Treasury Suspends Requirements On Partnership Interests

Summary

On January 2, 2018, the Department of the Treasury and the Internal Revenue Service (collectively, “Treasury”) issued Notice 2018-8 (the “Notice”). In the Notice, Treasury announced the suspension of the application of new Section 1446(f) in the case of a disposition of certain publicly traded partnership interests. New section 1446(f) was added by Section 13501 of “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” P.L. 115-97 (the “Act”), which was enacted on December 22, 2017. Section 13501 of the Act also added new Section 864(c)(8).

Details In general, Section 864(c)(8) provides that a nonresident alien individual’s or foreign corporation’s gain or loss from the sale, exchange, or other disposition of a partnership interest is effectively connected with the conduct of a trade or business in the United States to the extent that the person would have had effectively connected gain or loss had the partnership sold all of its assets at fair market value. New section 864(c)(8) applies to sales, exchanges, or other dispositions occurring on or after November 27, 2017. New Section 864(c)(3) essentially overrides the holding in Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Comm’r.[1] For a discussion of the Tax Court’s holding in Grecian, see Revenue Ruling 91-32, 1991-1 C.B. 107, for the IRS’s position with respect to sales, exchanges or other dispositions of an interest in a partnership occurring before November 27, 2017.

In general, new Section 1446(f)(1) provides that if any portion of the gain on any disposition of an interest in a partnership would be treated under new Section 864(c)(8) as effectively connected with the conduct of a trade or business within the United States, then the transferee must withhold a tax equal to 10 percent of the amount realized on the disposition. Under an exception in new Section 1446(f)(2), however, withholding is generally not required if the transferor furnishes an affidavit to the transferee stating, among other things, that the transferor is not a foreign person.

New Section 1446(f)(6) authorizes the Secretary to issue such regulations or other guidance as may be necessary to carry out the purposes of new Section 1446(f), including regulations providing for exceptions from the provisions of new Section 1446(f). Furthermore, new Section 1446(g) authorizes regulations that are necessary to carry out the purposes of new Section 1446 generally, including regulations providing for the application of new Section 1446 in the case of publicly traded partnerships. New Section 1446(f) applies to sales, exchanges, or other dispositions occurring after December 31, 2017.

Given certain practical concerns raised by stakeholders in publicly traded partnerships, and to allow for an orderly implementation of the requirements of new Section 1446(f), the Notice states that withholding under new Section 1446(f) is not required with respect to any disposition of an interest in a publicly traded partnership (within the meaning of Section 7704(b)) until regulations or other guidance have been issued under new Section 1446(f). This temporary suspension is limited to dispositions of interests that are publicly traded and does not extend to non-publicly traded interests. The Notice also states that Treasury intends to issue future regulations or other guidance on how to withhold, deposit, and report the tax withheld under new Section 1446(f) with respect to a disposition of an interest in a publicly traded partnership.

The Notice further provides that guidance under Section 1446(f) with respect to a disposition of an interest in a publicly traded partnership will be prospective and will include transition rules to allow sufficient time to prepare systems and processes for compliance. The rules suspending withholding under new Section 1446(f) does not extend to new Section 864(c)(8), which remains applicable. Lastly, in the Notice, Treasury also requested comments on the rules to be issued under new Section 1446(f).

Insights

The temporary suspension of the application of Section 1446(f) to dispositions of certain publicly traded partnership interests should provide relief for withholding agents facing practical difficulties in determining whether to withhold under new Section 1446(f) on dispositions of certain publicly traded partnership interests.