Section 1446(f): PTP Interests

For purposes of section 1446(f), a broker is generally required to withhold at a 10% rate on an amount realized from the transfer of a PTP interest that it effects for the transferor of the interest. However, certain exceptions to withholding may apply under Regulations section 1.1446(f)-4(b), which include exceptions for (i) a transferor providing a certification of non-foreign status, (ii) a certification from a transferor claiming an exemption from tax on any gain from the transfer under an income tax treaty, or (iii) a certification of the transferor’s status as a dealer in securities stating that any gain from the transfer is effectively connected with a trade or business in the U.S. without regard to section 864(c)(8). Additionally, for an amount realized paid to a transferor that is a foreign partnership, a broker may rely on a claim for a modified amount realized made by the partnership on a valid Form W-8IMY and determine its withholding taking into account a certification of non-foreign status or claim for treaty benefits provided for a partner in the partnership that meets the requirements of Regulations section 1.1446(f)-4(b)(2) or (5). See Regulations section 1.1446(f)-4(c)(2)(ii) for further information on a modified amount realized. For an amount realized paid to a transferor that is a grantor trust, a broker may similarly determine its withholding taking into account any withholding exception applicable to a grantor or owner in the trust.

A broker is also required to withhold under section 1446(f) an amount realized from the transfer of a PTP interest that it pays to a broker that is an NQI, a QI (other than a QI assuming primary withholding responsibility for the amount realized), or U.S. branch or territory financial institution that is not treated as a U.S. person for the amount realized. In the case of an amount realized paid to an NQI (including a U.S. branch or territory financial institution not treated as a U.S. person), a broker is required to withhold at the 10% rate under section 1446(f). See the Instructions for Form W-8IMY for additional information on the amount realized paid to NQIs. In the case of an amount realized paid to a QI not assuming primary withholding responsibility for the amount, a broker may withhold based on either withholding rate pool information provided by the QI or information on the transferors of the PTP interest when the QI acts as a disclosing QI.

A broker is not required to withhold under section 1446(f) when it may rely on a published qualified notice from the PTP that states the “10% exception” applies. See Regulations section 1.1446(f)-4(b)(3) for further information on this exception, which applies to a PTP with less than 10% effectively connected gain (or that is otherwise not engaged in a trade or business in the United States).

An amount realized from the sale of a PTP interest is the amount of gross proceeds paid or credited from the sale. In the case of a PTP distribution, an amount realized on the distribution is limited to an amount described in Regulations section 1.1446(f)-4(c)(2)(iii).

For when an amount realized is reportable on Form 1042-S and other requirements for reporting amounts

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realized on Form 1042-S, see Regulations section 1.1461-1(c)(2)(i) and the Instructions for Form 1042-S. Also, see the Instructions for Form 1042-S for the reporting of an amount realized paid to an NQI, or to a QI (including when the QI acts as a disclosing QI for the amount realized). See Revenue Procedure 2022-43 for the withholding and reporting requirements of QIs with respect to amounts realized paid to their account holders (including QIs acting as disclosing QIs), effective starting January 1, 2023.