESTS IN FOREIGN PUBLICLY TRADED PARTNERSHIPS

Following the publication of the final regulations, taxpayers and other

stakeholders raised concerns regarding the difficulty of brokers to determine, for

withholding under section 1446(f), whether entities organized outside of the United

States are classified as PTPs for U.S. tax purposes. Because the final regulations

generally require withholding on the sale of a PTP interest unless the PTP represents

on a qualified notice that the ten-percent exception applies, or the transferor provides a

certification claiming another exception to withholding under §1.1446(f)-4(b)), a broker

that is unable to determine the classification of an entity may be required to withhold on

each sale of an interest in such entity. The view of these stakeholders was that it is

impractical to identify a complete list of entities organized outside of the United States

that are classified as partnerships for U.S. tax purposes and that are traded on a foreign

established securities market or foreign secondary market. These stakeholders

requested that a broker be able to presume that an entity organized outside of the

United States is not a PTP unless it has actual knowledge to the contrary, and that a

PTP organized outside of the United States is presumed to not have effectively

connected income unless it represents otherwise on a qualified notice.

The Treasury Department and the IRS have determined that the burden on

brokers to determine whether a foreign entity that trades on a foreign market is a PTP

for U.S

tates is not a PTP unless it has actual knowledge to the contrary, and that a

PTP organized outside of the United States is presumed to not have effectively

connected income unless it represents otherwise on a qualified notice.

The Treasury Department and the IRS have determined that the burden on

brokers to determine whether a foreign entity that trades on a foreign market is a PTP

for U.S. tax purposes would likely be disproportionate to the amount of gain subject to

section 864(c)(8) on transfers of interests in such entities. The Treasury Department

and the IRS intend to issue proposed regulations that would amend the final regulations

to provide withholding relief to brokers on the sale of an interest in an entity that is

organized outside of the United States and that trades solely on a foreign established

securities market or foreign secondary market (foreign-traded entity). This proposed

amendment would allow a broker that effects a sale of an interest in a foreign-traded

entity to presume that the entity is not a PTP for U.S. tax purposes unless the broker

has actual knowledge otherwise.

However, the Treasury Department and the IRS have determined that it is

inappropriate to allow a broker that knows that a foreign-traded entity is a PTP for U.S.

tax purposes to presume that the PTP does not have effectively connected income, and

therefore do not intend to include such a presumption in the proposed regulations.

Thus, in such a case, a broker would be required to withhold under section 1446(f) on

the sale of an interest in the PTP unless the PTP has indicated on a qualified notice that

the ten-percent exception applies or the broker receives a certification from the

transferor claiming another exception or reduction to withholding.

IV.

RELIANCE ON LATE CERTIFICATIONS

Under the final regulations, a broker may rely on a certification from a transferor

that claims an exception or reduction to withholding

est in the PTP unless the PTP has indicated on a qualified notice that

the ten-percent exception applies or the broker receives a certification from the

transferor claiming another exception or reduction to withholding.

IV.

RELIANCE ON LATE CERTIFICATIONS

Under the final regulations, a broker may rely on a certification from a transferor

that claims an exception or reduction to withholding. However, a broker may not rely on

a certification if it is received earlier than 30 days before a transfer (unless an allowance

applies in the final regulations to allow a broker to rely on documentation that it already

possesses) or at any time after a transfer. Taxpayers and other stakeholders have

requested an allowance for brokers to rely on late certifications that claim an exception

or reduction to withholding on the transfer of a PTP interest. These stakeholders noted

that for other types of payments, brokers that are withholding agents are allowed to rely

on late documentation for purposes of reducing withholding (for example, under the

regulations under sections 1441 and 1471), and thus requested that the final regulations

be amended to provide that those same provisions apply for purposes of applying

section 1446(f) on the transfer of a PTP interest.

The Treasury Department and the IRS have determined that it is appropriate to

allow brokers to rely on late certifications for purposes of withholding under section

1446(f) in order to reduce overwithholding and claims for refund and to better coordinate

with the documentation rules under sections 1441 and 1471. The Treasury Department

and the IRS intend to issue proposed regulations that would amend the final regulations

to allow brokers to rely on late certifications when certain requirements are met. A

broker would be permitted to rely on a valid certification that it receives within 30 days of

the date of payment

nd to better coordinate

with the documentation rules under sections 1441 and 1471. The Treasury Department

and the IRS intend to issue proposed regulations that would amend the final regulations

to allow brokers to rely on late certifications when certain requirements are met. A

broker would be permitted to rely on a valid certification that it receives within 30 days of

the date of payment. If the certification is received more than 30 days after the date of

payment but within one year of the date of the payment, a broker would be permitted to

rely on the certification if it contains a signed affidavit stating that the information and

representations on the certification were accurate as of the time of payment. If a

certification is received more than one year after the date of payment, the broker would

be permitted to rely on the certification if it contains the signed affidavit and, in the case

of a claim for treaty benefits under §1.1446(f)-4(b)(5), documentary evidence described

in §1.1441-6(c)(4)(i) or (ii) to support the treaty claim made on the certificate.

The allowance for late certifications would apply to any certification used to claim

an exception or reduction to withholding on the transfer of a PTP interest under

§1.1446(f)-4. For example, a broker may rely on a late Form W-8IMY from a foreign

partnership to claim a modified amount realized pursuant to §1.1446(f)-4(c)(2)(ii) if the

form meets the requirements for late certifications. A broker may also rely on any

underlying certifications provided by the foreign partnership on behalf of its partners to

establish a claim of non-foreign status or a claim of treaty benefits to the extent that

those certifications separately meet the requirements for late certifications

unt realized pursuant to §1.1446(f)-4(c)(2)(ii) if the

form meets the requirements for late certifications. A broker may also rely on any

underlying certifications provided by the foreign partnership on behalf of its partners to

establish a claim of non-foreign status or a claim of treaty benefits to the extent that

those certifications separately meet the requirements for late certifications.

The Treasury Department and the IRS also intend to issue proposed regulations

that would amend the final regulations that relate to withholding under section 1446(a)

to provide the same allowance for late certifications that are received by nominees

treated as withholding agents under §1.1446-4 on PTP distributions subject to section

1446(a).

V.

SHORT SALES OF PTP INTERESTS

The Treasury Department and the IRS have received requests for clarity on the

application of section 1446(f) to transactions described by requestors as short sales of

PTP interests (PTP shorts). In a PTP short, a taxpayer obtains a PTP interest from a

third party (original PTP interest owner), subject to an obligation to deliver an identical

PTP interest to the original PTP interest owner in the future. The taxpayer immediately

sells the PTP interest to an unrelated market participant for cash (sale to market). To

satisfy its obligation to deliver an identical PTP interest to the original PTP interest

owner, the taxpayer may buy a replacement PTP interest and deliver it to the original

PTP interest owner. As an economic matter, the taxpayer will profit from the transaction

if the value of the PTP interest has declined during the term of the PTP short.

Alternatively, the taxpayer may instead deliver a PTP interest that it holds at that time to

the original PTP interest owner. In the latter case, the taxpayer may have owned the

PTP interest when it enters into the PTP short, or it may have acquired the PTP interest

during the term of the PTP short

e transaction

if the value of the PTP interest has declined during the term of the PTP short.

Alternatively, the taxpayer may instead deliver a PTP interest that it holds at that time to

the original PTP interest owner. In the latter case, the taxpayer may have owned the

PTP interest when it enters into the PTP short, or it may have acquired the PTP interest

during the term of the PTP short. Taxpayers typically carry out these transactions

through a broker, who has the legal relationship with both the taxpayer and the original

PTP interest owner.

Taxpayers and other stakeholders have requested that guidance be issued to the

effect that no withholding applies to PTP shorts. In response, the Treasury Department

and the IRS intend to issue proposed regulations that would amend the final regulations

to provide an exception to withholding under section 1446(f) on a PTP short (PTP short

exception). The PTP short exception would apply to a PTP short effected by a broker

on behalf of a taxpayer that obtained the PTP interest from another party (including the

broker or a customer of the broker) for sale to market. No withholding would be

required on the sale to market of the PTP interest or on the later transfer by the

taxpayer of an identical PTP interest to the original PTP interest owner. The proposed

regulations would not address the treatment of the PTP short to the original PTP

interest owner.

The Treasury Department and the IRS have determined that the PTP short

exception should not apply in certain situations in which there may be gain arising from

the PTP short that is subject to section 864(c)(8). Therefore, the PTP short exception

would not apply if on the date that the sale to market is entered on the books of the

broker (i) the taxpayer holds substantially identical property (within the meaning of

section 1233) in an account with the broker or (ii) the broker has actual knowledge that

the taxpayer holds substantially identical property in an account with another broker

on 864(c)(8). Therefore, the PTP short exception

would not apply if on the date that the sale to market is entered on the books of the

broker (i) the taxpayer holds substantially identical property (within the meaning of

section 1233) in an account with the broker or (ii) the broker has actual knowledge that

the taxpayer holds substantially identical property in an account with another broker. In

such cases, the taxpayer may realize gain from delivery of such substantially identical

property to the original PTP interest owner or from a constructive sale under section

1259. Because any such gain would be attributable, in whole or in part, to the

taxpayer’s ownership in the substantially identical PTP interest, it is inappropriate to

provide relief from withholding under section 1446(f). This limitation to the PTP short

exception would apply regardless of whether the taxpayer delivers to the original PTP

interest owner the substantially identical PTP interest held on the date of the sale to

market or a PTP interest acquired during the term of the PTP short.

The proposed regulations would also clarify existing guidance to brokers

regarding withholding and reporting associated with PTP shorts that do not qualify for

the PTP short exception. The date of transfer for purposes of withholding and reporting

on a PTP short under §1.1446(f)-4 would be the date on which the sale to market of the

PTP interest is entered on the books of the broker, but the broker would not be required

to satisfy its withholding liability until payment is made. This would allow a broker to

withhold from the proceeds of the sale to market when it knows that the PTP short

exception does not apply because it holds (or knows that another broker holds)

substantially identical property for the taxpayer at the time of such sale. A broker would

be required to deposit any withheld amounts with the IRS in accordance with §1.6302-2.

VI

until payment is made. This would allow a broker to

withhold from the proceeds of the sale to market when it knows that the PTP short

exception does not apply because it holds (or knows that another broker holds)

substantially identical property for the taxpayer at the time of such sale. A broker would

be required to deposit any withheld amounts with the IRS in accordance with §1.6302-2.

VI.

APPLICABILITY DATE AND TAXPAYER RELIANCE

The proposed regulations would apply to transfers or distributions made on or

after January 1, 2023. Before the promulgation of the proposed regulations, a broker

required to withhold under section 1446(a) or 1446(f) may rely on the provisions of this

Notice regarding the proposed regulations described in sections III through V. A QI

applying the provisions of the QI agreement (as in effect on January 1, 2023) may also

rely on the provisions of this Notice regarding the proposed regulations described in

sections III through V.

VII.

DRAFTING INFORMATION

The principal author of this notice is Subin Seth of the Office of Associate Chief

Counsel (International). For further information regarding this notice, contact Mr. Seth

at (202) 317-5003 (not a toll-free call).