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IRS Defers Applicability Date of Publicly Traded Partnership Withholding Regs

(Parker Tax Publishing September 2021)

The IRS issued a notice announcing that it will amend the regulations under Code Sec. 1446(a) and Code Sec. 1446(f) to defer until January 1, 2023, the applicability date for provisions relating to the following: (1) withholding under Code Sec. 1446(f) on transfers of interests in publicly traded partnerships (PTP interests); (2) withholding under Code Sec. 1446(a) on distributions made with respect to PTP interests; and (3) withholding under Code Sec. 1446(f)(4) by partnerships on distributions to transferees. Before the issuance of the amendments to these regulations, taxpayers may rely on the provisions in the notice. Notice 2021-51.


Code Secs. 864(c)(8) and 1446(f) were enacted by the Tax Cuts and Jobs Act (Pub. L. 115-97) on December 22, 2017. Code Sec. 864(c)(8) generally provides that gain or loss derived by a foreign person on the sale or exchange of an interest in a partnership engaged in a U.S. trade or business is treated as effectively connected gain or loss and, therefore, is subject to U.S. tax. Code Sec. 1446(f)(1) requires a transferee of an interest in a partnership to withhold 10 percent of the amount realized if any portion of the gain on the disposition would be treated under Code Sec. 864(c)(8) as effectively connected with the conduct of a trade or business within the United States (unless an exception applies). Code Sec. 1446(f)(4) provides that if a transferee fails to withhold on the disposition as required under Code Sec. 1446(f)(1), the partnership must withhold on distributions to the transferee.

On November 30, 2020, the IRS published final regulations (T.D. 9926) primarily relating to withholding and information reporting under Code Sec. 1446(f). The final regulations include withholding and reporting requirements under Code Sec. 1446(f)(1) applicable to brokers effecting transfers of interests in publicly traded partnerships (PTP interests) on behalf of foreign persons. The final regulations also require a broker that pays an amount realized to a foreign broker to withhold on the amount realized, unless the foreign broker is a qualified intermediary (QI) (or a U.S. branch treated as a U.S. person) that assumes primary withholding responsibility under Code Sec. 1446(f)(1). The final regulations modify certain rules in Reg. Sec. 1.1446-4, which previously permitted only a publicly traded partnership or a U.S. person to be the withholding agent, to allow a QI (or a U.S. branch treated as a U.S. person) to assume withholding on distributions with respect to PTP interests under Code Sec. 1446(a), in part to coordinate with withholding requirements under Code Sec. 1446(f)(1). Under the final regulations, a QI that assumes withholding on a distribution under Code Sec. 1446(a) must also assume withholding on the distribution under Code Sec. 1446(f). The final regulations also provide rules under Code Sec. 1446(f)(4) for withholding and reporting by partnerships (other than publicly traded partnerships) making distributions to transferees of partnership interests who failed to withhold as required under Code Sec. 1446(f)(1). These provisions of the final regulations apply to transfers and distributions that occur on or after January 1, 2022.

Following the publication of the final regulations, the IRS received comments noting that practitioners will face significant challenges complying with certain provisions of the final regulations by January 1, 2022, and requesting a deferred applicability date. These challenges include the following: (1) designing, building, and testing new withholding and reporting infrastructure; (2) analyzing new forms and withholding statements; and (3) implementing systems to capture required data. According to the IRS, brokers that are qualified intermediaries (and U.S. branches treated as U.S. persons) have the additional challenge of implementing systems and processes to withhold and report under Code Sec. 1446(a) as well as Code Sec. 1446(f).

Notice 2021-51

On August 24, the IRS issued Notice 2021-51 to announce that, in consideration of the concerns raised by taxpayers, and to allow for an orderly implementation of the requirements of Code Sec. 1446(f) with respect to PTP interests, it intends to amend certain applicability dates of the final regulations (primarily the applicability date in Reg. Sec. 1.1446(f)-4(f)) to provide that the provisions relating to withholding and reporting on transfers of PTP interests under Code Sec. 1446(f)(1) will apply to transfers that occur on or after January 1, 2023. The IRS also intends to amend the applicability date of the modifications to Reg. Sec. 1.1446-4 listed in Reg. Sec. 1.1446-7 to apply to distributions with respect to PTP interests made on or after January 1, 2023. The IRS explained that the modified applicability date for these provisions will then align with the modified applicability date for withholding and reporting under Code Sec. 1446(f)(1) with respect to PTP interests.

In addition, in order to allow for an orderly implementation of the withholding and reporting requirements for partnerships under Code Sec. 1446(f)(4), the IRS also said that it intends to amend the applicability date in Reg. Sec. 1.1446(f)-3(f) so that the provisions of the final regulations requiring partnerships to withhold under Code Sec. 1446(f)(4) will apply to transfers that occur on or after January 1, 2023.

For a discussion of the withholding tax on dispositions of interests in partnerships engaged in a U.S. trade or business, see Parker Tax ¶202,145.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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