<PRE>

[Federal Register: September 3, 2003 (Volume 68, Number 170)]
[Proposed Rules]
[Page 52465-52484]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03se03-16]


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Part II





Department of the Treasury





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Internal Revenue Service



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26 CFR Parts 1 and 301



Section 1446 Regulations; Proposed Rule


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-108524-00]
RIN 1545-AY28


Section 1446 Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations regarding the
obligation of a partnership to pay a withholding tax on effectively
connected taxable income allocable under section 704 to a foreign
partner. The regulations will affect partnerships engaged in a trade or
business in the United States that have one or more foreign partners.

DATES: Written or electronic comments and requests to speak, with
outlines of topics to be discussed at the public hearing scheduled for
December 4, 2003, must be received by November 13, 2003.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-108524-00), room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
108524-00), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit
comments electronically directly to the IRS Internet site at <A HREF="http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.irs.gov/regs">http://www.irs.gov/regs</A>.
The public hearing will be held in the IRS
Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
David J. Sotos, at (202) 622-3860, or to be placed on the attendance
list for the hearing, LaNita Van Dyke at (202) 622-7180 (not toll-free
numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collections of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP,
Washington, DC 20224. Comments on the collections of information should
be received by November 3, 2003. Comments are specifically requested
concerning:
Whether the proposed collections of information are necessary for
the proper performance of the functions of the Internal Revenue
Service, including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collections of information (see below);
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collections of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
The collections of information in this proposed regulation are in
Sec. Sec. 1.871-10, 1.1446-1, 1.1446-3, and 1.1446-4. This information
is required to determine whether a partnership is required to pay a
withholding tax with respect to a foreign partner and provide
information concerning the tax paid on such partner's behalf, and to
determine the foreign person required to report the effectively
connected taxable income earned by such partnership and entitled to
claim credit for the withholding tax paid by the partnership. This
information will be used in issuing refunds to foreign persons claiming
credit for withholding tax paid on their behalf, as well as for audit
and examination purposes. The reporting requirements in Sec. Sec.
1.871-10 and 1.1446-3 are mandatory. The reporting requirement in Sec.
1.1446-1 and 1.1446-4 are voluntary. The likely respondents include
individuals, business or other for-profit institutions, and small
businesses or organizations.
Estimated total annual reporting burden: 7,805 hours.
Estimated average annual burden hours per respondent: 0.5 hours.
Estimated number of respondents: 15,775.
Estimated annual frequency of responses: on occasion and quarterly.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

This document contains proposed amendments to 26 CFR part 1 under
section 1446 of the Internal Revenue Code (Code). Section 1446 was
added to the Code by section 1246(a) of the Tax Reform Act of 1986
(Public Law 99-514, 100 Stat. 2085, 2582 (1986 Act)), to impose
withholding at a rate of 20 percent on distributions to a foreign
partner by a partnership that was engaged in a U.S. trade or business.
Section 1012(s)(1)(A) of the Technical and Miscellaneous Revenue Act of
1988 (Public Law 100-647, 102 Stat. 3342, 3526 (1988 Act)) revised
section 1446 to require that a withholding tax (1446 tax) be imposed on
effectively connected taxable income (ECTI) allocable to a partner that
is a foreign person (foreign partner) at the highest tax rate
applicable to such person. Finally, section 7811(i)(6) of the Omnibus
Budget Reconciliation Act of 1989 (Public Law 101-239, 103 Stat. 2106,
2410 (1989 Act)), made certain technical amendments to section 1446.
Treasury and the IRS issued Rev. Proc. 88-21 (1988-1 C.B. 777) to
provide guidance on the operation of the withholding tax imposed under
section 1446 as enacted by the 1986 Act. After the 1988 Act, which
revised the withholding approach to apply to a partner's allocable
share of ECTI instead of to distributions, Treasury and the IRS
published Rev. Proc. 89-31 (1989-1 C.B. 895), which made Rev. Proc. 88-
21 obsolete. Rev. Proc. 89-31 was modified by Rev. Proc. 92-66 (1992-2
C.B. 428). Rev. Proc. 89-31, as modified by Rev. Proc. 92-66, provides
current guidance to partnerships for calculating, paying over, and
reporting the 1446 tax.

Explanation of Provisions

A. In General

Prior to the enactment of section 1446, a partnership generally was
not required to withhold on income that was effectively connected with
the conduct of a trade or business within the United States (a U.S.
trade or business) and allocated or distributed to its foreign
partners. Congress enacted section 1446 because it was concerned that
passive foreign investors could

[[Page 52467]]

escape U.S. tax on their partnership income. See S. Rep. No. 99-313,
99th Cong., 2d Sess. 414 (1986). As originally enacted, section 1446
generally required both domestic and foreign partnerships with any
income, gain, or loss that was effectively connected with the conduct
of a U.S. trade or business to withhold a tax equal to 20 percent of
any amount distributed to a foreign partner. Through a series of
modifications and refinements discussed below, this withholding tax
regime evolved from its original structure of withholding on
distributions to foreign partners to its present form of, generally,
withholding on an installment basis on partnership ECTI (whether
distributed or not distributed), apart from special provisions for
publicly traded partnerships.
In response to the enactment of section 1446, Treasury and the IRS
issued Rev. Proc. 88-21 to provide guidance for partnerships to comply
with section 1446. After Rev. Proc. 88-21 was issued, the 1988 Act
amended section 1446 retroactively and provided that no withholding was
required under section 1446 for partnership taxable years beginning
before January 1, 1988.
Section 1446, as revised by the 1988 Act, shifted from imposing a
withholding tax on partnership distributions to imposing a withholding
tax on the amount of ECTI allocable to the partnership's foreign
partners. More specifically, section 1446(a) requires partnerships that
have ECTI in any taxable year, any portion of which is allocable under
section 704 to a foreign partner, to pay the 1446 tax at such time and
in such manner as prescribed in regulations. The amount of withholding
tax payable by a partnership under section 1446 is equal to the
applicable percentage of the partnership's ECTI allocable under section
704 to foreign partners. The applicable percentage for ECTI allocable
to a foreign corporation is the highest rate of tax specified in
section 11(b), and the applicable percentage for ECTI allocable to a
non-corporate foreign partner is the highest rate of tax specified in
section 1. Further, section 1446(d), as amended by the 1988 Act,
provides that a foreign partner is entitled to a credit under section
33 for such partner's share of the 1446 tax, and, except as provided in
regulations, such partner's share of the 1446 tax paid by the
partnership is treated as distributed to such partner on the last day
of the taxable year for which such tax was paid. The credit under
section 33 is applied against the partner's U.S. tax liability for the
taxable year in which the partner includes its allocable share of the
partnership's effectively connected income.
Treasury and the IRS issued Rev. Proc. 89-31 to provide guidance to
partnerships under section 1446, as amended by the 1988 Act. This
revenue procedure made Rev. Proc. 88-21 obsolete. In general, Rev.
Proc. 89-31 provides guidance concerning the requirement to pay a
withholding tax, the determination of whether a partner is a foreign
person, the calculation of partnership ECTI, the amount of the
withholding tax, and the procedures for reporting and paying over the
1446 tax. The revenue procedure generally follows the regime set forth
in section 6655 for estimated tax payments by corporations, and
requires a partnership to annualize its ECTI and pay over the 1446 tax
in quarterly installments. Further, the revenue procedure provides
special rules for publicly traded partnerships and tiered partnership
structures. A partnership subject to section 1446 must continue to
comply with Rev. Proc. 89-31, as modified by Rev. Proc. 92-66
(discussed below), until the partnership's first taxable year beginning
after the date these regulations are issued in final form.
Section 7811(i)(6) of the 1989 Act amended section 1446 in three
respects. First, the amendment provides that, except as provided in
regulations, a foreign partner's share of the 1446 tax paid by a
partnership is treated as distributed to such partner on the earlier of
the day on which such tax is paid by the partnership or the last day of
the partnership's taxable year for which such tax is paid. Second, the
amendment grants Treasury and the IRS regulatory authority to apply the
addition to tax under section 6655 to a partnership as if it were a
corporation. Third, the amendment clarifies that the applicable
percentage for a foreign corporate partner is the highest rate of tax
specified in section 11(b)(1). The changes made by the 1989 Act are
effective for partnership taxable years beginning after December 31,
1987, as if originally included as part of the 1988 Act amendments.
In 1992, Treasury and the IRS issued Rev. Proc. 92-66, which
modified Rev. Proc. 89-31 in three respects. First, Rev. Proc. 92-66
provides that the applicable percentage to be used by publicly traded
partnerships in calculating the 1446 tax is the highest rate of tax
imposed under section 1, which at that time was 31 percent. Second, the
revenue procedure allows a partnership to seek a refund from the IRS in
certain circumstances for amounts it has paid under section 1446.
Third, the revenue procedure provides that a foreign partnership
subject to withholding under section 1445(a) during a taxable year is
allowed to credit the amount withheld under section 1445(a), to the
extent such amount is allocable to foreign partners, against its
liability to pay the 1446 tax for that year.

B. Structure of the Proposed Regulations

In general, the proposed regulations follow the approach in Rev.
Proc. 89-31 for computing, paying over and reporting the 1446 tax. The
proposed regulations are set forth in six sections. Section 1.1446-1
contains rules regarding a partnership's requirement to pay a
withholding tax, and how a partnership should determine the status of
its partners (i.e., domestic or foreign, corporate or non-corporate).
Section 1.1446-2 contains rules for calculating partnership ECTI
allocable to each foreign partner. Section 1.1446-3 contains rules
pertaining to a partnership's obligation to pay the 1446 tax on an
installment basis, including guidance on calculating the 1446 tax,
reporting and paying over the 1446 tax, and penalties for underpayment
of the 1446 tax. Section 1.1446-4 contains special rules applicable to
publicly traded partnerships. These rules generally implement a
withholding regime based upon the distribution of effectively connected
income to foreign partners. These regulations also permit publicly
traded partnerships to elect to withhold and pay over the 1446 tax
based upon the general rules set forth in Sec. Sec. 1.1446-1 through
1.1446-3 (withholding based upon ECTI allocable under section 704 to
foreign partners). Section 1.1446-5 contains rules applicable to tiered
partnership structures, including rules for looking through certain
upper-tier foreign partnerships to determine the 1446 tax obligation of
a lower-tier partnership. Finally, Sec. 1.1446-6 contains the proposed
effective date of the regulations.
In addition to the proposed regulatory amendments under section
1446, these regulations also include proposed amendments to Sec. Sec.
1.871-10, 1.1443-1, 1.1461-1 through 1.1461-3, 1.1462-1, 1.1463-1,
301.6109-1, and 301.6721-1, to coordinate the section 1446 withholding
regime with existing regulations.

C. Determining the Status and Classification of Partners--Sec. 1.1441-
1

Section 1446 applies only to partnerships with ECTI allocable under
section 704 to one or more foreign partners. Section 1446(e) defines a
foreign partner as any partner who is not a United States person.
Section

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7701(a)(30) defines a United States person to include a citizen or
resident of the United States, a domestic partnership, a domestic
corporation, any estate other than a foreign estate within the meaning
of section 7701(a)(31), and any trust if a court within the United
States is able to exercise primary supervision over the administration
of the trust and one or more United States persons have the authority
to control all substantial decisions of the trust. Section 1446 and the
legislative history are silent as to how a partnership is to determine
the domestic or foreign status of its partners.
Rev. Proc. 89-31 contains rules for determining whether a partner
is a foreign partner for purposes of section 1446. Under the revenue
procedure, a partnership may determine a partner's status by relying
upon a certification of non-foreign status provided by the partner, or
by relying on any other means. See Rev. Proc. 89-31, Sec. 5.02 and
Sec. 5.03.
In order to reduce the paperwork burden imposed on taxpayers and
avoid conflicting information, the proposed regulations reflect an
approach different from the approach taken in Rev. Proc. 89-31 for
determining whether a partner is a foreign partner. The proposed
regulations generally require a partnership to comply with the
paperwork requirements used under section 1441 to determine the status
(domestic or foreign) and the tax classification (corporate or non-
corporate) of its partners. Under the proposed regulations, a
partnership should obtain either a Form W-8BEN, ``Certificate of
Foreign Status of Beneficial Owner for U.S. Tax Withholding,'' Form W-
8IMY, ``Certificate of Foreign Intermediary, Flow Through Entity, or
Certain U.S. Branches for United States Tax Withholding,'' or Form W-9,
``Request for Taxpayer Identification Number and Certification,'' from
each of its partners. Additionally, special rules are provided with
respect to domestic and foreign trusts all or a portion of which are
treated as owned by a grantor or another person under subpart E of
subchapter J of the Code. The documentation requirement set forth in
the proposed regulations will allow a partnership required to withhold
under both section 1441 and section 1446 to receive one form instead of
two from each of its partners, and thus will reduce the paperwork and
recordkeeping burden imposed upon partners and partnerships. Further,
the required documentation will also serve to establish a uniform basis
for determining the foreign or non-foreign status of partners and to
reduce the instances where a partnership receives inconsistent
documentation.
In the absence of a valid Form W-8BEN, Form W-8IMY, or Form W-9
from a partner (or upon the receipt of a form that the partnership has
actual knowledge or reason to know is incorrect or unreliable), the
proposed regulations contain a presumption that the partner is a
foreign person and that the partnership must pay 1446 tax on ECTI
allocable to the partner. However, this presumption does not apply, and
the partnership shall not be liable for 1446 tax with respect to a
partner, to the extent the partnership relies on other means to
ascertain the non-foreign status of a partner, and the partnership is
correct in its determination that such partner is a U.S. person. This
approach is similar to Rev. Proc. 89-31, which permitted partnerships
to rely on other means to ascertain the non-foreign status of a
partner. See Rev. Proc. 89-31, Sec. 5.03. Under the proposed
regulations, when the presumption of foreign status applies, the
following rules apply for purposes of determining the applicable rate
that will apply in computing the 1446 tax. If the partnership knows
that the partner is an individual and not an entity, the partnership
shall compute the 1446 tax with respect to such partner using the
highest rate in section 1. If the partnership knows that the partner is
an entity that is a corporation under Sec. 301.7701-2(b)(8) (included
on the per se list of entities under the entity classification
regulations), the partnership shall treat the partner as a foreign
corporation and compute the 1446 tax with respect to such partner using
the highest rate in section 11(b)(1). In all other cases, including
where the partnership cannot reliably determine the status of the
partner, the proposed regulations presume that the partner is either a
corporate or non-corporate partner, based upon whichever classification
results in a higher 1446 tax being due. This presumption is necessary
to prevent a partner from obtaining a more favorable withholding result
than would have been achieved if the partner complied with the
documentation requirements. The duration and validity of the forms
required for purposes of section 1446 is intended to be consistent with
the standards applicable when these forms are submitted in the context
of sections 1441, 1442, and 3406. These forms and their instructions
will be modified as necessary to facilitate their use under section
1446.

D. Determining a Foreign Partner's Allocable Share of Partnership
ECTI--Sec. 1.1446-2

The proposed regulations contain rules for computing partnership
ECTI allocable to foreign partners. Consistent with Rev. Proc. 89-31,
the partnership determines its ECTI allocable to a foreign partner
using an aggregate approach. The partnership first determines the
effectively connected partnership items allocable to each of the
partnership's foreign partners. Partnership ECTI allocable to all
foreign partners then is computed by combining all of the foreign
partners' allocable shares of partnership ECTI.
The proposed regulations also provide guidance concerning capital
losses, suspended losses, and loss carryovers and carrybacks when
determining a foreign partner's allocable share of partnership ECTI.
The proposed regulations permit capital losses allocable to a foreign
partner to offset such partner's allocable share of capital gains
consistent with section 1211(a). Solely for purposes of section 1446,
the proposed regulations do not permit the partnership to consider
section 1211(b), which permits an individual to use capital losses in
excess of capital gains to the extent of $3,000 per taxable year.
Further, the proposed regulations do not permit the partnership to take
into account in determining a foreign partner's allocable share of
partnership ECTI any losses of a partner that are carried over or back
or are suspended.
A number of issues arise under section 1446 where the partnership
has cancellation of indebtedness income under section 61(a)(12),
including difficulties arising because the exclusion of cancellation of
indebtedness income under section 108 is applied at the partner level
rather than at the partnership level. See section 108(d)(6). These
proposed regulations do not specifically address the treatment of
cancellation of indebtedness income of a partnership under section
1446. Comments are requested concerning the appropriate treatment under
section 1446 of such income allocable to a foreign partner.

E. Calculating, Paying Over, and Reporting the 1446 Tax--Sec. 1.1446-3

Section 1446(f)(2) provides that the Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of section
1446, including regulations providing (1) that, for purposes of section
6655, the withholding tax imposed under section 1446 be treated as a
tax imposed by section 11 and any partnership required

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to pay such tax be treated as a corporation, and (2) appropriate
adjustments in applying section 6655 with respect to such withholding.
Section 6655 generally requires a corporation to make estimated tax
payments throughout its taxable year, and determines an addition to tax
for any underpayment of the required installments.
Rev. Proc. 89-31 generally requires a partnership, other than a
publicly traded partnership, to determine its ECTI allocable to foreign
partners, and, ultimately, its 1446 tax obligation, by annualizing its
effectively connected items under one of the three options generally
available to corporations under section 6655 when paying estimated
taxes. As an alternative, Rev. Proc. 89-31 permits a partnership to
determine its 1446 tax obligation based upon a safe harbor. Under both
the safe harbor and the annualization methods, a partnership must pay
the 1446 tax on an installment basis.
The proposed regulations adopt, with some modifications, the
estimated tax payment rules set forth in section 6655, including the
imposition of an addition to tax for an underpayment of the 1446 tax.
Consistent with Rev. Proc. 89-31, the proposed regulations require a
partnership to pay its 1446 tax obligation on an installment basis, and
pay its 1446 tax either based upon annualizing its income or based upon
a safe harbor. The proposed regulations broaden the approaches
available in Rev. Proc. 89-31 in certain circumstances. Under the
proposed regulations, a partnership that chooses to annualize its
income may use certain methods in section 6655 that address the
seasonality of income earned by a partnership. See section 6655(e).
Further, the proposed regulations modify the safe harbor set forth in
Rev. Proc. 89-31 so that a partnership does not need to have filed Form
1065, ``U.S. Return of Partnership Income,'' and Form 8804, ``Annual
Return for Partnership Withholding Tax (Section 1446),'' at the time it
makes an installment payment. Instead, it is sufficient if the
partnership timely files these forms (taking into account extensions).

F. Special Rule for Tiered Trust or Estate Structures--Sec. 1.1446-
3(d)(2)(iii)

Treasury and the IRS are concerned about the potential abuse of
tiered trust structures to claim inappropriate refunds of the 1446 tax,
to avoid reporting by a beneficiary of ECTI earned by a partnership, or
to avoid section 1446 entirely. Existing provisions contemplate that
entitlement to a credit or refund of any section 1446 withholding tax
follows the liability for tax. Section 1446(d) provides that each
foreign partner of a partnership shall be allowed a credit under
section 33 for such partner's share of the 1446 tax paid by the
partnership. A foreign partner's share of any 1446 tax paid by the
partnership is treated as distributed to the partner by such
partnership. Section 1462 provides that income on which any tax is
required to be withheld at the source under chapter 3 of the Code,
including section 1446, shall be included in the return of the
recipient of such income, and any amount of tax so withheld may be
credited against the amount of income tax as computed in such return.
The regulations under section 1462 explain that an amount withheld on a
payment to a fiduciary, partnership, or intermediary is deemed to have
been paid by the taxpayer ultimately liable for the tax upon such
income. See Sec. 1.1462-1(b). Sections 702(b), 652(b), and 662(b)
ensure that the character of income (e.g., income that is effectively
connected income) of a partnership allocated to a trust (whether
domestic or foreign) is preserved in the hands of a beneficiary (see
Rev. Rul. 85-60 (1985-1 C.B. 187)).
The proposed regulations include clarification of the regulations
under section 1462 to coordinate with section 1446(d) to provide that a
foreign trust's or estate's allocable share of ECTI is deemed to have
been paid by the taxpayer ultimately liable for tax upon such income.
In the case of a foreign grantor trust, the taxpayer ultimately liable
for the tax upon such income is the grantor of such trust.
Further, Sec. 1.1446-3 of the proposed regulations includes two
rules and several examples pertaining to tiered trust or estate
structures. The rules are intended to match the credit claimed under
section 33 with the taxpayer that reports and pays tax on the ECTI upon
which the credit is based. The first rule applies where a foreign trust
or estate is a partner in a partnership required to pay the 1446 tax
and the beneficiary of the foreign trust or estate is either another
foreign trust (with a foreign person as a beneficiary of such trust) or
a foreign person. In such a circumstance, the proposed regulations
provide that the foreign trust or estate is only entitled to claim the
portion of the credit under section 33 that corresponds to the portion
of the associated effectively connected income on which it bears the
tax liability.
The second rule addresses the use of a domestic trust. The second
rule applies where a partnership knows or has reason to know that a
foreign person that is the ultimate beneficial owner of the effectively
connected income holds its interest in the partnership through a
domestic trust, and such domestic trust was formed or availed of with a
principal purpose of avoiding the 1446 tax. The use of a domestic trust
in a tiered trust structure may have a principal purpose of avoiding
the 1446 tax even though the tax avoidance purpose is outweighed by
other purposes when taken together. Where applicable, this rule allows
the IRS to impose the 1446 tax obligation on such partnership as if
each domestic trust in the chain is a foreign trust.

G. Publicly Traded Partnerships--Sec. 1.1446-4

Section 1446(f)(1) provides that the Secretary shall prescribe
regulations to apply section 1446 in the case of publicly traded
partnerships. In this regard, the legislative history to section 1446
specifically notes that special rules may be necessary in identifying a
publicly traded partnership's partners as U.S. or foreign. See H.R.
Rep. No. 100-795, 100th Cong., 2d Sess. 291 (1988); S. Rep. No. 100-
445, 100th Cong., 2d Sess. 305 (1988).
Rev. Proc. 89-31 provides special rules for publicly traded
partnerships. Under Rev. Proc. 89-31, the term publicly traded
partnership means a regularly traded partnership within the meaning of
the regulations under section 1445(e)(1), but not a publicly traded
partnership treated as a corporation under the general rules of section
7704(a). Generally, publicly traded partnerships with effectively
connected income, gain or loss are required to withhold based upon
distributions made to foreign partners. Rev. Proc. 92-66 modified the
applicable percentage for withholding on distributions to the highest
rate of tax imposed under section 1, and applied that percentage to
both corporate and non-corporate partners.
Under Rev. Proc. 89-31, a publicly traded partnership generally
determines the tax status of its partners by receiving either a
certificate of non-foreign status, a Form W-8, or a Form W-9 from its
partners, or by relying on other means. Further, nominees that hold
interests in a publicly traded partnership on behalf of one or more
foreign partners may be responsible for the 1446 tax liability for
foreign partners under certain circumstances. Finally, Rev. Proc. 89-31
permits publicly traded partnerships to elect to apply the general
rules that determine the 1446 tax based on a foreign partner's
allocable share of partnership ECTI rather than on distributions to
foreign partners. Under

[[Page 52470]]

Rev. Proc. 89-31, the publicly traded partnership makes this election
by complying with the payment and reporting requirements of the general
rules and attaching a statement to its annual return of withholding tax
indicating that the election is being made.
The proposed regulations modify several of the rules for publicly
traded partnerships set forth in Rev. Proc. 89-31. First, the proposed
regulations define publicly traded partnership solely by reference to
the definition in section 7704. Second, the proposed regulations
provide that the documentation requirements and presumptions of Sec.
1.1446-1 apply to publicly traded partnerships, thereby requiring such
partnerships to obtain a Form W-8BEN, Form W-8IMY, or Form W-9 from
each of their partners if they do not rely on other means to determine
the status of their partners. Third, the proposed regulations provide
that the applicable percentage for withholding on distributions is the
rate applicable under section 1446(b).
Comments are requested as to whether the special rules applicable
to publicly traded partnerships should be extended to other
partnerships. Specifically, Treasury and the IRS are considering
whether these special rules should apply to partnerships that make an
election under section 775 of the Code or partnerships with a specified
minimum number of partners.

H. Tiered Partnership Structures--Sec. 1.1446-5

Special concerns arise when a foreign partnership (upper-tier
partnership) is a partner in a second partnership (lower-tier
partnership) that is subject to section 1446. Section 1446(f) provides
the Secretary with regulatory authority to prescribe rules necessary to
carry out the purposes of the section. The legislative history to
section 1446 notes that in the context of tiered partnership
structures, ``rules may be necessary to prevent the imposition of more
tax than will be properly due (for example, rules to prevent the tax
from being imposed on more than one partnership and rules to determine
the applicable percentages).'' H.R. Rep. No. 100-795, 100th Cong., 2d
Sess. 291 (1988); S. Rep. No. 100-445, 100th Cong., 2d Sess. 305
(1988).
Rev. Proc. 89-31 employs an entity approach in computing the 1446
tax obligation of a partnership that has a foreign partnership as one
of its partners. Under the entity approach, a lower-tier partnership
must pay a 1446 tax at the highest rate in section 1 on an upper-tier
foreign partnership's allocable share of ECTI, regardless of the
composition of the upper-tier partnership. Rev. Proc. 89-31 provides
the upper-tier partnership a credit for a portion of the 1446 tax paid
by the lower-tier partnership to avoid multiple application of the 1446
tax. This approach may result in a partnership paying a 1446 tax that
is greater in amount than would have been required if the partners of
the upper-tier partnership had been direct partners of the lower-tier
partnership, for example, where some of the partners of the upper-tier
partnership are U.S. persons.
The proposed regulations modify the rules in Rev. Proc. 89-31 with
respect to certain tiered partnership structures to address this
situation. The proposed regulations provide that if a partner in a
partnership that is required to pay the 1446 tax is a foreign
partnership, it may submit a completed Form W-8IMY to the lower-tier
partnership. If the upper-tier foreign partnership completes and
submits Form W-8IMY to the lower-tier partnership, and passes along the
Form W-8BEN, Form W-8IMY, or Form W-9 it received for some or all of
its partners, as well as information describing how effectively
connected items are allocated among its partners, the lower-tier
partnership shall look through the upper-tier partnership to the
partners of the upper-tier partnership (to the extent that it has
received the appropriate documentation and allocation information and
can reliably associate the allocation of its effectively connected
items to the partners of the upper-tier partnership) to determine its
1446 tax obligation. To the extent the lower-tier partnership receives
a valid Form W-8IMY from the upper-tier partnership but cannot reliably
associate the upper-tier partnership's allocable share of effectively
connected partnership items with a withholding certificate for each of
the upper-tier partnership's partners, the lower-tier partnership shall
withhold at the higher of the applicable percentages in section
1446(b).
Therefore, in appropriate circumstances, the lower-tier partnership
may determine its 1446 tax obligation based on the status of its
indirect partners. This approach generally is consistent with the
paperwork requirements under section 1441 applicable to a
nonwithholding foreign partnership and will ensure that the 1446 tax
paid by the partnership more closely approximates the actual tax
liability of the beneficial owner of the income in the case of a tiered
partnership structure. An upper-tier foreign partnership with foreign
partners remains obligated to file and report with respect to its 1446
tax obligation. Accordingly, the upper-tier partnership must comply
with the general rules of section 1446, including requiring payment in
installments, and reporting and passing along the credit under section
33 to its partners, which in these situations will also include the tax
paid at the lower-tier partnership level.
Comments are requested on the general approach taken in these
proposed regulations for situations involving two or more tiers of
partnerships. Further, comments are requested as to the desirability
and administrability of an alternative approach that allows a domestic
upper-tier partnership with foreign partners to elect to pass
information regarding its partners to the lower-tier partnership and
have the lower-tier partnership pay the 1446 tax based upon the
composition of the partners of the upper-tier partnership.

I. Withholding in Excess of Partner's Actual Tax Liability

Since the enactment of section 1446, Treasury and the IRS have
received and considered several comments regarding the potential for
section 1446 to require a partnership to pay a withholding tax in an
amount that exceeds a foreign partner's actual tax liability for a
taxable year. This situation may occur for several reasons, including
that: (1) Section 1446 does not take into account a partner's losses
from outside the partnership during the year, or a partner's loss
carryovers; and (2) section 1446 requires withholding at the maximum
statutory rates generally applicable to a foreign partner with
effectively connected income. Section 1446 does not contain provisions
for reducing or eliminating the general withholding obligation like the
provisions contained in section 1445 (which impose a withholding tax in
the case of the disposition of an interest in United States real
property). See section 1445(c). Rev. Proc. 89-31 provides that section
1446 applies instead of section 1445(e)(1) where the two sections
overlap, and, accordingly, partnerships owning U.S. real property are
not permitted to reduce withholding on gains from the disposition of
such property through the use of the procedures available under section
1445. See also Sec. 8.01 of Rev. Proc. 2000-35 (2000-2 C.B. 211).
Treasury and the IRS considered comments regarding alternative
approaches for adjusting the withholding tax obligation under section
1446 to more closely approximate a foreign partner's actual

[[Page 52471]]

U.S. tax liability. These proposed regulations contain provisions aimed
at mitigating the potential for withholding in excess of the partner's
actual tax liability (see e.g., Sec. 1.1446-5). These proposed
regulations do not contain other provisions that have been suggested
because, among other reasons, of concerns regarding the
administrability of such approaches. Comments are requested with
respect to approaches that would permit an adjustment to the amount of
1446 tax obligation that are consistent with the statute and
legislative history and administrable by partnerships, partners and the
IRS. In particular, comments are requested on whether the rules
coordinating sections 1445 and 1446 should be modified to address these
concerns.

J. Effective Date

These regulations are proposed to apply to partnership taxable
years beginning after the date these regulations are published as final
regulations in the Federal Register.

Effect on Other Documents

The following publications will be obsolete for partnership taxable
years beginning after the date these regulations are published as final
regulations in the Federal Register:

Rev. Proc. 89-31 (1989-1 C.B. 895)
Rev. Proc. 92-66 (1992-2 C.B. 428)

Special Analyses

It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. It also has been determined that section 533(b) of the
Administrative Procedures Act (5 U.S.C. chapter 5) does not apply to
these regulations. With respect to the collections of information
contained in Sec. 1.871-10, Sec. 1.1446-1 (pertaining to domestic
grantor trusts), and Sec. 1.1446-3 (pertaining to foreign trusts), it
is hereby certified that these collections of information will not have
a significant economic impact on a substantial number of small
entities. This certification is based upon the fact that only limited
small entities are impacted by these collections and the burden
associated with such collections is .5 hours. With respect to the
collections of information in Sec. Sec. 1.1446-3 (pertaining to a
partnership required to notify its foreign partners of an installment
payment of 1446 tax paid on behalf of such partner) and 1.1446-4, it is
hereby certified that these sections will not impose a significant
economic impact on a substantial number of small entities. This
certification is based upon the fact that while approximately 15,000
small entities will be impacted by these sections, the estimated annual
burden associated with these sections is only .5 hours per respondent.
Moreover, the information collection in Sec. 1.1446-4 is voluntary.
Therefore, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to
section 7805(f) of the Code, this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) that are submitted timely to the IRS.
Alternatively, taxpayers may submit comments electronically directly to
the IRS Internet Site at <A HREF="http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.irs.gov/regs">http://www.irs.gov/regs</A>. All comments will be
available for public inspection and copying. The Treasury Department
and IRS request comments on the clarity of the proposed regulations and
how they may be made easier to understand.
A public hearing has been scheduled for December 4, 2003, beginning
at 10 a.m. in the IRS Auditorium of the Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC. All visitors must come to the
Constitution Avenue entrance and present photo identification to enter
the building. Because of access restrictions, visitors will not be
admitted beyond the immediate entrance area more than 30 minutes before
the hearing starts. For information about having your name placed on
the building access list to attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit electronic or
written comments and an outline of the topics to be discussed and the
time to be devoted to each topic (signed original and eight (8) copies)
by November 13, 2003. A period of 10 minutes will be allotted to each
person for making comments. An agenda showing the schedule of speakers
will be prepared after the deadline for receiving outlines has passed.
Copies of the agenda will be available free of charge at the hearing.

Drafting Information

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

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements

26 CFR Part 301

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

Proposed Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as
follows:

PART 1--INCOME TAXES

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

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

Sec. 1.1446-3 also issued under 26 U.S.C. 1446(f). * * *
Sec. 1.1446-4 also issued under 26 U.S.C. 1446(f). * * *

Par. 2. In Sec. 1.871-10, paragraph (d)(3) is amended by adding a
sentence at the end of that paragraph, and paragraph (e) is amended by
revising the first sentence to read as follows:


Sec. 1.871-10 Election to treat real property income as effectively
connected with U.S. business.

* * * * *
(d) * * *
(3) Election by partnership. * * * If the nonresident alien or
foreign corporation makes an election, such person must provide the
partnership a Form W-8BEN, ``Certificate of Foreign Status of
Beneficial Owner for U.S. Withholding,'' and must indicate that the
nonresident alien or foreign corporation has made the election under
this section to treat real property income as effectively connected
income.
(e) Effective date. This section shall apply for taxable years
beginning after December 31, 1966, except the last sentence of
paragraph (d)(3) shall apply to partnership taxable years beginning
after the date these regulations are published as final regulations in
the Federal Register. * * *
Par. 3. Sec. 1.1443-1 is amended by:
1. Revising the first sentence of paragraph (a) and adding a
sentence at the end of the paragraph.
2. Revising paragraph (c)(1).
The revision and additions read as follows:

[[Page 52472]]

Sec. 1.1443-1 Foreign tax-exempt organizations.

(a) Income includible in computing unrelated business taxable
income. In the case of a foreign organization that is described in
section 501(c), amounts paid or effectively connected taxable income
allocable to the organization that are includible under section 512 in
computing the organization's unrelated business taxable income are
subject to withholding under Sec. Sec. 1.1441-1, 1.1441-4, 1.1441-6,
and 1.1446-1 through 1.1446-5, in the same manner as payments or
allocations of effectively connected taxable income of the same amounts
to any foreign person that is not a tax-exempt organization. * * * See
also Sec. 1.1446-3(c)(3).
* * * * *
(c) * * *
(1) In general. This section applies to payments made after
December 31, 2000, except that the references in paragraph (a) of this
section to effectively connected taxable income and withholding under
section 1446 shall apply to partnership taxable years beginning after
the date these regulations are published as final regulations in the
Federal Register.
* * * * *
Par. 4. Sections 1.1446-0 through 1.1446-6 are added to read as
follows.


Sec. 1.1446-0 Table of contents.

This section lists the captions contained in Sec. Sec. 1.1446-1
through 1.1446-6.

Sec. 1.1446-1 Withholding tax on foreign partners' share of
effectively connected taxable income.

(a) In general.
(b) Steps in determining 1446 tax obligation.
(c) Determining whether a partnership has a foreign partner.
(1) In general.
(2) Forms W-8BEN, W-8IMY, and W-9.
(i) In general.
(ii) Effect of Forms W-8BEN, W-8IMY, W-9, and statement.
(iii) Requirements for certificates to be valid.
(A) When period of validity expires.
(B) Required information for Forms W-8BEN and W-8IMY.
(iv) Partner must provide new withholding certificate when there
is a change in circumstances.
(v) Partnership must retain withholding certificates.
(3) Presumption of foreign status in absence of valid Form W-
8BEN, Form W-8IMY, Form W-9, or statement.
(4) Consequences when partnership knows or has reason to know
that Form W-8BEN, Form W-8IMY, or Form W-9 is incorrect or
unreliable and does not withhold.
Sec. 1.1446-2 Determining a partnership's effectively connected
taxable income allocable to foreign partners under section 704.
(a) In general.
(b) Computation.
(1) In general.
(2) Income and gain rules.
(i) Application of the principles of section 864.
(ii) Income treated as effectively connected.
(iii) Exempt income.
(3) Deduction and losses.
(i) Oil and gas interests.
(ii) Charitable contributions.
(iii) Net operating losses and other suspended or carried
losses.
(iv) Interest deductions.
(v) Limitation on capital losses.
(vi) Other deductions.
(vii) Limitations on deductions.
(4) Other rules.
(i) Exclusion of items allocated to U.S. partners.
(ii) Partnership credits.
(5) Examples.
Sec. 1.1446-3 Time and manner of calculating and paying over the
1446 tax.
(a) In general.
(1) Calculating 1446 tax.
(2) Applicable percentage.
(b) Installment payments.
(1) In general.
(2) Calculation.
(i) General application of the principles of section 6655.
(ii) Annualization methods.
(iii) Partner's estimated tax payments.
(iv) Partner whose interest terminates during the partnership's
taxable year.
(v) Exceptions and modifications to the application of the
principles under section 6655.
(A) Inapplicability of special rules for large corporations.
(B) Inapplicability of special rules regarding early refunds.
(C) Period of underpayment.
(D) Other taxes.
(E) 1446 tax treated as tax under section 11.
(F) Prior year tax safe harbor.
(3) 1446 tax safe harbor.
(i) In general.
(ii) Permission to change to standard annualization method.
(c) Coordination with other withholding rules.
(1) Fixed or determinable, annual or periodical income.
(2) Real property gains.
(i) Domestic partnerships.
(ii) Foreign partnerships.
(3) Coordination with section 1443.
(d) Reporting and crediting the 1446 tax.
(1) Reporting 1446 tax.
(i) Reporting of installment tax payments, installment tax
payment due dates, and notification to partners of installment tax
payments.
(ii) Payment due dates.
(iii) Annual return and notification to partners.
(iv) Information provided to beneficiaries of foreign trusts and
estates.
(v) Attachments required of foreign trusts and estates.
(vi) Attachments required of beneficiaries of foreign trusts and
estates.
(vii) Information provided to beneficiaries of foreign trusts
and estates that are partners in certain publicly traded
partnerships.
(2) Crediting 1446 tax against a partner's U.S. tax liability.
(i) In general.
(ii) Substantiation for purposes of claiming the credit under
section 33.
(iii) Tiered structures including trusts or estates.
(A) Foreign estates and trusts.
(B) Use of domestic trusts to circumvent section 1446.
(iv) Refunds to withholding agent.
(v) 1446 tax treated as cash distribution to partners.
(vi) Examples.
(e) Liability of partnership for failure to withhold.
(1) In general.
(2) Proof that tax liability has been satisfied.
(3) Liability for interest and penalties.
(f) Effect of withholding on partner.
Sec. 1.1446-4 Publicly traded partnerships.
(a) In general.
(b) Definitions.
(1) Publicly traded partnership.
(2) Applicable percentage.
(3) Nominee.
(4) Qualified notice.
(c) Time and manner of payment.
(d) Rules for designation of nominees to withhold tax under
section 1446.
(e) Determining foreign status of partners.
(1) In general.
(2) Presumptions regarding payee's status in absence of
documentation.
(f) Distributions subject to withholding.
(1) In general.
(2) In-kind distributions.
(3) Ordering rule relating to distributions.
(4) Coordination with section 1445.
(g) Election to withhold based upon ECTI allocable to foreign
partners instead of withholding on distributions.
Sec. 1.1446-5 Tiered partnership structures.
(a) In general.
(b) Reporting requirements.
(1) In general.
(2) Publicly traded partnerships.
(c) Look through rules for foreign upper-tier partnerships.
(d) Examples.
Sec. 1.1446-6 Effective date.


Sec. 1.1446-1 Withholding tax on foreign partners' share of
effectively connected taxable income.

(a) In general. If a domestic or foreign partnership has
effectively connected taxable income as computed under Sec. 1.1446-2
(ECTI), for any partnership tax year, and any portion of such taxable
income is allocable under section 704 to a foreign partner, then the
partnership must pay a withholding tax under section 1446 (1446 tax) at
the time and in the manner set forth in this section and Sec. Sec.
1.1446-2 through 1.1446-5.
(b) Steps in determining 1446 tax obligation. In general, a
partnership determines its 1446 tax as follows. The partnership
determines whether it has any foreign partners in accordance with

[[Page 52473]]

paragraph (c) of this section. If the partnership does not have any
foreign partners (including any person presumed to be foreign under
paragraph (c) of this section and any domestic trust treated as foreign
under Sec. 1.1446-3(d)) during its taxable year, it generally will not
have a 1446 tax obligation. If the partnership has one or more foreign
partners, it then determines under Sec. 1.1446-2 whether it has ECTI
any portion of which is allocable to one or more of the foreign
partners. If the partnership has ECTI allocable to one or more of its
foreign partners, the partnership computes its 1446 tax, pays over 1446
tax, and reports the amount paid in accordance with the rules in Sec.
1.1446-3. For special rules applicable to publicly traded partnerships,
see Sec. 1.1446-4. For special rules applicable to tiered partnership
structures, see Sec. 1.1446-5.
(c) Determining whether a partnership has a foreign partner--(1) In
general. Except as otherwise provided in Sec. 1.1446-3, only a
partnership that has at least one foreign partner during the
partnership's taxable year can have a 1446 tax liability. The term
foreign partner means any partner of the partnership who is not a U.S.
person within the meaning of section 7701(a)(30). Thus, a partner of
the partnership is a foreign partner if the partner is a nonresident
alien individual, foreign partnership, foreign corporation, foreign
estate or trust, as those terms are defined under section 7701 and the
regulations thereunder, or a foreign government within the meaning of
section 892 and the regulations thereunder. For purposes of this
section, a partner that is treated as a U.S. person for all income tax
purposes (by election or otherwise, see e.g., sections 953(d), 1504(d))
will not be a foreign partner, provided the partner has provided the
partnership a valid Form W-9, ``Request for Taxpayer Identification
Number and Certification,'' or if the partnership uses other means to
determine that the partner is not a foreign partner (see paragraph
(c)(3) of this section). A partner that is treated as a U.S. person
only for certain specified purposes is considered a foreign partner for
purposes of section 1446, and a partnership must pay a withholding tax
on the portion of ECTI allocable to that partner. For example, a
partnership must generally pay 1446 tax on ECTI allocable to a foreign
corporate partner that has made an election under section 897(i).
(2) Forms W-8BEN, W-8IMY, and W-9--(i) In general. Except as
otherwise provided in this paragraph (c)(2) or paragraph (c)(3) of this
section, a partnership must determine whether a partner is a foreign
partner, and the partner's tax classification (e.g., corporate or non-
corporate), by obtaining from the partner a Form W-8BEN, ``Certificate
of Foreign Status of Beneficial Owner for United States Tax
Withholding,'' Form W-8IMY, ``Certificate of Foreign Intermediary,
Flow-Through Entity, or Certain U.S. Branches for United States Tax
Withholding,'' or a Form W-9, as applicable. Specifically, a foreign
partner that is a nonresident alien individual, a foreign estate or
trust (other than a grantor trust described in this paragraph (c)(2)),
a foreign corporation, or a foreign government should provide a valid
Form W-8BEN. A partner that is a foreign partnership should provide a
valid Form W-8IMY. A partner that is a U.S. person (other than a
grantor trust described in this paragraph (c)(2)), including a domestic
partnership, should provide a valid Form W-9. An entity that is
disregarded as an entity separate from its owner under Sec. 301.7701-3
of this chapter may not submit a Form W-8BEN, W-8IMY, or Form W-9. See
Sec. Sec. 301.7701-1 through 301.7701-3 of this chapter for
determining the U.S. Federal tax classification of a partner. To the
extent that a grantor or another person is treated as the owner of any
portion of a trust under subpart E of subchapter J of the Internal
Revenue Code, such trust shall not provide a Form W-8BEN or Form W-9 to
the partnership, except to the extent that such trust is providing
documentation on behalf of the grantor or other person treated as the
owner of a portion of such trust as required by this paragraph (c)(2).
Instead, if such trust is a foreign trust, the trust shall submit Form
W-8IMY to the partnership identifying itself as a grantor trust and
shall provide such documentation (e.g., Forms W-8BEN, W-8IMY, or W-9)
and information pertaining to its owner(s) to the partnership that
permits the partnership to reliably associate (within the meaning of
Sec. 1.1441-1(b)(2)(vii)) such portion of the trust's allocable share
of partnership ECTI with the grantor or other person that is the owner
of such portion of the trust. If such trust is a domestic trust, the
trust shall furnish the partnership a statement under penalty of
perjury that the trust is, in whole or in part, a grantor trust and
identifying that portion of the trust that is treated as owned by a
grantor or another person under subpart E of subchapter J of the
Internal Revenue Code. The trust shall also provide such documentation
and information (e.g., Forms W-8BEN, W-8IMY, or W-9) pertaining to its
owner(s) to the partnership that permits the partnership to reliably
associate such portion of the trust's allocable share of partnership
ECTI with the grantor or other person that is the owner of such portion
of the trust. With respect to nominees, only nominees described in
Sec. 1.1446-4(b)(3) holding interests in publicly traded partnerships
subject to Sec. 1.1446-4 may submit a Form W-9. See Sec. 1.1446-4 for
additional documentation that may be submitted by such a nominee. In
all other cases where a nominee holds an interest in a partnership, the
beneficial owner of the partnership interest, not the nominee, shall
submit Form W-8BEN, Form W-8IMY, or Form W-9. A partnership that has
obtained a valid Form W-8BEN, Form W-8IMY, or Form W-9 from a partner,
nominee, or beneficial owner prior to the due date for paying any 1446
tax may rely on it to the extent provided in this paragraph (c)(2).
(ii) Effect of Forms W-8BEN, W-8IMY, W-9, and Statement. In
general, for purposes of this section, a partnership may rely on a
valid Form W-8BEN, Form W-8IMY, Form W-9, statement described in Sec.
1.1446-4(e)(1), or statement described in this paragraph (c)(2) from a
partner, nominee, beneficial owner, or grantor trust to determine
whether that person, beneficial owner, or the owner of a grantor trust,
is a domestic or foreign partner or a nominee, and if such person is a
foreign partner, to determine whether or not such person is a
corporation for U.S. tax purposes. To the extent a partnership receives
a Form W-8IMY from a foreign grantor trust or a statement described in
this paragraph (c)(2) from a domestic grantor trust, but does not
receive a Form W-8BEN, Form W-8IMY, or Form W-9 identifying such
grantor or other person, the rules of paragraph (c)(3) of this section
shall apply. Further, a partnership may not rely on a Form W-8BEN, Form
W-8IMY, Form W-9, or statement described in Sec. 1.1446-4(e)(1) or
this paragraph (c)(2), and such form or statement is therefore not
valid, if the partnership has actual knowledge or has reason to know
that any information on the withholding certificate or statement is
incorrect or unreliable and, if based on such knowledge or reason to
know, it should pay a 1446 tax in an amount greater than would be the
case if it relied on the information or certifications. A partnership
has reason to know that information on a withholding certificate or
statement is incorrect or unreliable if its knowledge

[[Page 52474]]

of relevant facts or statements contained on the form or other
documentation is such that a reasonably prudent person in the position
of the withholding agent would question the claims made. See Sec. Sec.
1.1441-1(e)(4)(viii) and 1.1441-7(b)(1) and (2). If the partnership
does not know or have reason to know that a Form W-8BEN, Form W-8IMY,
Form W-9, or statement received from a partner, nominee, beneficial
owner, or grantor trust contains incorrect or unreliable information,
but it subsequently determines that it does contain incorrect or
unreliable information, and, based on such knowledge the partnership
should pay 1446 tax in an amount greater than would be the case if it
relied on the information or certification, the partnership will not be
subject to penalties for its failure to pay the 1446 tax in reliance on
such form or statement for any installment payment date prior to the
date that the determination is made. See Sec. Sec. 1.1446-1(c)(4) and
1.1446-3 concerning penalties for failure to pay the withholding tax
when a partnership knows or has reason to know that the form or
statement is incorrect or unreliable.
(iii) Requirements for certificates to be valid. Except as
otherwise provided in this paragraph (c), for purposes of this section,
the validity of a Form W-9 shall be determined under section 3406 and
Sec. 31.3406(h)-3(e) of this chapter which establish when such form
may be reasonably relied upon. A Form W-8BEN, or Form W-8IMY is only
valid for purposes of this section if its validity period has not
expired, the partner submitting the form has signed it under penalties
of perjury, and it contains all the required information.
(A) When period of validity expires. For purposes of this section,
a Form W-8BEN or W-8IMY submitted by a partner shall be valid until the
end of the period of validity determined for such form under Sec.
1.1441-1(e). With respect to a foreign partnership submitting Form W-
8IMY, the period of validity of such form shall be determined under
Sec. 1.1441-1(e) as if such foreign partnership submitted the form
required of a nonwithholding foreign partnership. See Sec. 1.1441-
1(e)(4)(ii).
(B) Required information for Forms W-8BEN and W-8IMY. Forms W-8BEN
and W-8IMY submitted under this section must contain the partner's
name, permanent address and Taxpayer Identification Number (TIN), the
country under the laws of which the partner is formed, incorporated or
governed (if the person is not an individual), the classification of
the partner for U.S. federal tax purposes (e.g., partnership,
corporation), and any other information required to be submitted by the
forms or instructions to Form W-8BEN or Form W-8IMY, as applicable.
(iv) Partner must provide new withholding certificate when there is
a change in circumstances. The principles of Sec. 1.1441-
1(e)(4)(ii)(D) shall apply when a change in circumstances has occurred
(including situations where the status of a U.S. person changes) that
requires a partner to provide a new withholding certificate.
(v) Partnership must retain withholding certificates. A partnership
or nominee who has responsibility for paying the withholding tax under
this section or Sec. 1.1446-4, must retain each withholding
certificate and other documentation received from its direct and
indirect partners (including nominees) for as long as it may be
relevant to the determination of the withholding agent's tax liability
under section 1461 and the regulations thereunder.
(3) Presumption of foreign status in absence of valid Form W-8BEN,
Form W-8IMY, Form W-9, or statement. Except as otherwise provided in
this paragraph (c)(3), a partnership that does not receive a valid Form
W-8BEN, Form W-8IMY, Form W-9, statement described in Sec. 1.1446-
4(e)(1), or statement required by paragraph (c)(2) of this section from
a partner, nominee, beneficial owner, or grantor trust, or a
partnership that receives a withholding certificate or statement but
has actual knowledge or reason to know that the information on the
certificate or statement is incorrect or unreliable, must presume that
the partner is a foreign person. If the partnership knows that the
partner is an individual and not an entity, the partnership shall treat
the partner as a nonresident alien individual. If the partnership knows
that the partner is an entity, the partnership shall treat the partner
as a corporation if the entity is a corporation as defined in Sec.
301.7701-2(b)(8) of this chapter. In all other cases, the partnership
shall treat the partner as either a nonresident alien individual or a
foreign corporation, whichever classification results in a higher 1446
tax being due, and shall pay the 1446 tax in accordance with this
presumption. The presumption set forth in this paragraph (c)(3) that a
partner is a foreign person (either because a Form W-9 was not
furnished by such partner or the partnership determines that such form
is incorrect or unreliable) shall not apply to the extent that the
partnership relies on other means to ascertain the non-foreign status
of a partner and the partnership is correct in its determination that
such partner is a U.S. person. A partnership is in no event required to
rely upon other means to determine the non-foreign status of a partner
and may demand that a partner furnish a Form W-9. If a certification is
not provided in such circumstances, the partnership may presume that
the partner is a foreign partner, and for purposes of sections 1461
through 1463, will be considered to have been required to pay 1446 tax
on such partner's allocable share of partnership ECTI.
(4) Consequences when partnership knows or has reason to know that
Form W-8BEN, Form W-8IMY, or Form W-9 is incorrect or unreliable and
does not withhold. If a partnership knows or has reason to know that a
Form W-8BEN, Form W-8IMY, Form W-9, statement described in Sec.
1.1446-4(e)(1), or statement required by paragraph (c)(2) of this
section submitted by a partner, nominee, beneficial owner, or grantor
trust contains incorrect or unreliable information (either because the
certificate or statement when given to the partnership contained
incorrect information or because there has been a change in facts that
makes information on the certificate or statement incorrect), and the
partnership pays less than the full amount of withholding tax due on
ECTI allocable to that partner, the partnership shall be fully liable
under section 1461 and Sec. 1.1461-3 (Sec. 1.1461-1 for publicly
traded partnerships subject to Sec. 1.1446-4), Sec. 1.1446-3, and for
all applicable penalties and interest, for any failure to pay the 1446
tax for the period during which the partnership knew or had reason to
know that the certificate contained incorrect or unreliable information
and for all subsequent installment periods. If a partner, nominee,
beneficial owner, or grantor trust, submits a new valid Form W-8BEN,
Form W-8IMY, Form W-9, or statement, as applicable, the partnership may
rely on that form for paying installments of 1446 tax beginning with
the installment period during which such form is received.


Sec. 1.1446-2 Determining a partnership's effectively connected
taxable income allocable to foreign partners under section 704.

(a) In general. A partnership's effectively connected taxable
income (ECTI) is generally the partnership's taxable income as computed
under section 703, with adjustments as provided in section 1446(c) and
this section, and computed with

[[Page 52475]]

consideration of only those partnership items which are effectively
connected (or treated as effectively connected) with the conduct of a
trade or business in the United States. For purposes of determining the
section 1446 withholding tax (1446 tax) under Sec. 1.1446-3,
partnership ECTI allocable under section 704 to foreign partners is the
sum of the allocable shares of ECTI of each of the partnership's
foreign partners as determined under paragraph (b) of this section. The
calculation of partnership ECTI allocable to foreign partners as set
forth in paragraph (b) of this section, and the determination of the
partnership's withholding tax obligation, is a partnership-level
computation solely for purposes of determining the 1446 tax. Therefore,
any deduction that is not taken into account in calculating a partner's
allocable share of partnership ECTI (e.g., percentage depletion), but
which is a deduction that under U.S. tax law the foreign partner is
otherwise entitled to claim, can still be claimed by the foreign
partner when computing its U.S. tax liability and filing its U.S.
income tax return, subject to any restriction or limitation that
otherwise may apply.
(b) Computation--(1) In general. A foreign partner's allocable
share of partnership ECTI for the partnership's taxable year that is
allocable under section 704 to a particular foreign partner is equal to
that foreign partner's distributive share of partnership gross income
and gain for the partnership's taxable year that is effectively
connected and properly allocable to the partner under section 704 and
the regulations thereunder, reduced by the foreign partner's
distributive share of partnership deductions for the partnership
taxable year that are connected with such income under section 873 or
882(c) and properly allocable to the partner under section 704 and the
regulations thereunder, in each case, after application of the rules of
this section. For these purposes, a foreign partner's distributive
share of effectively connected gross income and gain and the deductions
connected with such income shall be computed by considering allocations
that are respected under the rules of section 704 and Sec. 1.704-
1(b)(1), including special allocations in the partnership agreement (as
defined in Sec. 1.704-1(b)(2)(ii)(h)), and adjustments to the basis of
partnership property described in section 743 pursuant to an election
by the partnership under section 754 (see Sec. 1.743-1(j)). The
character of effectively connected partnership items (capital versus
ordinary) shall be separately considered only to the extent set forth
in paragraph (b)(3)(v) of this section.
(2) Income and gain rules. For purposes of computing a foreign
partner's allocable share of partnership ECTI under this paragraph (b),
the following rules with respect to partnership income and gain shall
apply.
(i) Application of the principles of section 864. The determination
of whether a partnership's items of gross income are effectively
connected shall be made by applying the principles of section 864 and
the regulations thereunder.
(ii) Income treated as effectively connected. A partnership's items
of gross income that are effectively connected includes any income that
is treated as effectively connected income, including partnership
income subject to a partner's election under section 871(d) or section
882(d), any partnership income treated as effectively connected with
the conduct of a U.S. trade or business pursuant to section 897, and
any other items of partnership income treated as effectively connected
under another provision of the Code, without regard to whether those
amounts are taxable to the partner.
(iii) Exempt income. A foreign partner's allocable share of
partnership ECTI does not include income or gain exempt from U.S. tax
by reason of a provision of the Internal Revenue Code. A foreign
partner's allocable share of partnership ECTI also does not include
income or gain exempt from U.S. tax by operation of any U.S. income tax
treaty or reciprocal agreement. In the case of income excluded by
reason of a treaty provision, such income must be derived by a resident
of an applicable treaty jurisdiction, the resident must be the
beneficial owner of the item, and all other requirements for benefits
under the treaty must be satisfied. The partnership must have received
from the partner a valid withholding certificate, that is Form W-8BEN
or Form W-8IMY (see Sec. 1.1446-1(c)(2)(iii) regarding when a Form W-
8BEN or Form W-8IMY is valid for purposes of this section), containing
the information necessary to support the claim for treaty benefits
required in the forms and instructions to those forms. In addition, for
purposes of this section, the withholding certificate must contain the
beneficial owner's taxpayer identification number.
(3) Deduction and losses. For purposes of computing a foreign
partner's allocable share of partnership ECTI under this paragraph (b),
the following rules with respect to deductions and losses shall apply.
(i) Oil and gas interests. The deduction for depletion with respect
to oil and gas wells shall be allowed, but the amount of such deduction
shall be determined without regard to sections 613 and 613A.
(ii) Charitable contributions. The deduction for charitable
contributions provided in section 170 shall not be allowed.
(iii) Net operating losses and other suspended or carried losses.
The net operating loss deduction of any foreign partner provided in
section 172 shall not be taken into account. Further, the partnership
shall not take into account any suspended losses (e.g., losses in
excess of a partner's basis in the partnership, see section 704(d)) or
any capital loss carrybacks or carryovers available to a foreign
partner.
(iv) Interest deductions. The rules of this paragraph (b)(3)(iv)
shall apply for purposes of determining the amount of interest expense
that is allocable to income which is (or is treated as) effectively
connected with the conduct of a trade or business for purposes of
calculating the foreign partner's allocable share of partnership ECTI.
In the case of a non-corporate foreign partner, the rules of Sec.
1.861-9T(e)(7) shall apply. In the case of a corporate foreign partner,
the rules of Sec. 1.882-5 shall apply by treating the partnership as a
foreign corporation and using the partner's pro-rata share of the
partnership's assets and liabilities for these purposes. For these
purposes, the rules governing elections under Sec. 1.882-5(a)(7) shall
be made at the partnership level.
(v) Limitation on capital losses. Losses from the sale or exchange
of capital assets allocable under section 704 to a partner shall be
allowed only to the extent of gains from the sale or exchange of
capital assets allocable under section 704 to such partner.
(vi) Other deductions. No deduction shall be allowed for personal
exemptions provided in section 151 or the additional itemized
deductions for individuals provided in part VII of subchapter B of the
Internal Revenue Code (section 211 and following).
(vii) Limitations on deductions. Except as provided in paragraph
(b)(3) or (4) of this section, any limitations on losses or deductions
that apply at the partner level when determining ECTI allocable to a
foreign partner shall not be taken into account.
(4) Other rules--(i) Exclusion of items allocated to U.S. partners.
In computing ECTI allocable to a foreign partner, the partnership shall
not take into account any item of income, gain, loss, or deduction to
the extent allocable to any

[[Page 52476]]

partner that is not a foreign partner, as that term is defined in Sec.
1.1446-1(c) of this section.
(ii) Partnership credits. See Sec. 1.1446-3(a) providing that the
1446 tax is computed without regard to a partner's distrubutive share
of the partnership's tax credits.
(5) Examples. The following examples illustrate the application of
this section:

Example 1. Limitation on capital losses. PRS partnership has two
equal partners, A and B. A is a nonresident alien individual and B
is a U.S. citizen. A provides PRS with a valid Form W-8BEN, and B
provides PRS with a valid Form W-9. PRS has the following annualized
tax items for the relevant installment period, all of which are
effectively connected with its U.S. trade or business and are
allocated equally between A and B: $100 of long-term capital gain,
$400 of long-term capital loss, $300 of ordinary income, and $100 of
ordinary deductions. Assume that these allocations are respected
under section 704(b) and the regulations thereunder. Accordingly,
A's allocable share of PRS's effectively connected items includes
$50 of long-term capital gain, $200 of long-term capital loss, $150
of ordinary income, and $50 of ordinary deductions. In determining
A's allocable share of partnership ECTI, the amount of the long-term
capital loss that may be taken into account pursuant to paragraph
(b)(3)(v) of this section is limited to A's allocable share of gain
from the sale or exchange of capital assets. The amount of
partnership ECTI allocable under section 704 to A is $100 ($150 of
ordinary income less $50 of ordinary deductions, plus $50 of capital
gains less $50 of capital loss).
Example 2. Limitation on capital losses--special allocations.
PRS partnership has two equal partners, A and B. A and B are both
nonresident alien individuals. A and B each provide PRS with a valid
Form W-8BEN. PRS has the following annualized tax items for the
relevant installment period, all of which are effectively connected
with its U.S. trade or business: $200 of long-term capital gain,
$200 of long-term capital loss, and $400 of ordinary income. A and B
have equal shares in the ordinary income, however, pursuant to the
partnership agreement, capital gains and losses are subject to
special allocations. The long-term capital gain is allocable to A,
and the long-term capital loss is allocable to B. It is assumed that
all of the partnership's allocations are respected under section
704(b) and the regulations thereunder. Pursuant to paragraph
(b)(3)(v) of this section, A's allocable share of partnership ECTI
is $400 ($200 of ordinary income plus $200 of long-term capital
gain), and B's allocable share of partnership ECTI is $200 ($200 of
ordinary income).
Example 3. Withholding tax obligation where partner has net
operating losses. PRS partnership has two equal partners, FC, a
foreign corporation, and DC, a domestic corporation. FC and DC
provide a valid Form W-8BEN and Form W-9, respectively, to PRS. Both
FC and PRS are on a calendar taxable year. PRS is engaged in the
conduct of a trade or business in the United States and for its
first installment period during its taxable year has $100 of
annualized ECTI that is allocable to FC. As of the beginning of the
taxable year, FC had an unused effectively connected net operating
loss carryover in the amount of $300. The net operating loss
carryover is not taken into account in determining PRS's withholding
tax liability for ECTI allocable under section 704 to FC. PRS must
pay 1446 tax with respect to the $100 of ECTI allocable to FC.


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

(a) In general--(1) Calculating 1446 tax. This section provides
rules for calculating, reporting, and paying over the section 1446
withholding tax (1446 tax). A partnership's 1446 tax is equal to the
amount determined under this section and shall be paid in installments
during the partnership's taxable year (see paragraph (d)(1) of this
section for installment payment due dates), with any remaining tax due
paid with the partnership's annual return required to be filed pursuant
to paragraph (d) of this section. For these purposes, a partnership
shall not take into account either a partner's liability for any other
tax imposed under any other provision of the Internal Revenue Code
(e.g., section 55 or 884) or a partner's distributive share of the
partnership's tax credits when determining the amount of the
partnership's 1446 tax.
(2) Applicable percentage. In the case of a foreign partner that is
a corporation, the applicable percentage is the highest rate of tax
specified in section 11(b)(1) for such taxable year. Except to the
extent provided in Sec. 1.1446-5, in the case of a foreign partner
that is not taxable as a corporation (e.g., partnership, individual,
trust or estate), the applicable percentage is the highest rate of tax
specified in section 1.
(b) Installment payments--(1) In general. Except as provided in
Sec. 1.1446-4 for certain publicly traded partnerships, a partnership
must pay its 1446 tax by making installment payments of the 1446 tax
based on the amount of partnership ECTI allocable under section 704 to
its foreign partners, without regard to whether the partnership makes
any distributions to its partners during the partnership's taxable
year. The amount of the installment payments are determined in
accordance with this paragraph (b), and the tax must be paid at the
times set forth in paragraph (d) of this section. Subject to paragraph
(b)(3) of this section, in computing its first installment of 1446 tax
for a taxable year, a partnership must choose whether it will pay its
1446 tax for the entire taxable year by using the safe harbor set forth
in paragraph (b)(3) of this section, or by using one of several
annualization methods available under paragraph (b)(2)(ii) of this
section for computing partnership ECTI allocable to foreign partners.
In the case of any underpayment of an installment payment of 1446 tax
by a partnership, the partnership shall be subject to an addition to
tax equal to the amount determined under section 6655, as modified by
this section, as if such partnership were a domestic corporation, as
well as any other applicable interest and penalties. See Sec. 1.1446-
3(f). Section 6425 (permitting an adjustment for an overpayment of
estimated tax by a corporation) shall not apply to a partnership with
respect to the payment of its 1446 tax.
(2) Calculation--(i) General application of the principles of
section 6655. Installment payments of 1446 tax required during the
partnership's taxable year are based upon partnership ECTI for the
portion of the partnership taxable year to which they relate, and,
except as set forth in this paragraph (b)(2) or paragraph (b)(3) of
this section, shall be calculated using the principles of section 6655.
Under the principles of section 6655, the partnership's effectively
connected items are annualized to determine each foreign partner's
allocable share of partnership ECTI under Sec. 1.1446-2. Each foreign
partner's allocable share of partnership ECTI is then multiplied by the
applicable percentage for each foreign partner. This computation will
yield an annualized 1446 tax with respect to such partner. The
installment of 1446 tax due with respect to a foreign partner's
allocable share of partnership ECTI equals the excess of the section
6655(e)(2)(B)(ii) percentage of the annualized 1446 tax for that
partner (or, if applicable, the adjusted seasonal amount) for the
relevant installment period, over the aggregate of any amounts paid
under section 1446 with respect to that partner in prior installments
during the partnership's taxable year.
(ii) Annualization methods. A partnership that chooses to annualize
its income for the taxable year shall use one of the annualization
methods set forth in section 6655(e) and the regulations thereunder,
and as described in the forms and instructions for Form 8804, ``Annual
Return for Partnership Withholding Tax (Section 1446),'' Form 8805,
``Foreign Partner's Information Statement of Section 1446 Withholding
Tax,'' and Form 8813, ``Partnership Withholding Tax Payment Voucher.''
(iii) Partner's estimated tax payments. In computing its
installment payments of 1446 tax, a partnership may not take

[[Page 52477]]

into account a partner's estimated tax payments.
(iv) Partner whose interest terminates during the partnership's
taxable year. With respect to a partner whose interest in the
partnership terminates prior to the end of the period for which the
partnership is making an installment payment, the partnership shall
take into account the income that is allocable to the partner for the
portion of the partnership taxable year that the person was a partner.
(v) Exceptions and modifications to the application of the
principles under section 6655. To the extent not otherwise modified in
Sec. Sec. 1.1446-1 through 1.1446-6, or inconsistent with those rules,
the principles of section 6655 apply to the calculation of the
installment payments of 1446 tax made by a partnership, except that:
(A) Inapplicability of special rules for large corporations. The
principles of section 6655(d)(2), concerning large corporations (as
defined in section 6655(g)(2)), shall not apply.
(B) Inapplicability of special rules regarding early refunds. The
principles of section 6655(h), applicable to amounts excessively
credited or refunded under section 6425, shall not apply. See paragraph
(b)(1) of this section providing that section 6425 shall not apply for
purposes of the 1446 tax.
(C) Period of underpayment. The period of the underpayment set
forth in section 6655(b)(2) shall end on the earlier of the 15th day of
the 4th month following the close of the partnership's taxable year
(or, in the case of a partnership described in Sec. 1.6081-5(a)(1) of
this chapter, the 15th day of the 6th month following the close of the
partnership's taxable year), or with respect to any portion of the
underpayment, the date on which such portion is paid.
(D) Other taxes. Section 6655 shall be applied without regard to
any references to alternative minimum taxable income and modified
alternative minimum taxable income.
(E) 1446 tax treated as tax under section 11. The principles of
section 6655(g)(1) shall be applied to treat the 1446 tax as a tax
imposed by section 11.
(F) Prior year tax safe harbor. The safe harbor set forth in
section 6655(d)(1)(B)(ii) shall not apply and instead the safe harbor
set forth in paragraph (b)(3) of this section applies.
(3) 1446 tax safe harbor--(i) In general. The addition to tax under
section 6655 shall not apply to a partnership with respect to a current
installment of 1446 tax if--
(A) The average of the amount of the current installment and prior
installments during the taxable year is at least 25 percent of the
total 1446 tax that would be payable on the amount of the partnership's
ECTI allocable under section 704 to foreign partners for the prior
taxable year;
(B) The prior taxable year consisted of twelve months;
(C) The partnership timely files (including extensions) an
information return under section 6031 for the prior year; and
(D) The amount of ECTI for the prior taxable year is not less than
50 percent of the ECTI shown on the annual return of section 1446
withholding tax that is (or will be) timely filed for the current year.
(ii) Permission to change to standard annualization method. Except
as otherwise provided in this paragraph (b)(3), if a partnership
chooses to pay its 1446 tax for the first installment period based upon
the safe harbor method set forth in this paragraph (b)(3), the
partnership must use the safe harbor method for each installment
payment made during the partnership's taxable year. Notwithstanding the
foregoing, if a partnership paying over 1446 tax during the taxable
year pursuant to this paragraph (b)(3) determines during an installment
period (based upon the standard option annualization method set forth
in section 6655(e) and the regulations thereunder, as modified by the
forms and instructions to Forms 8804, 8805, and 8813) that it will not
qualify for the safe harbor in this paragraph (b)(3) because the prior
year's ECTI will not meet the 50-percent threshold in paragraph
(b)(3)(i)(D) of this section, then the partnership is permitted,
without being subject to the addition to tax under section 6655, to pay
over its 1446 tax for the period in which such determination is made,
and all subsequent installment periods during the taxable year, using
the standard option annualization method. A change pursuant to this
paragraph shall be disclosed in a statement attached to the Form 8804
the partnership files for the taxable year and shall include
information to allow the Service to determine whether the change was
appropriate.
(c) Coordination with other withholding rules--(1) Fixed or
determinable, annual or periodical income. Fixed or determinable,
annual or periodical income subject to tax under section 871(a) or
section 881 is not subject to withholding under section 1446, and such
income is independently subject to the withholding requirements of
sections 1441 and 1442 and the regulations thereunder.
(2) Real property gains--(i) Domestic partnerships. A domestic
partnership that is otherwise subject to the withholding requirements
of sections 1445 and 1446 will be subject to the payment and reporting
requirements of section 1446 only and not section 1445(e)(1) and the
regulations thereunder, with respect to partnership gain from the
disposition of a U.S. real property interest (as defined in section
897(c)), provided that the partnership complies fully with the
requirements under section 1446 and the regulations thereunder,
including any reporting obligations, with respect to dispositions of
U.S. real property interests. A partnership that has complied with such
requirements will be deemed to satisfy the withholding requirements of
section 1445 and the regulations thereunder. In the event that amounts
are withheld under section 1445(a) at the time of the disposition of a
U.S. real property interest, such amounts may be credited against the
section 1446 tax.
(ii) Foreign partnerships. A foreign partnership that is subject to
withholding under section 1445(a) during its taxable year may credit
the amount withheld under section 1445(a) against its section 1446 tax
liability for that taxable year only to the extent such gain is
allocable to foreign partners.
(3) Coordination with section 1443. A partnership that has ECTI
allocable under section 704 to a foreign organization described in
section 1443(a) shall be required to withhold under this section.
(d) Reporting and crediting the 1446 tax--(1) Reporting 1446 tax.
This paragraph (d) sets forth the rules for reporting and crediting the
1446 tax paid by a partnership. To the extent that 1446 tax is paid on
behalf of a domestic trust (including a grantor or other person treated
as an owner of a portion of such trust) or a grantor or other person
treated as the owner of a portion of a foreign trust, the rules of this
paragraph (d) applicable to a foreign trust or its beneficiaries shall
be applied to such domestic or foreign trust and its beneficiaries or
owners, as applicable, so that appropriate credit for the 1446 tax may
be claimed by the trust, beneficiary, grantor, or other person.
(i) Reporting of installment tax payments and notification to
partners of installment tax payments. Each partnership required to make
an installment payment of 1446 tax must file Form 8813, ``Partnership
Withholding Tax Payment Voucher (Section 1446),'' in accordance with
the instructions of that form. When making a payment of 1446 tax, a
partnership must notify each foreign partner of the

[[Page 52478]]

1446 tax paid on its behalf. A foreign partner generally may credit a
1446 tax paid by the partnership on the partner's behalf against the
partner's estimated tax that the partner must pay during the partner's
own taxable year. No particular form is required for a partnership's
notification to a foreign partner, but each notification must include
the partnership's name, the partnership's Taxpayer Identification
Number (TIN), the partnership's address, the partner's name, the
partner's TIN, the partner's address, the annualized ECTI estimated to
be allocated to the foreign partner, and the amounts of tax paid on
behalf of the partner for the current and prior installment periods
during the partnership's taxable year.
(ii) Payment due dates. The 1446 tax is calculated based on
partnership ECTI allocable under section 704 to foreign partners during
the partnership's taxable year, as determined under section 706.
Payments of the 1446 tax generally must be made during the
partnership's taxable year in which such income is derived. A
partnership must pay to the Internal Revenue Service a portion of its
estimated annual 1446 tax in installments on or before the 15th day of
the fourth, sixth, ninth, and twelfth months of the partnership's
taxable year as provided in section 6655. Any additional amount
determined to be due is to be paid with the filing of the annual return
of tax required under this section and clearly designated as for the
prior taxable year. Form 8813 should not be submitted for a payment
made under the preceding sentence.
(iii) Annual return and notification to partners. Every partnership
(except a publicly traded partnership that has not elected to apply the
general withholding tax rules under section 1446) that has effectively
connected gross income for the partnership's taxable year allocable
under section 704 to one or more of its foreign partners (or is treated
as having paid 1446 tax under Sec. 1.1446-5(a)), must file Form 8804,
``Annual Return for Partnership Withholding Tax (Section 1446).''
Additionally, every partnership that is required to file Form 8804 also
must file Form 8805, ``Foreign Partner's Information Statement of
Section 1446 Withholding Tax,'' and furnish this form to the Internal
Revenue Service and to each of its partners with respect to which the
1446 tax was paid. Forms 8804 and 8805 are separate from Form 1065,
``U.S. Return of Partnership Income,'' and the attachments thereto, and
are not to be filed as part of the partnership's Form 1065. A
partnership must generally file Forms 8804 and 8805 on or before the
due date for filing the partnership's Form 1065. See Sec. 1.6031(a)-
1(c) for rules concerning the due date of a partnership's Form 1065.
However, with respect to partnerships described in Sec. 1.6081-
5(a)(1), Forms 8804 and 8805 are not due until the 15th day of the
sixth month following the close of the partnership's taxable year. Any
additional tax owed under section 1446 for the prior taxable year of
the partnership must be paid to the Internal Revenue Service with the
Form 8804.
(iv) Information provided to beneficiaries of foreign trusts and
estates. A foreign trust or estate that is a partner in a partnership
subject to withholding under section 1446 shall be provided Form 8805
by the partnership. The foreign trust or estate must provide to each of
its beneficiaries a copy of the Form 8805 furnished by the partnership.
In addition, the foreign trust or estate must provide a statement for
each of its beneficiaries to inform each beneficiary of the amount of
the credit that may be claimed under section 33 (as determined under
this section) for the 1446 tax paid by the partnership. Until an
official IRS form is available, the statement from a foreign trust or
estate that is described in this paragraph (d)(1)(iv) shall contain the
following information--
(A) Name, address, and TIN of the foreign trust or estate;
(B) Name, address, and TIN of the partnership;
(C) The amount of the partnership's ECTI allocated to the foreign
trust or estate for the partnership taxable year (as shown on the Form
8805 provided to the trust or estate);
(D) The amount of 1446 tax paid by the partnership on behalf of the
foreign trust or estate;
(E) Name, address, and TIN of the beneficiary of the foreign trust
or estate;
(F) The amount of the partnership's ECTI allocated to the trust or
estate for purposes of section 1446 that is to be included in the
beneficiary's gross income; and
(G) The amount of 1446 tax paid by the partnership on behalf of the
foreign trust or estate that the beneficiary is entitled to claim on
its return as a credit under section 33.
(v) Attachments required of foreign trusts and estates. The
statement furnished to each foreign beneficiary under this paragraph
(d)(1) must also be attached to the foreign trust or estate's U.S.
Federal income tax return filed for the taxable year including the
installment period to which the statement relates.
(vi) Attachments required of beneficiaries of foreign trusts and
estates. The beneficiary of the foreign trust or estate must attach the
statement provided by the trust or estate, along with a copy of the
Form 8805 furnished by the partnership to such trust or estate, to its
U.S. income tax return for the year in which it claims a credit for the
1446 tax. See Sec. 1.1446-3(d)(2)(ii) for additional rules regarding a
partner or beneficial owner claiming a credit for 1446 tax.
(vii) Information provided to beneficiaries of foreign trusts and
estates that are partners in certain publicly traded partnerships. A
statement similar to the statement required by paragraph (d)(1)(iv) of
this section shall be provided by trusts or estates that hold interests
in publicly traded partnerships subject to Sec. 1.1446-4.
(2) Crediting 1446 tax against a partner's U.S. tax liability--(i)
In general. A partnership's payment of 1446 tax on the portion of ECTI
allocable to a foreign partner relates to the partner's U.S. income tax
liability for the partner's taxable year in which the partner is
subject to U.S. tax on that income. Subject to paragraphs (d)(2)(ii)
and (iii) of this section, a partner may claim as a credit under
section 33 the 1446 tax paid by the partnership with respect to ECTI
allocable to that partner. The partner may not claim an early refund of
these amounts under the estimated tax rules.
(ii) Substantiation for purposes of claiming the credit under
section 33. A partner may credit the amount paid under section 1446
with respect to such partner against its U.S. income tax liability only
if it attaches proof of payment to its U.S. income tax return for the
partner's taxable year in which the items comprising such partner's
allocable share of partnership ECTI are included in the partner's
income. Except as provided in the next sentence, proof of payment
consists of a copy of the Form 8805 the partnership provides to the
partner (or in the case of a beneficiary of a foreign trust or estate,
the statement required under paragraph (d)(1)(iv) of this section to be
provided by such trust or estate and the related Form 8805 furnished to
such trust or estate), but only if the name and TIN on the Form 8805
(or the statement provided by a foreign trust or estate) match the name
and TIN on the partner's U.S. tax return, and such form (or statement)
identifies the partner (or beneficiary) as the person entitled to the
credit under section 33. In the case of a partner of a publicly traded
partnership that is subject to withholding on distributions under Sec.
1.1446-4, proof of payment consists of

[[Page 52479]]

a copy of the Form 1042-S, ``Foreign Person's U.S. Source Income
Subject to Withholding,'' provided to the partner by the partnership.
(iii) Tiered structures including trusts or estates--(A) Foreign
trusts and estates. Section 1446 tax paid on the portion of ECTI
allocable under section 704 to a foreign trust or estate that the
foreign trust or estate may claim as a credit under section 33 shall
bear the same ratio to the total 1446 tax paid on behalf of the trust
or estate as the total ECTI allocable to such trust or estate and not
distributed (or treated as distributed) to the beneficiaries of such
trust or estate, and, accordingly not deducted under section 651 or
section 661 in calculating the trust or estate's taxable income, bears
to the total ECTI allocable to such trust or estate. Any 1446 tax that
a foreign trust or estate is not entitled to claim as a credit under
this paragraph (d)(2) may be claimed as a credit by the beneficiary or
beneficiaries of such trust or estate that includes the partnership's
ECTI (distributed or deemed distributed) allocated to the trust or
estate in gross income under section 652 or section 662 (with the same
character as effectively connected income as in the hands of the trust
or estate). The trust or estate must provide each beneficiary with a
copy of the Form 8805 provided to it by the partnership and prepare the
statement required by paragraph (d)(1)(iv) of this section.
(B) Use of domestic trusts to circumvent section 1446. This
paragraph (d)(2)(iii)(B) shall apply if a partnership knows or has
reason to know that a foreign person that is the ultimate beneficial
owner of the ECTI holds its interest in the partnership through a
domestic trust (and possibly other entities), and such domestic trust
was formed or availed of with a principal purpose of avoiding the 1446
tax. The use of a domestic trust in a tiered trust structure may have a
principal purpose of avoiding the 1446 tax even though the tax
avoidance purpose is outweighed by other purposes when taken together.
In such case, a partnership is required to pay 1446 tax under this
paragraph as if the domestic trust was a foreign trust for purposes of
section 1446 and the regulations thereunder. Accordingly, all
applicable penalties and interest shall apply to the partnership for
its failure to pay 1446 tax under this paragraph (d)(2)(iii)(B),
commencing with the installment period during which the partnership
knew or had reason to know that this paragraph (d)(2)(iii)(B) applied.
(iv) Refunds to withholding agent. A partnership (or nominee
pursuant to Sec. 1.1446-4) may apply for a refund of the 1446 tax paid
only to the extent allowable under section 1464 and the regulations
thereunder.
(v) 1446 tax treated as cash distribution to partners. Amounts paid
by a partnership under section 1446 with respect to a partner are
treated as distributed to that partner on the earliest of the day on
which such tax was paid by the partnership, the last day of the
partnership taxable year for which the tax was paid, or, the last day
during the partnership's taxable year on which the partner owned an
interest in the partnership. Thus, for example, 1446 tax paid by a
partnership after the close of a partnership taxable year that relates
to ECTI allocable to a foreign partner for the prior taxable year will
be considered distributed by the partnership to the respective foreign
partner on the last day of the partnership's prior taxable year.
(vi) Examples. The following examples illustrate the application of
this section:

Example 1. Simple trust that reports entire amount of ECTI. PRS
is a partnership that has two partners, FT, a foreign trust, and A,
a U.S. person. FT is a simple trust under section 651. FT and A each
provide PRS with a valid Form W-8BEN and Form W-9, respectively. FT
has one beneficiary, NRA, a nonresident alien individual. In
computing its installment obligation during the 2004 taxable year,
PRS has $200 of annualized income, all of which is ordinary ECTI.
The $200 of income will be allocated equally to FT and A under
section 704 and it is assumed that such an allocation will be
respected under section 704(b) and the regulations thereunder. FT's
allocable share of ECTI is $100. PRS withholds $35 under section
1446 with respect to the $100 of ECTI allocable to FT. FT's only
income for its tax year is the $100 of income from PRS. Pursuant to
the terms of the trust's governing instrument and local law, the
$100 of ECTI is not included in FT's fiduciary accounting income and
the deemed distribution of the $35 withholding tax paid under
paragraph (d)(2)(v) of this section is not included in FT's
fiduciary accounting income. Accordingly, the $100 of ECTI is not
income required to be distributed by FT, and FT may not claim a
deduction under section 651 for this amount. FT must report the $100
of ECTI in its gross income and may claim a credit under section 33
in the amount of $35 for the 1446 tax paid by PRS. NRA is not
required to include any of the ECTI in gross income and accordingly
may not claim a credit for any amount of the $35 of 1446 tax paid by
PRS.
Example 2. Simple trust that distributes a portion of ECTI to
the beneficiary.
Assume the same facts as in Example 1, except that PRS
distributes $60 to FT, which is included in FT's fiduciary
accounting income under local law. FT will report the $100 of ECTI
in its gross income and may claim a deduction for the $60 required
to be distributed under section 651(a) to NRA. Pursuant to paragraph
(d)(2)(iii) of this section, FT may claim a credit under section 33
in the amount of $14 for the 1446 tax paid by PRS ($40/$100
multiplied by $35). NRA is required to include the $60 of the ECTI
in gross income under section 652 (as ECTI) and may claim a credit
under section 33 in the amount of $21 for the 1446 tax paid by PRS
($35 less $14 or $60/$100 multiplied by $35).
Example 3. Complex trust that distributes entire ECTI to the
beneficiary. Assume the same facts as in Example 1, except that FT
is a complex trust under section 661. PRS distributes $60 to FT,
which is included in FT's fiduciary accounting income. FT
distributes the $60 of fiduciary accounting income to NRA and also
properly distributes an additional $40 to NRA from FT's principal.
FT will report the $100 of ECTI in its gross income and may deduct
the $60 required to be distributed to NRA under section 661(a)(1)
and may deduct the $40 distributed to NRA under section 661(a)(2).
FT may not claim a credit under section 33 for any of the $35 of
1446 tax paid by PRS. NRA is required to include $100 of the ECTI in
gross income under section 662 (as ECTI) and may claim a credit
under section 33 in the amount of $35 for the 1446 tax paid by PRS
($35 less $0).

(e) Liability of partnership for failure to withhold--(1) In
general. Every partnership required to pay a 1446 tax is made liable
for that tax by section 1461. Therefore, a partnership that is required
to pay a 1446 tax but fails to do so, or pays less than the amount
required under this section, is liable under section 1461 for the
payment of the tax required to be withheld under chapter 3 of the
Internal Revenue Code and the regulations thereunder unless the
partnership can demonstrate pursuant to paragraph (e)(2) of this
section, to the satisfaction of the Commissioner or his delegate, that
the full amount of effectively connected taxable income allocable to
such partner was included in income on the partner's U.S. Federal
income tax return and the full amount of tax due on such return was
paid by such partner to the Internal Revenue Service. See paragraph
(e)(3) of this section and section 1463 regarding the partnership's
liability for penalties and interest even though a foreign partner has
satisfied the underlying tax liability. See Sec. 1.1461-3 for
applicable penalties when a partnership fails to pay 1446 tax. See
paragraph (b) of this section for an addition to tax under section 6655
when there is an underpayment of 1446 tax.
(2) Proof that tax liability has been satisfied. Proof of payment
of tax may be established for purposes of paragraph (e)(1) of this
section on the basis of a Form 4669, ``Statement of Payments
Received,'' or such other form as the Internal Revenue Service may
prescribe

[[Page 52480]]

in published guidance (see Sec. 601.601(d)(2) of this chapter),
establishing the amount of tax, if any, actually paid by the partner on
the income. Such partnership's liability for tax, and the requirement
that such partnership file Forms 8804 and 8805 shall be deemed to have
been satisfied with respect to such partner as of the date on which the
partner's income tax return was filed and all tax required to be shown
on the return is paid in full.
(3) Liability for interest and penalties. Notwithstanding paragraph
(e)(2) of this section, a partnership that fails to pay over tax under
section 1446 is not relieved from liability under section 6655 or for
interest under section 6601. See Sec. 1.1463-1. Such liability may
exist even if there is no underlying tax liability due from a foreign
partner on its allocable share of partnership ECTI. The addition to tax
under section 6655 or the interest charge under section 6601 that is
required by those sections shall be imposed as set forth in those
sections, as modified by this section. For example, under section 6601,
interest shall accrue beginning on the last date for paying the tax due
under section 1461 (which is the due date, without extensions, for
filing the Forms 8804 and 8805). The interest shall stop accruing on
the 1446 tax liability on the date, and to the extent, that the unpaid
tax liability under section 1446 is satisfied. A foreign partner is
permitted to reduce any addition to tax under section 6654 or 6655 by
the amount of any section 6655 addition to tax paid by the partnership
with respect to its failure to pay adequate installment payments of the
1446 tax on ECTI allocable to the foreign partner.
(f) Effect of withholding on partner. The payment of the 1446 tax
by a partnership does not excuse a foreign partner to which a portion
of ECTI is allocable from filing a U.S. tax or informational return, as
appropriate, with respect to that income. Information concerning
installment payments of 1446 tax paid during the partnership's taxable
year on behalf of a foreign partner shall be provided to such foreign
partner in accordance with paragraph (d) of this section and such
information may be taken into account by the foreign partner when
computing the partner's estimated tax liability during the taxable
year. Form 1040NR, ``U.S. Nonresident Alien Income Tax Return,'' Form
1065, ``U.S. Return of Partnership Income,'' Form 1120F, ``U.S. Income
Tax Return of a Foreign Corporation,'' or such other return as
appropriate, must be filed by the partner, and any tax due must be
paid, by the filing deadline (including extensions) generally
applicable to such person. Pursuant to Sec. 1.1446-3(d), a partner may
generally claim a credit under section 33 for its share of any 1446 tax
paid by the partnership against the amount of income tax (or 1446 tax
in the case of tiers of partnerships) as computed in such partner's
return.


Sec. 1.1446-4 Publicly traded partnerships.

(a) In general. This section sets forth rules for applying the
section 1446 withholding tax (1446 tax) to publicly traded
partnerships. A publicly traded partnership (as defined in paragraph
(b) of this section) that has effectively connected gross income, gain
or loss must pay 1446 tax by withholding from distributions to a
foreign partner. Publicly traded partnerships that withhold on
distributions must pay over and report any 1446 tax as provided in
paragraph (c), and generally are not to pay over and report the 1446
tax under the rules in Sec. 1.1446-3. However, under paragraph (g) of
this section, a publicly traded partnership may elect not to apply the
rules of this section, and instead, to pay the 1446 tax based on the
effectively connected taxable income (ECTI) allocable under section 704
to foreign partners under the general rules of Sec. Sec. 1.1446-1
through 1.1446-3. The amount of the withholding tax on distributions,
other than distributions excluded under paragraph (f) of this section,
that are made during any partnership taxable year, equals the
applicable percentage (defined in paragraph (b)(2) of this section) of
such distributions.
(b) Definitions--(1) Publicly traded partnership. For purposes of
this section, the term publicly traded partnership has the same meaning
as in section 7704 (including the regulations thereunder), but does not
include a publicly traded partnership treated as a corporation under
that section.
(2) Applicable percentage. For purposes of this section, applicable
percentage shall have the meaning as set forth in Sec. 1.1446-3(a)(2).
(3) Nominee. For purposes of this section, the term nominee means a
domestic person that holds an interest in a publicly traded partnership
on behalf of a foreign person.
(4) Qualified notice. For purposes of this section, a qualified
notice is a notice given by a publicly traded partnership regarding a
distribution that is attributable to effectively connected income, gain
or loss of the partnership, and in accordance with the notice
requirements with respect to dividends described in 17 CFR 240.10b-
17(b)(1) or (3) issued pursuant to the Securities Exchange Act of 1934,
15 U.S.C. section 78(a).
(c) Time and manner of payment. The withholding tax required under
this section is to be paid pursuant to the rules and procedures of
section 1461, Sec. Sec. 1.1461-1, 1.1461-2, and 1.6302-2. However, the
reimbursement and set-off procedures set forth in those regulations
shall not apply. A publicly traded partnership must use Form 1042,
``Annual Withholding Tax Return for U.S. Source Income of Foreign
Persons,'' and Form 1042-S, ``Foreign Person's U.S. Source Income
Subject to Withholding,'' to report withholding from distributions
under this section. See Sec. 1.1461-1(b). See Sec. 1.1446-
3(d)(1)(vii) requiring a foreign trust or estate that holds an interest
in a publicly traded partnership to provide a statement to the
beneficiaries of such foreign trust or estate with respect to the
credit to be claimed under section 33. For penalties and additions to
the tax for failure to comply with this section, see Sec. Sec. 1.1461-
1 and 1.1461-3.
(d) Rules for designation of nominees to withhold tax under section
1446. A nominee that receives a distribution from a publicly traded
partnership subject to withholding under this section, and which is to
be paid to (or for the account of) any foreign person, may be treated
as a withholding agent under this section. A nominee is treated as a
withholding agent under this section only to the extent of the amount
specified in the qualified notice (as defined in paragraph (b)(4) of
this section) that the nominee receives. Where a nominee is designated
as a withholding agent with respect to a foreign partner of the
partnership, then the obligation to withhold on distributions to such
foreign partner in accordance with the rules of this section shall be
imposed solely on the nominee. A nominee under this section shall
identify itself as a nominee by providing Form W-9, ``Request for
Taxpayer Identification Number and Certification,'' to the partnership,
along with the statement required by paragraph (e)(1) of this section.
If a nominee furnishes Form W-9 and the statement required by paragraph
(e)(1) of this section to the partnership, but a qualified notice is
not received by the nominee from the partnership, the nominee shall not
be a withholding agent subject to the rules of this section and the
partnership shall presume that such nominee is a nonresident alien
individual or foreign corporation, whichever classification results in
a higher 1446 tax being due, and pay a withholding tax consistent with
such presumption. A nominee responsible for

[[Page 52481]]

withholding under the rules of this section shall be subject to
liability under sections 1461 and 6655, as well as for all applicable
penalties and interest, as if such nominee was a partnership
responsible for withholding under this section.
(e) Determining foreign status of partners--(1) In general. Except
as provided in paragraph (d) of this section permitting nominees to
submit a Form W-9 to a publicly traded partnership, the rules of Sec.
1.1446-1 shall apply in determining whether a partner of a publicly
traded partnership is a foreign partner for purposes of the 1446 tax
(see Sec. 1.1446-4(a)) and a nominee obligated to withhold under this
section shall be entitled to rely on a Form W-8BEN, ``Certificate of
Foreign Status of Beneficial Owner for United States Tax Withholding,''
Form W-8IMY, ``Certificate of Foreign Intermediary, Flow-Through
Entity, or Certain U.S. Branches for United States Tax Withholding,''
or Form W-9, ``Request for Taxpayer Identification Number,'' received
from persons on whose behalf it holds interests in the partnership to
the same extent a partnership is entitled to rely on such forms under
those rules. In addition to the rules stated in Sec. Sec. 1.1446-1
through 1.1446-3 with respect to certificates establishing a partner as
a domestic or foreign person, a nominee shall attach a brief statement
to the Form W-9 that it furnishes to the partnership, informing the
partnership that the nominee holds interests in the partnership on
behalf of one or more foreign persons, including information that
permits the partnership to determine the partnership interest held on
behalf of such foreign persons. A statement furnished by a nominee
pursuant to Sec. 1.6031(c)-1T satisfies the requirements of the
previous sentence.
(2) Presumptions regarding payee's status in absence of
documentation. The rules of Sec. 1.1446-1(c)(3) shall apply to
determine a partner's status in the absence of documentation.
(f) Distributions subject to withholding--(1) In general. Except as
provided in this paragraph (f)(1), a publicly traded partnership must
withhold at the applicable percentage with respect to any actual
distribution made to a foreign partner. The amount of a distribution
subject to 1446 tax includes the amount of any 1446 tax required to be
withheld on the distribution and, in the case of a partnership that
receives a partnership distribution from another partnership in which
it is a partner (i.e., a tiered structure described in Sec. 1.1446-5),
any 1446 tax that was withheld from such distribution. For example, a
foreign publicly traded partnership, UTP, owns an interest in domestic
publicly traded partnership, LTP. UTP does not provide LTP any
documentation with respect to its domestic or foreign status. LTP and
UTP each have a calendar taxable year. LTP makes a distribution subject
to section 1446 of $100 to UTP during its taxable year beginning
January 1, 2004, and withholds 35 percent (the highest rate in section
1) of that distribution under section 1446. UTP receives a net
distribution of $65 which it immediately redistributes to its partners.
UTP has a liability to pay 35 percent of the total actual and deemed
distribution it makes to its foreign partners as a section 1446
withholding tax. UTP may credit the $35 withheld by LTP against this
liability as if it were paid by UTP. When UTP distributes the $65 it
actually receives from LTP to its partners, UTP is treated for purposes
of section 1446 as if it made a distribution of $100 to its partners
($65 actual distribution and $35 deemed distribution). UTP's partners
(U.S. and foreign) may claim a credit against their U.S. income tax
liability for their allocable share of the $35 of 1446 tax paid on
their behalf.
(2) In-kind distributions. If a publicly traded partnership
distributes property other than money, the partnership shall not
release the property until it has funds sufficient to enable the
partnership to pay over in money the required 1446 tax.
(3) Ordering rule relating to distributions. Distributions from
publicly traded partnerships are deemed to be paid out of the following
types of income in the order indicated--
(i) Amounts attributable to income described in section 1441 or
1442 that are not effectively connected, without regard to whether such
amounts are subject to withholding because of a treaty or statutory
exemption;
(ii) Amounts attributable to recurring dispositions of crops and
timber that are subject to withholding under Sec. 1.1445-5(c)(3)(iv)
of the regulations, which continue to be subject to the rules of Sec.
1.1445-5(c)(3);
(iii) Amounts effectively connected with a U.S. trade or business,
but not subject to withholding under section 1446 (e.g., exempt by
treaty);
(iv) Amounts subject to withholding under section 1446; and
(v) Amounts not listed in paragraphs (f)(3)(i) through (iv) of this
section.
(4) Coordination with section 1445(e)(1). Except as otherwise
provided in this section, a publicly traded partnership that complies
with the requirements of withholding under section 1446 and this
section will be deemed to have satisfied the requirements of section
1445(e)(1) and the regulations thereunder. Notwithstanding the excluded
amounts set forth in paragraph (f)(3) of this section, distributions
subject to withholding at the applicable percentage shall include the
following--
(i) Amounts subject to withholding under section 1445(e)(1) upon
distribution pursuant to an election under Sec. 1.1445-5(c)(3); and
(ii) Amounts not subject to withholding under section 1445 because
the distributee is a partnership or is a foreign corporation that has
made an election under section 897(i).
(g) Election to withhold based upon ECTI allocable to foreign
partners instead of withholding on distributions. A publicly traded
partnership may elect to comply with the requirements of Sec. Sec.
1.1446-1 through 1.1446-3 (relating to withholding on ECTI allocable to
foreign partners) and Sec. 1.1446-5 (relating to tiered partnership
structures) instead of the rules of this section. A publicly traded
partnership shall make the election described in this paragraph (g) by
complying with the payment and reporting requirements of Sec. Sec.
1.1446-1 through 1.1446-3 and by complying with the information
reporting requirements of this paragraph (g). The election is made by
attaching a statement to a timely filed Form 8804, ``Annual Return for
Partnership Withholding Tax (Section 1446),'' that is required to be
filed by the partnership for the taxable year, indicating that the
partnership is a publicly traded partnership that is electing to pay
the 1446 tax under section 1446 based upon ECTI allocable under section
704 to its foreign partners. Once made, an election under this
paragraph (g) may be revoked only with the consent of the Commissioner.


Sec. 1.1446-5 Tiered partnership structures.

(a) In general. The rules of this section shall apply in cases
where a partnership (lower-tier partnership) that has effectively
connected taxable income (ECTI), has a partner that is itself a
partnership (upper-tier partnership). A partnership that directly or
indirectly (through a chain of partnerships) owns a partnership
interest in a lower-tier partnership shall be allowed a credit against
its own section 1446 withholding tax (1446 tax) for the tax paid by the
lower-tier partnership on its behalf. If an upper-tier domestic
partnership directly owns an interest in a lower-tier partnership, the
lower-tier partnership is not required to pay a withholding tax with
respect to the upper-tier partnership's allocable share

[[Page 52482]]

of effectively connected taxable income (ECTI), regardless of whether
the upper-tier domestic partnership's partners are foreign.
(b) Reporting requirements--(1) In general. To the extent that an
upper-tier partnership that is a foreign partnership is a partner in a
lower-tier partnership, and the lower-tier partnership has made 1446
tax installment payments on ECTI allocable to the upper-tier
partnership, the upper-tier partnership shall receive a copy of the
statements and forms filed by the lower-tier partnership allocable to
its partnership interest in the lower-tier partnership under Sec. Sec.
1.1446-1 through 1.1446-3 (e.g., Form 8805, ``Foreign Partner's
Information Statement of Section 1446 Withholding Tax''). The upper-
tier partnership may treat the 1446 tax paid by the lower-tier
partnership on its behalf as a credit against its liability to pay 1446
tax, as if the upper-tier partnership actually paid over the amounts at
the time that the amounts were paid by the lower-tier partnership. See
Sec. 1.1462-1(b). However, the upper-tier partnership may not obtain a
refund for the amounts paid by the lower-tier partnership, but instead,
must file such forms as prescribed by Sec. 1.1446-3 and this section
to allow the credits under section 33 to be properly claimed by the
beneficial owners of such income. See Sec. 1.1462-1. The upper-tier
partnership must file Form 8804, ``Annual Return for Partnership
Withholding Tax (Section 1446),'' and Form 8805, ``Foreign Partner's
Information Statement of Section 1446 Withholding Tax,'' with respect
to its 1446 tax obligation, passing the credit for 1446 tax paid by the
lower-tier partnership to its partners.
(2) Publicly traded partnerships. In the case of an upper-tier
foreign partnership that is a publicly traded partnership, the rules of
Sec. 1.1446-4(c) shall apply.
(c) Look through rules for foreign upper-tier partnerships. For
purposes of computing the 1446 tax obligation of a lower-tier
partnership, if an upper-tier partnership owns an interest in the
lower-tier partnership, the upper-tier partnership's allocable share of
the lower-tier partnership's ECTI shall be treated as allocable to the
partners of the upper-tier partnership (as if they were direct partners
in the lower-tier partnership) to the extent that--
(1) The upper-tier partnership furnishes the lower-tier partnership
with a valid Form W-8IMY, ``Certificate of Foreign Intermediary, Flow
Through Entity, or Certain U.S. Branches for United States Tax
Withholding,'' indicating that it is a look-through foreign partnership
for purposes of section 1446, and
(2) The lower-tier partnership can reliably associate (within the
meaning of Sec. 1.1441-1(b)(2)(vii)) the effectively connected
partnership items allocable to the upper-tier partnership with a Form
W-8BEN, ``Certificate of Foreign Status of Beneficial Owner for U.S.
Tax Withholding,'' Form W-8IMY, or Form W-9, ``Request for Taxpayer
Identification Number and Certification,'' for each of the upper-tier
partnership's partners. The principles of Sec. 1.1441-1(b)(2)(vii)
shall apply to determine whether a lower-tier partnership can reliably
associate effectively connected partnership items allocable to the
upper-tier partnership to the partners of the upper-tier partnership.
The upper-tier partnership shall provide the lower-tier partnership
with a withholding certificate for each partner in the upper-tier
partnership and information regarding the allocation of effectively
connected items to the respective partners of the upper-tier
partnership. To the extent the lower-tier partnership receives a valid
Form W-8IMY from the upper-tier partnership but cannot reliably
associate the upper-tier partnership's allocable share of effectively
connected partnership items with a withholding certificate for each of
the upper-tier partnership's partners, the lower-tier partnership shall
withhold at the higher of the applicable percentages in section
1446(b). If a lower-tier partnership has not received a valid Form W-
8IMY from the upper-tier partnership, the lower-tier partnership shall
withhold at the higher of the applicable percentages in section
1446(b). See Sec. 1.1446-1(c)(3). The approach set forth in this
paragraph (c) shall not apply to partnerships whose interests are
publicly traded. See Sec. 1.1446-4.
(d) Examples. The following examples illustrate the provisions of
Sec. 1.1446-5:

Example 1. Sufficient documentation--tiered partnership
structure. (i) Nonresident alien (NRA) and foreign corporation (FC)
are partners in PRS, a foreign partnership, and share profits and
losses in PRS 70 and 30 percent, respectively. All of PRS's
partnership items are allocated based upon each partner's respective
ownership interest and it is assumed that these allocations are
respected under section 704(b) and the regulations thereunder. NRA
and FC each furnish PRS with a valid Form W-8BEN establishing
themselves as a foreign individual and foreign corporation,
respectively. PRS holds a 40 percent interest in the profits, losses
and capital of LTP, a lower-tier partnership. NRA holds the
remaining 60 percent interest in profits, losses and capital of LTP.
LTP has $100 of annualized ECTI for the relevant installment period.
PRS has no income other than the income allocated from LTP. PRS
provides LTP with a valid Form W-8IMY indicating that it is a
foreign partnership and attaches the valid Form W-8BENs executed by
NRA and FC, as well as a statement describing the allocation of
PRS's effectively connected items among its partners. Further, NRA
provides a valid Form W-8BEN to LTP.
(ii) LTP must pay 1446 tax on the $60 allocable to its direct
partner NRA using the highest rate in section 1.
(iii) With respect to the effectively connected partnership
items that LTP can reliably associate with NRA through PRS (70
percent of PRS's allocable share, or $28), LTP will pay 1446 tax on
NRA's allocable share of LTP's partnership ECTI (as determined by
looking through PRS) using the applicable percentage for non-
corporate partners (the highest rate in section 1).
(iv) With respect to the effectively connected partnership items
that LTP can reliably associate with FC through PRS (30 percent of
PRS's allocable share, or $12), LTP will pay 1446 tax on FC's
allocable share of LTP's ECTI (as determined by looking through PRS)
using the applicable percentage for corporate partners.
(v) LTP's payment of the 1446 tax is treated as a distribution
to NRA and PRS, its direct partners, that those partners may credit
against their respective tax obligations. PRS will report its 1446
tax obligation with respect to its direct foreign partners, NRA and
FC, on the Form 8804 and Form 8805 that it files with the Internal
Revenue Service and will credit the amount withheld by LTP. Thus,
PRS will pass along to NRA and FC the credit for the 1446 tax
withheld by LTP which will be treated as a distribution to them.
Example 2. Insufficient documentation--tiered partnership
structure. PRS is a domestic partnership that has two equal partners
A and UTP. A is a nonresident alien individual and UTP is a foreign
partnership that has two equal foreign partners, C and D. Neither A
nor UTP provide PRS with a valid Form W-8BEN, Form W-8IMY, or Form
W-9. Neither C nor D provide UTP with a valid Form W-8BEN, Form W-
8IMY, or Form W-9. PRS must presume that UTP is a foreign person
subject to withholding under section 1446 at the higher of the
highest rate under section 1 or 11(b)(1). PRS has also not received
any documentation with respect to A. PRS must presume that A is a
foreign person, and, if PRS knows that A is an individual, compute
and pay 1446 tax based on that knowledge.


Sec. 1.1446-6 Effective date.

Sections 1.1446-1 through 1.1446-5 shall apply to partnership
taxable years beginning after the date that these regulations are
published as final regulations in the Federal Register.
Par. 5. Section 1.1461-1 is amended as follows:
1. Paragraph (a)(1) is amended by adding three sentences at the end
of the paragraph.
2. The second sentence of paragraph (c)(1)(i) is removed and two
sentences are added in its place.

[[Page 52483]]

3. Paragraph (c)(1)(ii)(A)(8) is redesignated as paragraph
(c)(1)(ii)(A)(9), and a new paragraph (c)(1)(ii)(A)(8) is added.
4. The first sentence of paragraph (c)(2)(i) is removed and two
sentences are added in its place.
5. The first sentence of paragraph (c)(3) is removed and two
sentences are added in its place.
6. Paragraph (i) is revised.
The additions and revisions read as follows:


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

(a) * * *
(1) * * * With respect to withholding under section 1446, this
section shall only apply to publicly traded partnerships that have not
made an election under Sec. 1.1446-4(g). See Sec. 1.1461-3 for
penalties applicable to partnerships that fail to withhold under
section 1446 on effectively connected taxable income allocable to
foreign partners, including a publicly traded partnership that has made
an election under Sec. 11446-4(g). The previous two sentences shall
apply to partnership taxable years beginning after the date that these
regulations are published as final regulations in the Federal Register.
* * * * *
(c) * * *
(1) * * *
(i) * * * Notwithstanding the preceding sentence, any person that
withholds or is required to withhold an amount under sections 1441,
1442, 1443, or Sec. 1.1446-4(a) must file a Form 1042-S, ``Foreign
Person's U.S. Source Income Subject to Withholding,'' for the payment
withheld upon whether or not that person is engaged in a trade or
business and whether or not the payment is an amount subject to
reporting. The reference in the previous sentence to withholding under
Sec. 1.1446-4 shall apply to partnership taxable years beginning after
the date that these regulations are published as final regulations in
the Federal Register. * * *
(ii) * * *
(A) * * *
(8) A partner receiving a distribution from a publicly traded
partnership subject to withholding under section 1446 and Sec. 1.1446-
4. This paragraph (c)(1)(ii)(A)(8) shall apply to partnership taxable
years beginning after the date that these regulations are published as
final regulations in the Federal Register.
* * * * *
(2) Amounts subject to reporting--(i) In general. Subject to the
exceptions described in paragraph (c)(2)(ii) of this section, amounts
subject to reporting on Form 1042-S are amounts paid to a foreign payee
or partner (including persons presumed to be foreign) that are amounts
subject to withholding as defined in Sec. 1.1441-2(a) or Sec. 1.1446-
4(a). The reference in the previous sentence to withholding under Sec.
1.1446-4 shall apply to partnership taxable years beginning after the
date that these regulations are published as final regulations in the
Federal Register. * * *
* * * * *
(3) Required information. The information required to be furnished
under this paragraph (c)(3) shall be based upon the information
provided by or on behalf of the recipient of an amount subject to
reporting (as corrected and supplemented based on the withholding
agent's actual knowledge) or the presumption rules of Sec. Sec.
1.1441-1(b)(3), 1.1441-4(a); 1.1441-5(d) and (e); 1.1441-9(b)(3),
1.1446-1(c)(3) or 1.6049-5(d). The reference in the previous sentence
to presumption rules applicable to withholding under section 1446 shall
apply to partnership taxable years beginning after the date that these
regulations are published as final regulations in the Federal Register.
* * *
* * * * *
(i) Effective date. Unless otherwise provided in this section, this
section shall apply to returns required for payments made after
December 31, 2000.
Par. 6. Section 1.1461-2 is amended by:
1. Removing the first sentence of paragraph (a)(1) and adding two
sentences in its place.
2. Revising paragraphs (b) and (d).
The revisions and addition read as follows:


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

(a) Adjustments of overwithheld tax--(1) In general. Except for
partnerships or nominees required to withhold under section 1446, a
withholding agent that has overwithheld under chapter 3 of the Internal
Revenue Code, and made a deposit of the tax as provided in Sec.
1.6302-2(a) may adjust the overwithheld amount either pursuant to the
reimbursement procedure described in paragraph (a)(2) of this section
or pursuant to the set-off procedure described in paragraph (a)(3) of
this section. References in the previous sentence excepting from this
section certain partnerships withholding under section 1446 shall apply
to partnership taxable years beginning after the date that these
regulations are published as final regulations in the Federal Register.
* * *
* * * * *
(b) Withholding of additional tax when underwithholding occurs. A
withholding agent may withhold from future payments (or a partner's
allocable share of ECTI under section 1446) made to a beneficial owner
the tax that should have been withheld from previous payments (or paid
under section 1446 with respect to a partner's allocable share of ECTI)
to such beneficial owner under chapter 3 of the Internal Revenue Code.
In the alternative, the withholding agent may satisfy the tax from
property that it holds in custody for the beneficial owner or property
over which it has control. Such additional withholding or satisfaction
of the tax owed may only be made before the date that the annual return
(e.g. Form 1042, Form 8804) is required to be filed (not including
extensions) for the taxable year in which the underwithholding
occurred. See Sec. 1.6302-2 for making deposits of tax or Sec.
1.1461-1(a) for making payment of the balance due for a calendar year.
See also Sec. Sec. 1.1461-1, 1.1461-3, and 1.1446-1 through 1.1446-5
for rules relating to withholding under section 1446. References in
this paragraph (b) to withholding under section 1446 shall apply to
partnership taxable years beginning after the date that these
regulations are published as final regulations in the Federal Register.
* * * * *
(d) Effective date. Unless otherwise provided in this section, this
section applies to payments made after December 31, 2000.
Par. 7. Section 1.1461-3 is added to read as follows.


Sec. 1.1461-3 Withholding under section 1446.

For rules relating to the withholding tax liability of a
partnership or nominee under section 1446, see Sec. Sec. 1.1446-1
through 1.1446-6. For penalties and additions to the tax for failure to
timely pay the tax required to be paid under section 1446, see sections
6655 (in the case of publicly traded partnerships that have not made an
election under Sec. 1.1446-4(g), see section 6656), 6672, and 7202 and
the regulations under those sections. For penalties and additions to
the tax for failure to file returns or furnish statements in accordance
with the regulations under section 1446, see sections 6651, 6662, 6663,
6721, 6722, 6723, 6724(c), 7201, 7203, and the regulations under those
sections. This section shall apply to partnership taxable years
beginning after the date that these regulations are

[[Page 52484]]

published as final regulations in the Federal Register.
Par. 8. Section 1.1462-1 is amended by revising paragraphs (b) and
(c) to read as follows:


Sec. 1.1462-1 Withheld tax as credit to recipient of income.

* * * * *
(b) Amounts paid to persons who are not the beneficial owner.
Amounts withheld at source under chapter 3 of the Internal Revenue Code
on payments to (or effectively connected taxable income allocable to) a
fiduciary, partnership, or intermediary is deemed to have been paid by
the taxpayer ultimately liable for the tax upon such income. Thus, for
example, if a beneficiary of a trust is subject to the taxes imposed by
section 1, 2, 3, or 11 upon any portion of the income received from a
foreign trust, the part of any amount withheld at source which is
properly allocable to the income so taxed to such beneficiary shall be
credited against the amount of the income tax computed upon the
beneficiary's return, and any excess shall be refunded. See Sec.
1.1446-3 for examples applying this rule in the context of a
partnership interest held through a foreign trust or estate. Further,
if a partnership withholds an amount under chapter 3 of the Internal
Revenue Code with respect to the distributive share of a partner that
is a partnership or with respect to the distributive share of partners
in an upper-tier partnership, such amount is deemed to have been
withheld by the upper-tier partnership. See Sec. 1.1446-5 for rules
applicable to tiered partnership structures. References in this
paragraph (b) to withholding under section 1446 shall apply to
partnership taxable years beginning after the date that these
regulations are published as final regulations in the Federal Register.
(c) Effective date. Unless otherwise provided in this section, this
section applies to payments made after December 31, 2000.
Par. 9. Section 1.1463-1 is amended by:
1. Adding two sentences at the end of paragraph (a).
2. Revising paragraph (b).
The addition and revision read as follows:


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

(a) * * * See Sec. 1.1446-3(f) for additional rules where the tax
was required to be withheld under section 1446. The reference in the
previous sentence to withholding under section 1446 shall apply to
partnership taxable years beginning after the date that these
regulations are published as final regulations in the Federal Register.
(b) Effective date. Unless otherwise provided in this section, this
section applies to failures to withhold occurring after December 31,
2000.

PART 301--PROCEDURE AND ADMINISTRATION

Par. 10. The authority for 26 CFR part 301 continues to read in
part as follows:

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

Par. 11. In Sec. 301.6109-1 is amended as follows:
1. In paragraph (b)(2)(vi), remove the word ``and''.
2. In paragraph (b)(2)(vii), remove the period at the end of the
paragraph and add ``; and'' in its place.
3. Paragraph (b)(2)(viii) is added.
4. In paragraph (c), the first three sentences are revised and a
sentence is added at the end of the paragraph.
The amendments and additions read as follows:


Sec. 301.6109-1 Identifying numbers.

* * * * *
(b) * * *
(2) * * *
(viii) A foreign person that furnishes a withholding certificate
described in Sec. 1.1446-1(c)(2) or (3) of this chapter. This
paragraph (b)(2)(viii) shall apply to partnership taxable years
beginning after the date these regulations are published as final
regulations in the Federal Register.
(c) Requirement to furnish another's number. Every person required
under this title to make a return, statement, or other document must
furnish such taxpayer identifying numbers of other U.S. persons and
foreign persons that are described in paragraph (b)(2)(i), (ii), (iii),
(vi), (vii), or (viii) of this section as required by the forms and the
accompanying instructions. The taxpayer identifying number of any
person furnishing a withholding certificate referred to in paragraph
(b)(2)(vi) or (viii) of this section shall also be furnished if it is
actually known to the person making a return, statement, or other
document described in this paragraph (c). If the person making the
return, statement, or other document does not know the taxpayer
identifying number of the other person, and such other person is one
that is described in paragraph (b)(2)(i), (ii), (iii), (vi), (vii), or
(viii) of this section, such person must request the other person's
number. * * * References in this paragraph (c) to paragraph
(b)(2)(viii) of this section shall apply to partnership taxable years
beginning after the date these regulations are published as final
regulations in the Federal Register.
* * * * *
Par. 12. In Sec. 301.6721-1, paragraph (g)(4) is revised to read
as follows:


Sec. 301.6721-1 Failure to file correct information returns.

* * * * *
(g) * * *
(4) Other items. The term information return also includes any
form, statement, or schedule required to be filed with the Internal
Revenue Service with respect to any amount from which tax is required
to be deducted and withheld under chapter 3 of the Internal Revenue
Code (or from which tax would be required to be so deducted and
withheld but for an exemption under the Internal Revenue Code or any
treaty obligation of the United States), generally Forms 1042-S,
``Foreign Person's U.S. Source Income Subject to Withholding,'' and
8805, ``Foreign Partner's Information Statement of Section 1446
Withholding Tax.'' The provisions of this paragraph (g)(4) referring to
Form 8805, shall apply to partnership taxable years beginning after the
date these regulations are published as final regulations in the
Federal Register.

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 03-22175 Filed 9-2-03; 8:45 am]
BILLING CODE 4830-01-P

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