SECTION 2. BACKGROUND AND

SUMMARY OF COMMENTS

In general, section 864(c)(8) provides that gain or loss from the sale, exchange, or other disposition of a partnership interest by a nonresident alien or foreign corporation 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. Section 864(c)(8) applies to sales, exchanges, or other dispositions occurring on or after November 27, 2017. See Rev. Rul. 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 by a nonresident alien individual or foreign corporation occurring before November 27, 2017.

In general, 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 section 864(c)(8) as effectively connected with the conduct of a trade or business within the United States, then the transferee must deduct and withhold a tax equal to 10 percent of the amount realized on the disposition. Under an exception in 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.

Section 1446(f)(4) provides that if a transferee fails to withhold any amount required to be withheld under section 1446(f)(1), the partnership shall be required to deduct and withhold from distributions to the transferee a tax in an amount equal to the amount the transferee failed to withhold (plus interest under the Code on such amount).

Section 1446(f)(6) authorizes the Secretary to prescribe such regulations or other guidance as may be necessary to carry out the purposes of section 1446(f), including regulations providing for exceptions from the provisions of section 1446(f). Furthermore, section 1446(g) authorizes the Secretary to prescribe such regulations as may be necessary to carry

out the purposes of section 1446 generally. Section 1446(f) applies to sales, exchanges, or other dispositions occurring after December 31, 2017.

On December 29, 2017, the Treasury Department and IRS advance released Notice 2018–08, 2018–7 I.R.B. 352 (“PTP Notice”). The PTP Notice suspended the requirement to withhold on dispositions of certain interests in publicly traded partnerships (“PTPs”) in response to stakeholder concerns that applying section 1446(f) to PTPs without guidance presented significant practical problems. The PTP Notice also requested comments on the implementation of section 1446(f), including whether a temporary suspension of section 1446(f) for partnership interests that are not publicly traded (“non-PTP interests”) was needed. Several comments were received.

Comments in response to the PTP Notice requested guidance minimizing the application of section 1446(f) until further guidance was issued, including suspension of section 1446(f) for non-PTP interests. This notice does not suspend the application of section 1446(f) for nonPTP interests in all cases, but does include guidance under section 1446(f) designed to allow for an effective and orderly implementation, including minimizing occasions of overwithholding. The rules in this notice (including section 6) that modify or suspend withholding under section 1446(f) do not affect the transferor’s tax liability under section 864(c)(8). See section 4.06 of this notice.

Comments stated that applying section 1446(f) to dispositions of non-PTP interests presents significant practical problems. Comments stated that a transferee is obligated to withhold with respect to dispositions occurring after December 31, 2017, but without forms, instructions or other guidance, it is unclear when or how to deposit the withheld amounts. To address this concern, section 5 of this notice provides interim guidance on reporting and paying over the amount required to be withheld under section 1446(f)(1). This guidance generally adopts the forms and procedures relating to withholding on dispositions of U.S. real property interests under section 1445 and the regulations thereunder.

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Comments requested guidance on the procedures for the transferor to furnish an affidavit of non-foreign status to the transferee as described in section 1446(f)(2) to be relieved from withholding. Section 6.01 of this notice provides this guidance by generally adopting the rules in the section 1445 regulations for similar situations.

Section 1446(f) applies only when there is gain on a disposition of an interest in a partnership. To prevent withholding when no gain occurs on a disposition, section 6.02 of this notice provides that if a transferee receives a certification from a transferor that the disposition will not result in gain, then the transferee generally is not required to withhold under section 1446(f). Comments requested relief from withholding obligations when the amount of effectively connected gain under section 864(c)(8) is zero or a small amount. One comment recommended a rule providing relief based on the value of the assets producing effectively connected income, modeled on § 1.1445–11T. Section 1.1445–11T provides an exception from the requirement that a transferee withhold on the transfer of an interest in a partnership that holds U.S. real property interests. The transferee is relieved from withholding under this exception if the partnership provides the transferee a statement certifying that fifty percent or more of the value of the gross assets does not consist of U.S. real property interests, or that ninety percent or more of the value of the gross assets of the partnership does not consist of U.S. real property interests plus cash or cash equivalents. Instead of adopting a rule based on the test in § 1.1445–11T, sections 6.03 and 6.04 of this notice provide two rules that relieve the transferee from withholding in circumstances similar to those described by the comments.

Section 6.03 of this notice provides generally that, if a transferor certifies to a transferee that for each of the past three years the transferor’s effectively connected taxable income from the partnership was less than 25 percent of the transferor’s total income from the partnership, the transferee is not required to withhold. This rule is designed to provide a simple approach, obviating the need for the part

nership to make the computation required by section 864(c)(8) or to otherwise provide information to the transferor or transferee at the time of the transaction. However, in certain cases transferees may not be able to obtain this certification, so section 6.04 of this notice provides a separate rule relieving a transferee of its withholding obligation under section 1446(f)(1) when the transferee receives a certification from the partnership that the partnership’s effectively connected gain under section 864(c)(8) would be less than 25 percent of the total gain on the deemed sale of all its assets. The Treasury Department and the IRS intend to provide future guidance that will reduce the threshold for withholding below 25 percent for both of these rules. Other limitations are also under consideration. The Treasury Department and the IRS expect that any such reduction in the threshold for withholding would be effective at the same time as guidance providing for withholding certificates or otherwise providing for withholding determined by reference to gain recognized under section 1446(f)(3).

A comment recommended guidance providing that no gain or loss be recognized under section 864(c)(8) in certain dispositions that would otherwise be considered nonrecognition transactions, provided that gain or loss is preserved. Specifically, the comment suggested alternative rules, one considering whether the gain or loss is preserved in the U.S. tax base, and the other considering whether the gain or loss is preserved in the hands of the transferee. The Treasury Department and the IRS are studying the appropriate treatment of nonrecognition transactions under section 864(c)(8), and comments are requested on this issue, including the relationship between nonrecognition transactions under sections 864(c)(8) and 897. See § 1.897– 6T. Until this guidance is provided, section 6.05 of this notice provides that no withholding is required under section 1446(f) in a transaction in which no gain is recognized.

Section 1446(f)(1) applies to the amount realized on the disposition of a partnership interest. The amount realized includes a reduction in the transferor’s share of partnership liabilities and other liabilities to which the partnership interest is subject.

See §§ 1.752–1(h) and 1.1001–2. Section 7 of this notice provides two rules for determining the amount of partnership liabilities that are included in the amount realized. Section 7.02 of this notice provides that a transferee may generally rely on a transferor’s most recently issued Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., for purposes of determining the transferor’s share of partnership liabilities included in the amount realized for purposes of section 1446(f). Alternatively, section 7.03 provides that a transferee may generally rely on a certification from the partnership providing the amount of the transferor’s share of partnership liabilities.

Comments stated that when the amount realized includes a reduction in liabilities, the amount the transferee may be required to withhold could exceed the cash or other property the transferee pays to the transferor. Further, in some situations, a transferor may not provide any information to the transferee about its share of partnership liabilities, making a determination of the total amount realized difficult. To address these issues, section 8 of this notice provides that in certain cases, the total amount of withholding is generally limited to the total amount of cash and property to be transferred. The Treasury Department and the IRS expect that the exception in section 8 will not apply after guidance is issued providing for withholding certificates or otherwise providing for withholding determined by reference to gain recognized under section 1446(f)(3).

The comments also raised an issue relating to the determination of a transferor’s basis in its partnership interest. Section 731(a) provides that in the case of a distribution by a partnership to a partner, gain shall not be recognized to such partner, except to the extent that any money distributed exceeds the adjusted basis of such partner’s interest in the partnership immediately before the distribution. Any gain recognized under section 731(a) is considered gain from the sale or exchange of the partnership interest of the distributee partner. Thus, section 1446(f) applies in certain cases when a distribution of money (including marketable securities) results in gain under section 731. According to a comment, when a partnership distributes money, it may not know the

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distributee partner’s basis in its interest and, thus, may not know whether the distribution will cause the distributee partner to recognize gain. In response to this comment, section 9 of this notice provides that the partnership may generally rely on its books and records, or on a certification received from the distributee partner, to determine whether the distribution exceeds the partner’s basis.

Section 10 of this notice responds to requests for guidance on the interaction of section 1445 with section 1446(f).

The Treasury Department and the IRS are considering rules that would relieve a partnership of its obligation under section 1446(f)(4) if it provides the information required by a transferor and transferee to comply with the requirements under sections 864(c)(8) and 1446(f), including the certification described in section 6.04 of this notice, information on the calculation of the tax liability under section 864(c)(8) to the transferor, and information necessary to calculate the amount realized (including calculations relating to section 752) by the transferor. Section 11 of this notice provides that the withholding requirements described in section 1446(f)(4) will not apply until regulations or other guidance have been issued under that section.