Sec. 1446(f) proposed regs.: Withholding on transfers of partnership interests

By Brent Felten, CPA, J.D., Grand Rapids, Mich., and Laurie Cameron, CPA, Oak Brook, Ill.

Editor: Howard Wagner, CPA

On May 7, Treasury and the IRS issued proposed regulations (REG-105476-18) under Sec. 1446(f), which was enacted by the law known as the Tax Cuts and Jobs Act(TCJA), P.L. 115-97. Sec. 1446(f) imposes new withholding requirements for gain realized on the disposition of a partnership interest by a foreign partner. The proposed regulations incorporate many of the provisions of Notice 2018-29, which established interim procedures for implementing Sec. 1446(f), and apply to transactions occurring between Dec. 31, 2017, and the effective date of the final regulations. Like the notice, the proposed regulations apply only to interests in partnerships that are not publicly traded. The proposed regulations are effective for dispositions of partnership interests occurring on or after 60 days after they are published as final in the Federal Register

For more than 25 years, the IRS maintained that the sale of a partnership interest is income effectively connected with a U.S. trade or business (ECI) when the seller was a foreign person and the partnership was engaged in a trade or business in the United States. As ECI, gain on the sale of a partnership interest was subject to U.S. income tax, unlike other gains realized by foreign persons from the sale of property. In a 2017 decision, the Tax Court rejected the IRS position that gain from the sale of a U.S. partnership interest qualified as ECI (Grecian Magnesite Mining, Indus. & Shipping Co., SA, 149 T.C. 63 (2017), aff'd, 926 F.3d 819 (D.C. Cir. 2019)). In response, Congress enacted Sec. 864(c)(8) as part of the TCJA, codifying the IRS's position.

The enactment of Sec. 864(c)(8) effectively ended the debate for transactions that occur in tax years beginning after Dec. 31, 2017. However, the IRS is left with the problem of identifying targeted transactions and collecting the tax. Apart from real estate, no mechanism is in place for flagging sales of property by foreign persons because gains and losses on those sales generally are exempt from tax. Arguably, the targeted transactions could be identified when the foreign taxpayer stops filing U.S. tax returns on Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, or Form 1040NR, U.S. Nonresident Alien Income Tax Return, but at that point it is too late for the IRS to enforce collection. Additionally, given the reporting and withholding under Sec. 1446, some foreign taxpayers might not have been filing tax returns, on the premise that withholding effectively covers their tax, and the cost of compliance is not worth the benefit. Because the IRS is left without any leverage on potential foreign taxpayers, Congress enlisted U.S. taxpayers into the role of reporting and collecting the tax by adding new Sec. 1446(f).

Sec. 1446(f)(1) provides that if any portion of the gain on any disposition of an interest in a partnership would be treated as ECI under Sec. 864(c)(8), the transferee must withhold and remit 10% of the amount realized on the disposition. If a transferee fails to meet the withholding requirement, Sec. 1446(f)(4) provides that the partnership is required to withhold and remit an amount equal to the amount the transferee failed to withhold (10% of the proceeds realized on the transfer), plus interest, from the transferee's future partnership distributions.

In April 2018, the IRS issued Notice 2018-29, which announced its intent to issue regulations that would establish rules and procedures for executing the provisions of Sec. 1446(f) and provided guidance until those rules were issued. The notice established an express presumption that all transferors of a partnership interest are treated as foreign transferors unless they certify their nonforeign status, thereby creating a trap for the unwary by requiring documentation on virtually every transfer of a partnership interest.

Proposed regulations

The proposed regulations retain the foreign transferor presumption as well as many of the other provisions of Notice 2018-29. Under the proposed regulations, as in the notice, the certification of nonforeign status can be satisfied with Form W-9, Request for Taxpayer Identification Number and Certification, or an affidavit containing certain information required by the proposed regulations. The certification must be provided in the window starting 30 days before the transfer and ending on the date of the transfer. A transferee that does not receive certification of nonforeign status or certification of another exemption from withholding must withhold 10% of the amount realized on the transfer, deposit the amount withheld with the IRS, and comply with reporting requirements with respect to the withholding. 

In addition to the certification of nonforeign status, Prop. Regs. Sec. 1.1446(f)-2 provides an exemption from withholding in the following situations:

  • The transferor certifies it will not realize a gain from the transaction.
  • The transferor certifies that a sale of all of the partnership's assets at fair market value would result in ECI of less than 10% of the total gain.
  • The transferor certifies that for the three preceding tax years, the transferor was a partner and reported all ECI activity on a U.S. tax return and paid any tax due (if the return was required to be filed when the certification was furnished), and the ECI was less than $1 million and less than 10% of the transferor's net partnership income each year.
  • The transferor certifies that a nonrecognition provision applies to the transfer.
  • The transferor certifies that the transfer is not subject to tax under the provisions of a U.S. tax treaty and includes with the certification a valid Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), or Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities).

Borrowing a page out of the FIRPTA book (Foreign Investment in Real Property Tax Act of 1980, P.L. 96-499), the proposed regulations assume every transfer of a partnership interest is tainted, creating a trap for the unwary. Thankfully, the regulations also provide for relative ease in avoiding that trap. The vast majority of transfers likely are not subject to Sec. 864(c)(8), based solely on the residency of the transferor. Those same transactions are, however, subject to withholding under Sec. 1446(f), but tax advisers and attorneys can ameliorate the burden by building the appropriate documentation procedures into their due diligence and standard contractual provisions. For example, due diligence could include a request for a Form W-9 or other appropriate documentation that withholding would not apply. Similarly, a partnership transfer agreement could incorporate a provision requiring the transferor to furnish no earlier than 30 days prior to close a Form W-9, a certificate of nonforeign status, or other certification that withholding does not apply. Tax advisers or transaction attorneys should build a library of simple certification templates to offer transferors.

Those most likely to walk into the trap are those involved with transfers of closely held businesses between parties who enjoy close relationships. Even though Sec. 1041(a) provides for nonrecognition of income between spouses, the sale of a partnership interest between spouses would arguably be a transfer under Sec. 1446(f) for which a certification of nonforeign status is required. However, these transfers tend to be far less formal, rarely including a formal due-diligence process. Parties to these transactions are least likely to seek specific tax advice on the transfer and usually use a family attorney to draft transfer agreements. Their advisers are unlikely to be versed in the nuances of international tax practice, nor should they be. However, tax advisers and attorneys with this type of clientele should establish procedures to comply with Sec. 1446(f) on every partnership transfer.

Partnerships also will need to establish procedures to deal with secondary withholding in the event that transferees do not withhold or collect the appropriate documentation. For the time being, the enforcement of partnership-level withholding is deferred until final regulations are issued. Accordingly, partnerships are on notice but are not currently subject to withholding.


Howard Wagner, CPA, is a partner with Crowe LLP in Louisville, Ky.

For additional information about these items, contact Mr. Wagner at 502-420-4567 or

Unless otherwise noted, contributors are members of or associated with Crowe LLP.

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