§1446 — Withholding of tax on foreign partners’ share of effectively connected income
5 cases·1 followed·2 distinguished·1 overruled·1 cited—20% support
Statute Text — 26 U.S.C. §1446
If—
a partnership has effectively connected taxable income for any taxable year, and
any portion of such income is allocable under section 704 to a foreign partner,
such partnership shall pay a withholding tax under this section at such time and in such manner as the Secretary shall by regulations prescribe.
The amount of the withholding tax payable by any partnership under subsection (a) shall be equal to the applicable percentage of the effectively connected taxable income of the partnership which is allocable under section 704 to foreign partners.
For purposes of paragraph (1), the term “applicable percentage” means—
the highest rate of tax specified in section 1 in the case of the portion of the effectively connected taxable income which is allocable under section 704 to foreign partners who are not corporations, and
the highest rate of tax specified in section 11(b) in the case of the portion of the effectively connected taxable income which is allocable under section 704 to foreign partners which are corporations.
For purposes of this section, the term “effectively connected taxable income” means the taxable income of the partnership which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States computed with the following adjustments:
Paragraph (1) of section 703(a) shall not apply.
The partnership shall be allowed a deduction for depletion with respect to oil and gas wells but the amount of such deduction shall be determined without regard to sections 613 and 613A.
There shall not be taken into account any item of income, gain, loss, or deduction to the extent allocable under section 704 to any partner who is not a foreign partner.
Each foreign partner of a partnership shall be allowed a credit under section 33 for such partner’s share of the withholding tax paid by the partnership under this section. Such credit shall be allowed for the partner’s taxable year in which (or with which) the partnership taxable year (for which such tax was paid) ends.
Except as provided in regulations, a foreign partner’s share of any withholding tax paid by the partnership under this section shall be treated as distributed to such partner by such partnership on the earlier of—
the day on which such tax was paid by the partnership, or
the last day of the partnership’s taxable year for which such tax was paid.
For purposes of this section, the term “foreign partner” means any partner who is not a United States person.
Except as provided in this subsection, if any portion of the gain (if any) 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, the transferee shall be required to deduct and withhold a tax equal to 10 percent of the amount realized on the disposition.
No person shall be required to deduct and withhold any amount under paragraph (1) with respect to any disposition if the transferor furnishes to the transferee an affidavit by the transferor stating, under penalty of perjury, the transferor’s United States taxpayer identification number and that the transferor is not a foreign person.
Subparagraph (A) shall not apply to any disposition if—
the transferee has actual knowledge that the affidavit is false, or the transferee receives a notice (as described in section 1445(d)) from a transferor’s agent or transferee’s agent that such affidavit or statement is false, or
the Secretary by regulations requires the transferee to furnish a copy of such affidavit or statement to the Secretary and the transferee fails to furnish a copy of such affidavit or statement to the Secretary at such time and in such manner as required by such regulations.
The rules of section 1445(d) shall apply to a transferor’s agent or transferee’s agent with respect to any affidavit described in subparagraph (A) in the same manner as such rules apply with respect to the disposition of a United States real property interest under such section.
At the request of the transferor or transferee, the Secretary may prescribe a reduced amount to be withheld under this section if the Secretary determines that to substitute such reduced amount will not jeopardize the collection of the tax imposed under this title with respect to gain treated under section 864(c)(8) as effectively connected with the conduct of a trade or business with in the United States.
If a transferee fails to withhold any amount required to be withheld under paragraph (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 this title on such amount).
Any term used in this subsection which is also used under section 1445 shall have the same meaning as when used in such section.
The Secretary shall prescribe such regulations or other guidance as may be necessary to carry out the purposes of this subsection, including regulations providing for exceptions from the provisions of this subsection.
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including—
regulations providing for the application of this section in the case of publicly traded partnerships, and
regulations providing—
that, for purposes of section 6655, the withholding tax imposed under this section shall be treated as a tax imposed by section 11 and any partnership required to pay such tax shall be treated as a corporation, and
appropriate adjustments in applying section 6655 with respect to such withholding tax.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.1446-0 Table of contents
- Treas. Reg. §Treas. Reg. §1.1446-0(a) In general.
- Treas. Reg. §Treas. Reg. §1.1446-0(b) Foreign partners to whom this section applies.
- Treas. Reg. §Treas. Reg. §1.1446-0(c) Reduction of 1446 tax with respect to a foreign partner.
- Treas. Reg. §Treas. Reg. §1.1446-0(d) Effect of certificate of deductions and losses on partner and partnership.
- Treas. Reg. §Treas. Reg. §1.1446-0(e) Examples.
- Treas. Reg. §Treas. Reg. §1.1446-0(f) Effective/Applicability date.
- Treas. Reg. §Treas. Reg. §1.1446-0(g) Transition rule.
- Treas. Reg. §Treas. Reg. §1.1446-0(i) Filing requirement.
- Treas. Reg. §Treas. Reg. §1.1446-0(v) §1.1446-0(v)
- Treas. Reg. §Treas. Reg. §1.1446-1 Withholding tax on foreign partners' share of effectively connected taxable income
- Treas. Reg. §Treas. Reg. §1.1446-1(a) In general.
- Treas. Reg. §Treas. Reg. §1.1446-1(b) Steps in determining 1446 tax obligation.
- Treas. Reg. §Treas. Reg. §1.1446-1(c) Determining whether a partnership has a foreign partner—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1446-1(v) Partner must provide new withholding certificate when there is a change in circumstances.
- Treas. Reg. §Treas. Reg. §1.1446-2 Determining a partnership's effectively connected taxable income allocable to foreign partners under section 704
- Treas. Reg. §Treas. Reg. §1.1446-2(a) In general.
- Treas. Reg. §Treas. Reg. §1.1446-2(b) Computation—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1446-2(i) Oil and gas interests.
- Treas. Reg. §Treas. Reg. §1.1446-2(v) Limitation on capital losses.
- Treas. Reg. §Treas. Reg. §1.1446-3 Time and manner of calculating and paying over the 1446 tax
- Treas. Reg. §Treas. Reg. §1.1446-3(a) In general—(1) Calculating 1446 tax.
- Treas. Reg. §Treas. Reg. §1.1446-3(b) Installment payments—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1446-3(c) Coordination with other withholding rules—(1) Fixed or determinable, annual or periodical income.
- Treas. Reg. §Treas. Reg. §1.1446-3(d) Reporting and crediting the 1446 tax—(1) Reporting 1446 tax.
5 Citing Cases
They make no argument that any of YA Global’s foreign partners certified their nonpartnership deductions in accordance with Treasury Regulation § 1.1446-6, conceding that that regulation “is inapplicable here.” And they concede that “YA Offshore did not file its Form 1120–F for .
Background Section 1446(a) requires a partnership to pay a withholding tax on any ECTI allocable to a foreign partner. Section 1446(b)(1) provides that “[t]he amount of the withholding tax payable by any partnership under [section 1446(a)] shall be equal to the applicable percentage of the effectively connected taxable income of the partnership which is allocable under section 704 to foreign partners.” The “applicable percentage,” in respect of any foreign partner, is the highest rate of tax spe
LE ADVISORS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 14546-15. Filed August 8, 2018. R issued FPAAs with respect to Y, a partnership. R determined that Y was liable for withholding taxes under I.R.C. sec. 1446 and made adjustments in the FPAAs to reflect the withholding tax liabilities as well as related additions to tax and penalties. Y's tax matters partner (TMP) filed a petition for readjustment ofpartnership items under I.R.C. sec. 6226