Final 1446(f) regulations
ComplianceJune 11, 2021

Final 1446(f) regulations impose new withholding requirements on brokers

By: Robyn Lang

In 2017, the Tax Cuts and Jobs Act introduced two new sections to the Internal Revenue Code. The first, Sec. 864(c)(8), provides that nonresident alien individual (NRA) taxpayers and foreign corporations must recognize capital gain or loss on the sale or exchange of an interest in a partnership engaged in any trade or business within the United States. The second, Sec. 1446(f), requires that the transferee in a sale or exchange of a partnership interest must withhold 10 percent of the amount realized on the transfer. Initial guidance deferred applying the rules to publicly traded partnerships (PTPs) even though these provisions generally apply to all partnerships (including PTPs). On October 7, 2020, the Treasury Department released final regulations on the new withholding scheme, which includes a provision obligating a transferee’s broker to withhold on a transferred interest in a PTP or in connection with certain distributions by the PTP to the NRA partner. Notably, the final regulations generally impose the obligation to withhold on the broker for the NRA holding or selling the PTP interest.

Under the final regulations, transferees’ brokers are exempt from withholding on PTP transfers under a number of exceptions, including instances where a PTP issues a “qualified notice” stating that the partnership meets certain entity-level criteria relating to the partnership’s assets and business operations. A partnership may issue qualified notices relating to both transfers of partnership interests and distributions made to current partners. Brokers do not have to withhold on gain arising from transfers of a partnership interest when a partnership has issued a qualified notice stating its effectively connected gain is less than 10 percent of the net gain realized by that partnership in a hypothetical sale of all its assets at fair market value or if that partnership is not engaged in a U.S. trade or business. Similarly, brokers are exempt from withholding on distributions made by the partnership if the partnership provides a qualified notice that a given distribution does not exceed the partnership’s cumulative net income.

The final regulations on Sec. 1446(f) withholding are scheduled to go into effect on January 1, 2022.

Update: Per Notice 2021-51, the Treasury Department and the IRS intend to amend certain applicability dates of the final regulations to provide that the provisions relating to withholding and reporting on transfers of PTP interests under section 1446(f)(1) will apply to transfers that occur on or after January 1, 2023.
Robyn Lang
Corporate Actions Analyst
Robyn E. Lang, J.D., LL.M, is a Corporate Actions Analyst with Wolters Kluwer. Prior to joining Wolters Kluwer, she worked on a variety of commercial litigation and corporate tax controversy matters. She now focuses primarily on tax issues affecting brokers and investors, such as withholding and taxation of debt instruments and derivatives. Lang is licensed to practice law in Illinois.
Capital Changes 1446F PTP Alert
Capital Changes 1446F PTP Alert automates the monitoring and analyzing of qualified notices issued by publicly traded partnerships, which can contain exceptions to withholding.
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