Section 1446(f): Non-PTP Interests

Exceptions to withholding on transfers of non-PTP interests. A transferee, including a partnership when the partner is a distributee, is not required to withhold on the transfer of a non-PTP interest if it properly relies on one of the following six certifications, the requirements of which are more fully described in the referenced regulations. A transferee may not rely on a certification if it has actual knowledge that the certification is incorrect or unreliable. A partnership that is a transferee because it makes a distribution may not rely on its books and records if it knows, or has reason to know, that the information is incorrect or unreliable. A certification must provide the name and address of the person providing it, be signed under penalties of perjury, and generally include the TIN of the transferor. See Regulations sections 1.1446(f)-1(c)(2)(i) and 1.1446(f)-2(b)(1). Also, separate rules apply if the transfer results from a partnership distribution. Only the certification in Exception 6 must be submitted to the IRS.

The certifications in several of the exceptions are based on a determination date . The determination date must be one of the following: (a) the date of the transfer; (b) any date no more than 60 days before the date of the transfer; or (c) if the transferor is not a controlling partner, as defined in Regulations section 1.1446(f)-1(b)(2), the later of (i) the first day of the partnership’s taxable year in which the transfer occurs, or (ii) the date before the transfer of the partnership’s most recent capital account revaluation event. See Regulations section 1.1446(f)-1(c)(4).

1. Certification of non-foreign status. The transferor provides a certification of non-foreign status signed under penalties of perjury that states that the transferor is not a foreign person, and provides the transferor’s name, TIN, and address. A certificate of non-foreign status includes a Form W-9. See Regulations section 1.1446(f)-2(b)(2).

2. Certification of no realized gain. The transferor provides a certification that there was no realized gain on the transfer of the partnership interest (including no ordinary income arising from the application of section 751 and Regulations section 1.751-1) as of the determination date. See Regulations section 1.1446(f)-2(b) (3).

3. Certification of less than 10% effectively connec- ted gain. The partnership provides a certification stating that:

a. On the deemed sale of the partnership assets in

the manner described in Regulations section 1.864(c)(8)-1(c) as of the determination date either: the partnership would have no effectively connected gain (or the net amount of its effectively connected gain would be less than 10% of the total net gain) on all its assets; or the transferor’s distributive share of net effectively connected gain resulting from the deemed sale would be less than 10% of the transferor’s distributive share of the total net gain; or

b. The partnership was not engaged in a trade or

business within the United States at any time during the taxable year of the partnership until the date of transfer. See Regulations section 1.1446(f)-2(b)(4).

4. Certification of less than 10% effectively connec- ted income. The transferor provides a certification that:

a. The transferor was a partner in the partnership for

the transferor’s immediately prior tax year (for which it has already received a Schedule K-1) and the 2 preceding tax years (the look-back period) and had a distributive share of gross income from the partnership in each of these years;

b. The transferor’s distributive share of gross ECI

from the partnership, and any persons related to the transferor, as reported on a Schedule K-1 (Form 1065) or other statement required by the partnership, was less than $1 million for each of the tax years during the look-back period;

c. The transferor’s distributive share of partnership

gross ECI, as reported on a Schedule K-1 or K-3 (Form 1065) or other statement required by the partnership, for each year during the look-back period, was less than 10% of its total distributive share of partnership gross income; and

d. For each year during the look-back period, the

transferor’s distributive share of partnership ECI or gain (or losses properly allocated and apportioned to that income) has been timely reported on a federal income tax return of the transferor (or if the transferor was a partnership, its direct or indirect nonresident alien and foreign corporate partners) and any tax due with respect to such amounts have been timely paid, provided the return was required to be filed when the transferor furnishes the

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certification. See Regulations section 1.1446(f)-2(b)(5).

5. Certification of nonrecognition. The transferor provides a certification that it is not required to recognize any gain or loss with respect to the transfer by reason of the operation of a nonrecognition provision of the Internal Revenue Code. The certification must briefly describe the transfer and provide the relevant law and facts relating to the certification. This exception does not apply if only a portion of the gain is not recognized. See Regulations section 1.1446(f)-2(b)(6).

6. Certification that an income tax treaty ap- plies. The transferor provides a certification using Form W-8BEN or W-8BEN-E, as applicable, or applicable substitute form that meets the requirements under Regulations section 1.1446-1(c)(5) that the transferor is not subject to tax on any gain from the transfer pursuant to an income tax treaty. The transferor may not provide this certification if any portion of the gain is subject to tax. The form should contain the information necessary to support the claim for treaty benefits. Within 30 days after the date of the transfer, the transferee must mail certain information, plus a copy of the certificate, to the IRS, at the address in the Instructions for Form 8288. See Regulations section 1.1446(f)-2(b)(7).

A non-PTP making a distribution to a partner may generally rely on any of the above exceptions, with certain additional considerations.

• In Exception 2, the no realized gain exception, a distributing partnership may generally rely on its books and records or on a certification from the distributee partner.

• In Exception 4, the less than 10% ECI exception, a distributing partnership may generally rely on its books and records but must also obtain a representation from the distributee partner stating that the distributee partner satisfies the reporting and tax payment requirements with respect to the partnership’s ECI for the look-back period.

Caution: See the discussion, later, regarding certification of maximum tax lability if a nonrecognition provision applies to only a portion of the gain realized on the transfer or only a portion of the gain on the transfer is not subject to tax pursuant to an income tax treaty.

Determining the amount to withhold. In general, the transferee must withhold 10% of the amount realized. The amount realized includes the cash paid, the fair market value of property transferred, plus the assumption of and relief from liabilities, and liabilities to which the partnership interest is subject. See Regulations section 1.1446(f)-2(c) (2)(i). If certain requirements are met, the transferee may rely on a certification of the amount of the transferor’s share of partnership liabilities reported on the most recent Schedule K-1 (Form 1065) issued by the partnership or a certification from a partnership that provides the amount of the transferor’s share of partnership liabilities as of the

determination date. See Regulations section 1.1446(f)-2(c)(2)(ii) and (iii).

Modified amount realized. If a foreign partnership is the transferor, separate rules may apply to determine a modified amount realized. The modified amount realized is determined by multiplying the amount realized by the aggregate percentage computed as of the determination date. The aggregate percentage is the percentage of the gain (if any) arising from the transfer that would be allocated to any presumed foreign taxable persons. For this purpose, a presumed foreign taxable person is any person that has not provided a certificate of non-foreign status, as previously described in the Exception 1 to withholding, or a certification that pursuant to a tax treaty no portion of the foreign taxable person’s gain is subject to tax. The certification the transferor foreign partnership provides does not need to be submitted to the IRS. See Regulations section 1.1446(f)-2(c)(2)(iv).

Lack of money or property or lack of knowledge regarding liabilities. Under certain circumstances, the amount the transferee must withhold equals the entire amount realized, rather than 10% of the amount realized, but the amount realized is determined without regard to any decrease in the transferor’s share of partnership liabilities. These circumstances are if:

1. The amount otherwise required to be withheld would exceed the amount realized determined without regard to the decrease in the transferor’s share of partnership liabilities; or

2. The transferee is unable to determine the amount realized because it does not have actual knowledge of the transferor’s share of partnership liabilities (and has not received or cannot rely on a certification of the transferor’s share of partnership liabilities received from the transferor (including the most recent Schedule K-1) or a certification of the transferor’s share of liabilities received from the partnership). See Regulations section 1.1446(f)-2(c)(3)(ii).

Certification of maximum tax liability. A transferor that meets certain requirements can certify its maximum tax liability to the transferee. The maximum tax liability is the amount of the transferor’s effectively connected gain multiplied by the applicable percentage under Regulations section 1.1446-3(a)(2). The applicable percentage for foreign corporations is the highest rate of tax under section 11(b) and for non-corporations is the highest rate of tax under section 1. See Regulations section 1.1446(f)-2(c)(4) for further information. The certificate does not need to and should not be submitted to the IRS for approval.

Effect of withholding on transferor. A transferee’s withholding of tax under section 1446(f)(1) does not relieve a foreign person from filing a U.S. tax return with respect to the transfer. Further, it does not relieve a nonresident alien individual or foreign corporation subject to tax on gain by reason of section 864(c)(8) from paying with the return any tax due that has not been fully satisfied through withholding.

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Transfers of partnership interests subject to with- holding under sections 1445(e)(5) and 1446(f)(1). The transfer of a partnership interest may be subject to withholding under section 1445(e)(5) or Regulations section 1.1445-11T(d)(1) if 50% or more of the value of the partnership’s gross assets consist of USRPI, and 90% or more of the value of its gross assets consist of USRPI plus any cash or cash equivalents. The transfer of a partnership interest may also be subject to withholding under section 1446(f)(1) and Regulations section 1.1446(f)-2 if the partnership also holds other property used in the conduct of a trade or business within the United States. If both sections 1445(e)(5) and 1446(f)(1) could apply to the same transfer, generally the transfer is subject to the payment and reporting requirements of section 1445 only, and not section 1446(f)(1). However, if the transferor has applied for a withholding certificate under the last sentence of Regulations section 1.1445-11T(d)(1), the transferee must withhold the greater of the amounts required under section 1445(e)(5) or 1446(f)(1). A transferee that has complied with the withholding requirements under either section 1445(e)(5) or 1446(f)(1), as described under this paragraph, will be deemed to satisfy its withholding requirement.

Forms for paying and reporting section 1446(f)(1) withholding. To meet the withholding, payment, and reporting requirements under section 1446(f)(1) for transfers of interests in partnerships other than PTPs, taxpayers must use Forms 8288 and 8288-A and follow the instructions for those forms.

The time for filing Forms 8288 and 8288-A to report section 1446(f)(1) withholding is the same as for section 1445 withholding. The same rules for filing Forms 8288 and 8288-A by transferees withholding tax under section 1445 apply to transferees withholding tax under section 1446(f)(1). The same rules for claiming a credit for withholding of tax under section 1445 apply to transferors receiving Form 8288-A claiming credit for withholding under section 1446(f)(1). For the rules relating to Forms 8288 and 8288-A discussed in this paragraph, see U.S. Real Property Interest and Reporting and Paying the Tax , later, as well as the Instructions for Form 8288 .

Transferee reporting to partnership. No later than 10 days after the transfer, a transferee (other than a partnership that is a transferee because it made a distribution) must certify to the partnership the extent to which it has satisfied its withholding obligation. See Regulations section 1.1446(f)-2(d)(2) for the documentation required for making this certification.

Partnership’s requirement to withhold under section 1446(f)(4) on distributions to transferee. Section 1446(f)(4) requires a partnership to withhold on distributions to a transferee on any amount that the transferee failed to properly withhold under section 1446(f)(1), plus any interest on this amount. See Regulations section 1.1446(f)-3. These rules apply to transfers occurring on or after January 1, 2023. See Notice 2021-51 .

Requirement to withhold. If a transferee fails to withhold any amount required by Regulations section 1.1446(f)-2 in connection with the transfer of a partnership interest, the partnership must withhold from the distributions it makes to the transferee. Generally, a partnership may rely on the certification described in Regulations section 1.1446(f)-2(d)(2) that it receives from the transferee to determine whether a transferee has withheld the amount required by Regulations section 1.1446(f)-2, unless it knows, or has reason to know, that the certification is incorrect or unreliable. See Regulations section 1.1446(f)-3(a)(1). If the partnership receives, within 10 days from the transfer, a certification from the transferee stating that an exception to withholding applies or establishing that the transferee has withheld the amount required to be withheld under Regulations section 1.1446(f)-2, then the partnership is generally not required to withhold under Regulations section 1.1446(f)-3(a)(1). See Regulations section 1.1446(f)-3(b)(1). However, a partnership is required to withhold under section 1446(f)(4) if it receives notification from the IRS that the transferee has provided incorrect information on the certification. This may occur when the IRS determines that the transferee has provided incorrect information on the certification regarding the amount realized or the amount withheld, or that the transferee failed to pay the amounts reported as withheld to the IRS. See Regulations section 1.1446(f)-3(a)(2).

A partnership that is a transferee because it makes a distribution subject to section 1446(f)(1) is not required to withhold under section 1446(f)(4). However, the partnership remains liable for its failure to withhold in its capacity as a transferee. A PTP is not required to withhold on distributions made to a transferee under section 1446(f)(4). See Regulations sections 1.1446(f)-3(b)(2) and (3).

Withholding rules. A partnership that does not receive, or cannot rely on, a timely certification from a transferee stating that an exception to withholding applies or that the proper amount has been withheld must begin withholding on distributions made to the transferee on the later of the date that is 30 days after the transfer or the date that is 15 days after the partnership acquires actual knowledge of the transfer. See Regulations section 1.1446(f)-3(c)(1)(i).

The partnership must withhold on the entire amount of each distribution made to the transferee until it may rely on a certification from the transferee that states that an exception to withholding applies or that provides the information necessary to determine the amount required to be withheld. See Regulations section 1.1446(f)-3(c)(1)(ii). The partnership may rely on this certification to determine its withholding obligation regardless of whether it is provided within the time prescribed in Regulations section 1.1446(f)-2(d)(2). Once the partnership receives a certification from the transferee, the partnership must withhold 10% of the amount realized on the transfer, reduced by any amount already withheld by the transferee, plus any computed interest. See Regulations section 1.1446(f)-3(c) (2)(i).

A partnership that is required to withhold under Regulations section 1.1446(f)-3(a)(1) may not take into account

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any adjustment procedures that would otherwise affect the amount required to be withheld under Regulations section 1.1446(f)-2(c)(2)(i). See Regulations section 1.1446(f)-3(c)(2)(i)(A). Thus, for example, a partnership may not reduce the amount that it is required to withhold under the procedures described in Regulations section 1.1446(f)-2(c)(4) (adjusting the amount subject to withholding based on a transferor’s maximum tax liability). For example, if a partnership is required to withhold $30 under section 1441 on a $100 distribution, the maximum amount required to be withheld on that distribution under section 1446(f)(4) is $70. A partnership that does not receive or cannot rely on a certification from the transferee must withhold the full amount of each distribution made to the transferee until the partnership receives a certification that it can rely on. However, any amount required to be withheld on a distribution under any other withholding provision in the Code is not required to be withheld under section 1446(f)(4). See Regulations section 1.1446(f)-3(c)(3). Nevertheless, the partnership may stop withholding if the transferee disposes of all of its interest in the partnership, unless the partnership has actual knowledge that any successor to the transferee is related to the transferee or the transferor from which the transferee acquired the interest.

Computation of interest. The amount of interest required to be withheld is the amount of interest that would be required to be paid under section 6601 and Regulations section 301.6601-1 if the amount that should have been withheld by the transferee was considered an underpayment of tax. Interest is payable between the date that is 20 days after the date of the transfer and the date on which the transferee’s withholding tax liability due under section 1446(f)(1) is satisfied. See Regulations section 1.1446(f)-3(c)(2)(ii).

Forms and filing dates. A partnership required to withhold under section 1446(f)(4) must report and pay the tax withheld using Forms 8288 and 8288-C. See Regulations section 1.1446(f)-3(d). To report section 1446(f)(4) withholding, see the Instructions for Form 8288 for the deadline to file Forms 8288 and 8288-C.

Buyer/transferee claiming refund of section 1446(f) (4) withholding. A transferee may claim a refund for an excess amount if it has been overwithheld upon under section 1446(f)(4). An excess amount is the amount of tax and interest withheld that exceeds the transferee’s withholding tax liability plus any interest owed by the transferee with respect to such liability. See Regulations section 1.1446(f)-3(e). The transferee may also be liable for any applicable penalties or additions to tax. A transferee must complete Part V of Form 8288 and attach Form(s) 8288-C it received from the partnership when making a claim for refund of section 1446(f)(4) withholding. If a transferee that has not yet completed and filed Part III of Form 8288 with respect to a transfer and is now claiming a refund for amounts withheld under section 1446(f)(4), the transferee must complete Part III when filing Part V of Form 8288.