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IRS Addresses Issues with Respect to Tax Withholding on Transfers of Non-Publicly Traded Partnership Interests

Apr 16, 2018

On April 2, 2018 the IRS released Notice 2018-29 (the ‘Notice”), which provides interim guidance on tax withholding on transfers of non-publicly traded partnerships and announces the intention of the Treasury and IRS to issue regulations on this subject.  In previously issued Notice 2018-08, the IRS suspended the withholding regime under IRC Sec. 1446(f) for publicly traded partnerships until regulations or other guidance are issued.


In Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Commissioner, 149 T.C. No. 3 (2017), the Tax Court held that the IRS position in Rev. Rul. 91-32 -- that a foreign partner is generally subject to U.S. tax on gain from the sale of an interest in a partnership to the extent the gain is attributable to U.S. trade or business assets of the partnership -- is not valid.

IRC Sec. 1446(f) and IRC Sec. 864(c)(8), added as part of the Tax Cuts and Jobs Act, effectively codify the IRS position taken in Rev. Rul. 91-32.

In general, IRC Sec. 864(c)(8) is the operative taxing provision.  It treats sales or exchanges of partnership interests by a nonresident alien or foreign corporation as effectively connected with a U.S. trade or business and subject to U.S. federal income tax to the extent that the transferor of such partnership interest would have effectively connected gain or loss if the partnership had sold all its assets at fair market value as of the date of the transfer. It applies for sales, exchanges or other dispositions on or after November 27, 2017.

IRC Sec. 1446(f)(1) requires that the transferee withhold 10% of the “amount realized” by a transferor that is a non-United States person on the sale or exchange of a partnership interest after December 31, 2017, if (i) any portion of the transferor’s gain on the sale would be U.S. effectively connected income under IRC Sec. 864(c)(8) and (ii) the transferor does not provide a certificate of non-foreign status.

IRC Sec. 1446(f) also imposes secondary liability for the withholding tax (plus interest) on the partnership if the transferee does not withhold.

Notice 2018-29 provides some welcome relief pending the issuance of regulations, although it does not suspend the application of the withholding rules as does Notice 2018-08 (publicly traded partnerships). And, it does not affect the transferor’s liability under IRC Sec. 864(c)(8).

Summary of Notice 2018-29

  • The Notice suspends (until regulations or other guidance are issued) secondary withholding on partnerships where a transferee fails to properly withhold.
  • The Notice allows partnerships and transferees to rely on new or previously collected Form W-9s meeting certain requirements in lieu of an affidavit of non-foreign status.
  • Generally, a transferee is not required to withhold if it receives a certification from the transferor for the transferor’s immediately prior taxable year and the two taxable years that precede it that the transferor’s allocable share of the partnership’s effectively connected taxable income was less than 25% of the transferor’s total distributive share of the partnership’s income for that year.  This is subject to certain limitations: (i) the certification is not available for transferors that were not partners in the partnership for the entirety of the three-year period; (ii) a transferor that did not have a distributive share of income in any of the three immediately prior taxable years during which the partnership had effectively connected income cannot provide this certification; (iii) a transferee may not rely on such certification prior to the receipt by the transferor of the relevant Forms 8805 (foreign partner’s share of effectively connected income) and Schedules K-1 (Form 1065); and (iv) a transferee may not rely on the certification and it is not relieved from withholding if it has actual knowledge that the certification is false.
  • A transferee is not required to withhold if it receives a certification from the partnership stating that if the partnership had sold all of its assets at fair market value, the amount of effectively connected gain would be less than 25% of the total gain on the deemed sale of its assets.
  • If a transferor transfers an interest in a partnership (upper-tier partnership) that owns an interest (directly or indirectly) in another partnership (lower-tier partnership) and the lower tier partnership would have effectively connected gain upon the deemed transaction that would be taken into account by the transferor at the time of the transfer of the interest in the upper tier partnership, a portion of the gain recognized by the transferor is characterized as effectively connected gain.
  • Under partnership tax law, the “amount realized” in a transfer of a partnership interest includes a transferor’s share of liabilities.  A transferee may generally rely on a transferor’s most recently issued Schedule K-1 (Form 1065) for purposes of determining the transferor’s share of partnership liabilities included in the amount realized.  Alternatively, a transferee may generally rely on a certification from the partnership providing the amount of the transferor’s share of partnership liabilities.
  • The Notice provides that until further guidance is issued, in certain cases withholding is limited to the total amount cash and property transferred to the transferor.
  • The Notice permits a transferee to rely on a certificate from the transferor that no gain is recognized because of a non-recognition provision or a provision of a tax treaty.
  • If a transferee receives a certification from a transferor that the transfer of its partnership interest will not result in gain, the transferee generally is not required to withhold.
  • The Notice confirms that withholding rules continue to be suspended with respected to publicly traded partnerships per Notice 2018-08.
  • The Notice provides that until the final regulations are published, taxpayers required to withhold under IRC Sec. 1446(f) must do so within twenty days of the transaction in accordance with the principles of IRC Sec. 1445 (i.e., the provisions related to the Foreign Interest in Real Property Tax Act [FIRPTA]).  Forms 8288 and 8222-A should be used to report and pay withheld amounts, with the phrase “Section 1446(f)(1) Withholding” written at the top of each form. The IRS intends to issue regulations providing that no penalties or interest will be asserted if forms that were required to be filed, or amounts that were due under IRC Sec. 1446(f), on or before May 31, 2018, if such forms are filed, and such amounts are paid, on or before May 31, 2018.

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Gerard O'Beirne

Gerard O’Beirne is a Partner and the National Leader of the firm’s International Tax Group, with more than 25 years of experience. Gerry has extensive experience with both inbound and outbound structuring, including mergers and acquisitions.l

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