>> For current developments related to this topic, read our June 18, 2019, update: "Courts Confirm Foreign Partner Gain from Disposition of a U.S. Partnership Doesn’t Mean U.S. Tax Liabilities"
The passing of the Tax Cuts and Jobs Act (TCJA) brought with it new tax ramifications for those selling U.S. partnership interests. Specifically, it created a 10 percent withholding tax on the amount realized when a foreign person sells, exchanges or otherwise disposes of a U.S. partnership interest. The burden of collecting the withholding tax lies with the U.S. person acquiring the interest, or the partnership itself in certain circumstances.
However, as with many areas of the TCJA, the initial regulations weren’t necessarily clear as to how to calculate and comply with the new withholding requirement. Consequently, the IRS has released guidance that not only provides temporary relief to the new rules for some, but also offers critical clarifications.
The TCJA laid out the following rules surrounding a sale of U.S. partnership interest by a foreign person or corporation:
On December 29, 2017, the IRS and Department of the Treasury released Notice 2018-08, which grants a temporary suspension of the 10 percent withholding obligation on the sale of publicly traded partnerships (PTPs) until further regulations or guidance are issued. The Notice did not suspend the treatment of gains or losses as ECI to a foreign partner under Sec. 864(c)(8). The IRS acknowledged that the purchaser of a PTP interest may not be able to determine if the seller is foreign or domestic or whether any portion of the seller’s gain should be treated as ECI.
PTP units are generally held by a broker and transferred through a clearing agent. While brokers could potentially withhold on behalf of the transferee, the brokers have not developed systems and controls around the withholding process given the short timeline between the enactment of the TCJA and the January 1, 2018, implementation of this rule. Once more guidance is issued, the IRS states that withholding will be prospective from the date of the guidance and will include transition rules.
While the PTP Notice did not extend to private companies, the Treasury Department and the IRS did request comments on whether there is a need to have a temporary suspension of the withholding requirements for these partnerships as well. The notice also solicited comments on the application of the withholding requirement, the possible role of brokers and procedures for calculating the withholding amount.
On April 2, 2018, the IRS and the Department of the Treasury released Notice 2018-29, which will directly impact the disposition of a private partnership interest. In general, the Notice:
The guidance clarifies that a purchaser required to withhold must follow the same forms and procedures used on the disposition of U.S. real property by a foreign person under Sec. 1445 and related regulations, including the requirement to report and remit withholding within 20 days of a transfer. A purchaser of the partnership interest also must include the statement “Section 1446(f)(1) withholding” at the top of relevant forms.
Notice 2018-29 also clarifies several exceptions that would exempt the purchaser from the withholding requirement altogether:
Notice 2018-29 also discusses specific rules related to the treatment of liabilities and tiered structures, clarifying how the realized amount is calculated when such circumstances are present.
The two notices issued on Section 1446(f) have offered welcome temporary relief to the new 10 percent withholding rules for PTPs and much needed clarification on the basics related to non-PTP withholding. While the partners selling and purchasing PTP units received full relief, even though temporary, non-PTP sales are still subject to withholding as of January 1, 2018. There is still significant uncertainty as to how these withholding rules will apply in practice, but the notices provide interim guidance that taxpayers can rely upon until additional guidance is issued.
Please contact a member of your service team, or contact Andreana Shengelya at ashengelya@cohencpa.com or Kim Palmer at kpalmer@cohencpa.com for further discussion.
This item was originally published in the August 2018 issue of The Tax Adviser, an AICPA publication. Read Andreana’s full technical article in The Tax Adviser now.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.