[Federal Register Volume 68, Number 170 (Wednesday, September 3, 2003)]
[Proposed Rules]
[Pages 52466-52484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-22175]



[[Page 52465]]

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Part II





Department of the Treasury





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Internal Revenue Service



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26 CFR Parts 1 and 301



Section 1446 Regulations; Proposed Rule

  Federal Register / Vol. 68, No. 170 / Wednesday, September 3, 2003 / 
Proposed Rules  

[[Page 52466]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-108524-00]
RIN 1545-AY28


Section 1446 Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations regarding the 
obligation of a partnership to pay a withholding tax on effectively 
connected taxable income allocable under section 704 to a foreign 
partner. The regulations will affect partnerships engaged in a trade or 
business in the United States that have one or more foreign partners.

DATES: Written or electronic comments and requests to speak, with 
outlines of topics to be discussed at the public hearing scheduled for 
December 4, 2003, must be received by November 13, 2003.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-108524-00), room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
108524-00), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically directly to the IRS Internet site at http://www.irs.gov/regs. The public hearing will be held in the IRS 
Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., 
Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
David J. Sotos, at (202) 622-3860, or to be placed on the attendance 
list for the hearing, LaNita Van Dyke at (202) 622-7180 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collections of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collections of information should 
be received by November 3, 2003. Comments are specifically requested 
concerning:
    Whether the proposed collections of information are necessary for 
the proper performance of the functions of the Internal Revenue 
Service, including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collections of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collections of information in this proposed regulation are in 
Sec. Sec.  1.871-10, 1.1446-1, 1.1446-3, and 1.1446-4. This information 
is required to determine whether a partnership is required to pay a 
withholding tax with respect to a foreign partner and provide 
information concerning the tax paid on such partner's behalf, and to 
determine the foreign person required to report the effectively 
connected taxable income earned by such partnership and entitled to 
claim credit for the withholding tax paid by the partnership. This 
information will be used in issuing refunds to foreign persons claiming 
credit for withholding tax paid on their behalf, as well as for audit 
and examination purposes. The reporting requirements in Sec. Sec.  
1.871-10 and 1.1446-3 are mandatory. The reporting requirement in Sec.  
1.1446-1 and 1.1446-4 are voluntary. The likely respondents include 
individuals, business or other for-profit institutions, and small 
businesses or organizations.
    Estimated total annual reporting burden: 7,805 hours.
    Estimated average annual burden hours per respondent: 0.5 hours.
    Estimated number of respondents: 15,775.
    Estimated annual frequency of responses: on occasion and quarterly.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains proposed amendments to 26 CFR part 1 under 
section 1446 of the Internal Revenue Code (Code). Section 1446 was 
added to the Code by section 1246(a) of the Tax Reform Act of 1986 
(Public Law 99-514, 100 Stat. 2085, 2582 (1986 Act)), to impose 
withholding at a rate of 20 percent on distributions to a foreign 
partner by a partnership that was engaged in a U.S. trade or business. 
Section 1012(s)(1)(A) of the Technical and Miscellaneous Revenue Act of 
1988 (Public Law 100-647, 102 Stat. 3342, 3526 (1988 Act)) revised 
section 1446 to require that a withholding tax (1446 tax) be imposed on 
effectively connected taxable income (ECTI) allocable to a partner that 
is a foreign person (foreign partner) at the highest tax rate 
applicable to such person. Finally, section 7811(i)(6) of the Omnibus 
Budget Reconciliation Act of 1989 (Public Law 101-239, 103 Stat. 2106, 
2410 (1989 Act)), made certain technical amendments to section 1446.
    Treasury and the IRS issued Rev. Proc. 88-21 (1988-1 C.B. 777) to 
provide guidance on the operation of the withholding tax imposed under 
section 1446 as enacted by the 1986 Act. After the 1988 Act, which 
revised the withholding approach to apply to a partner's allocable 
share of ECTI instead of to distributions, Treasury and the IRS 
published Rev. Proc. 89-31 (1989-1 C.B. 895), which made Rev. Proc. 88-
21 obsolete. Rev. Proc. 89-31 was modified by Rev. Proc. 92-66 (1992-2 
C.B. 428). Rev. Proc. 89-31, as modified by Rev. Proc. 92-66, provides 
current guidance to partnerships for calculating, paying over, and 
reporting the 1446 tax.

Explanation of Provisions

A. In General

    Prior to the enactment of section 1446, a partnership generally was 
not required to withhold on income that was effectively connected with 
the conduct of a trade or business within the United States (a U.S. 
trade or business) and allocated or distributed to its foreign 
partners. Congress enacted section 1446 because it was concerned that 
passive foreign investors could

[[Page 52467]]

escape U.S. tax on their partnership income. See S. Rep. No. 99-313, 
99th Cong., 2d Sess. 414 (1986). As originally enacted, section 1446 
generally required both domestic and foreign partnerships with any 
income, gain, or loss that was effectively connected with the conduct 
of a U.S. trade or business to withhold a tax equal to 20 percent of 
any amount distributed to a foreign partner. Through a series of 
modifications and refinements discussed below, this withholding tax 
regime evolved from its original structure of withholding on 
distributions to foreign partners to its present form of, generally, 
withholding on an installment basis on partnership ECTI (whether 
distributed or not distributed), apart from special provisions for 
publicly traded partnerships.
    In response to the enactment of section 1446, Treasury and the IRS 
issued Rev. Proc. 88-21 to provide guidance for partnerships to comply 
with section 1446. After Rev. Proc. 88-21 was issued, the 1988 Act 
amended section 1446 retroactively and provided that no withholding was 
required under section 1446 for partnership taxable years beginning 
before January 1, 1988.
    Section 1446, as revised by the 1988 Act, shifted from imposing a 
withholding tax on partnership distributions to imposing a withholding 
tax on the amount of ECTI allocable to the partnership's foreign 
partners. More specifically, section 1446(a) requires partnerships that 
have ECTI in any taxable year, any portion of which is allocable under 
section 704 to a foreign partner, to pay the 1446 tax at such time and 
in such manner as prescribed in regulations. The amount of withholding 
tax payable by a partnership under section 1446 is equal to the 
applicable percentage of the partnership's ECTI allocable under section 
704 to foreign partners. The applicable percentage for ECTI allocable 
to a foreign corporation is the highest rate of tax specified in 
section 11(b), and the applicable percentage for ECTI allocable to a 
non-corporate foreign partner is the highest rate of tax specified in 
section 1. Further, section 1446(d), as amended by the 1988 Act, 
provides that a foreign partner is entitled to a credit under section 
33 for such partner's share of the 1446 tax, and, except as provided in 
regulations, such partner's share of the 1446 tax paid by the 
partnership is treated as distributed to such partner on the last day 
of the taxable year for which such tax was paid. The credit under 
section 33 is applied against the partner's U.S. tax liability for the 
taxable year in which the partner includes its allocable share of the 
partnership's effectively connected income.
    Treasury and the IRS issued Rev. Proc. 89-31 to provide guidance to 
partnerships under section 1446, as amended by the 1988 Act. This 
revenue procedure made Rev. Proc. 88-21 obsolete. In general, Rev. 
Proc. 89-31 provides guidance concerning the requirement to pay a 
withholding tax, the determination of whether a partner is a foreign 
person, the calculation of partnership ECTI, the amount of the 
withholding tax, and the procedures for reporting and paying over the 
1446 tax. The revenue procedure generally follows the regime set forth 
in section 6655 for estimated tax payments by corporations, and 
requires a partnership to annualize its ECTI and pay over the 1446 tax 
in quarterly installments. Further, the revenue procedure provides 
special rules for publicly traded partnerships and tiered partnership 
structures. A partnership subject to section 1446 must continue to 
comply with Rev. Proc. 89-31, as modified by Rev. Proc. 92-66 
(discussed below), until the partnership's first taxable year beginning 
after the date these regulations are issued in final form.
    Section 7811(i)(6) of the 1989 Act amended section 1446 in three 
respects. First, the amendment provides that, except as provided in 
regulations, a foreign partner's share of the 1446 tax paid by a 
partnership is treated as distributed to such partner on the earlier of 
the day on which such tax is paid by the partnership or the last day of 
the partnership's taxable year for which such tax is paid. Second, the 
amendment grants Treasury and the IRS regulatory authority to apply the 
addition to tax under section 6655 to a partnership as if it were a 
corporation. Third, the amendment clarifies that the applicable 
percentage for a foreign corporate partner is the highest rate of tax 
specified in section 11(b)(1). The changes made by the 1989 Act are 
effective for partnership taxable years beginning after December 31, 
1987, as if originally included as part of the 1988 Act amendments.
    In 1992, Treasury and the IRS issued Rev. Proc. 92-66, which 
modified Rev. Proc. 89-31 in three respects. First, Rev. Proc. 92-66 
provides that the applicable percentage to be used by publicly traded 
partnerships in calculating the 1446 tax is the highest rate of tax 
imposed under section 1, which at that time was 31 percent. Second, the 
revenue procedure allows a partnership to seek a refund from the IRS in 
certain circumstances for amounts it has paid under section 1446. 
Third, the revenue procedure provides that a foreign partnership 
subject to withholding under section 1445(a) during a taxable year is 
allowed to credit the amount withheld under section 1445(a), to the 
extent such amount is allocable to foreign partners, against its 
liability to pay the 1446 tax for that year.

B. Structure of the Proposed Regulations

    In general, the proposed regulations follow the approach in Rev. 
Proc. 89-31 for computing, paying over and reporting the 1446 tax. The 
proposed regulations are set forth in six sections. Section 1.1446-1 
contains rules regarding a partnership's requirement to pay a 
withholding tax, and how a partnership should determine the status of 
its partners (i.e., domestic or foreign, corporate or non-corporate). 
Section 1.1446-2 contains rules for calculating partnership ECTI 
allocable to each foreign partner. Section 1.1446-3 contains rules 
pertaining to a partnership's obligation to pay the 1446 tax on an 
installment basis, including guidance on calculating the 1446 tax, 
reporting and paying over the 1446 tax, and penalties for underpayment 
of the 1446 tax. Section 1.1446-4 contains special rules applicable to 
publicly traded partnerships. These rules generally implement a 
withholding regime based upon the distribution of effectively connected 
income to foreign partners. These regulations also permit publicly 
traded partnerships to elect to withhold and pay over the 1446 tax 
based upon the general rules set forth in Sec. Sec.  1.1446-1 through 
1.1446-3 (withholding based upon ECTI allocable under section 704 to 
foreign partners). Section 1.1446-5 contains rules applicable to tiered 
partnership structures, including rules for looking through certain 
upper-tier foreign partnerships to determine the 1446 tax obligation of 
a lower-tier partnership. Finally, Sec.  1.1446-6 contains the proposed 
effective date of the regulations.
    In addition to the proposed regulatory amendments under section 
1446, these regulations also include proposed amendments to Sec. Sec.  
1.871-10, 1.1443-1, 1.1461-1 through 1.1461-3, 1.1462-1, 1.1463-1, 
301.6109-1, and 301.6721-1, to coordinate the section 1446 withholding 
regime with existing regulations.

C. Determining the Status and Classification of Partners--Sec.  1.1441-
1

    Section 1446 applies only to partnerships with ECTI allocable under 
section 704 to one or more foreign partners. Section 1446(e) defines a 
foreign partner as any partner who is not a United States person. 
Section

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7701(a)(30) defines a United States person to include a citizen or 
resident of the United States, a domestic partnership, a domestic 
corporation, any estate other than a foreign estate within the meaning 
of section 7701(a)(31), and any trust if a court within the United 
States is able to exercise primary supervision over the administration 
of the trust and one or more United States persons have the authority 
to control all substantial decisions of the trust. Section 1446 and the 
legislative history are silent as to how a partnership is to determine 
the domestic or foreign status of its partners.
    Rev. Proc. 89-31 contains rules for determining whether a partner 
is a foreign partner for purposes of section 1446. Under the revenue 
procedure, a partnership may determine a partner's status by relying 
upon a certification of non-foreign status provided by the partner, or 
by relying on any other means. See Rev. Proc. 89-31, Sec.  5.02 and 
Sec.  5.03.
    In order to reduce the paperwork burden imposed on taxpayers and 
avoid conflicting information, the proposed regulations reflect an 
approach different from the approach taken in Rev. Proc. 89-31 for 
determining whether a partner is a foreign partner. The proposed 
regulations generally require a partnership to comply with the 
paperwork requirements used under section 1441 to determine the status 
(domestic or foreign) and the tax classification (corporate or non-
corporate) of its partners. Under the proposed regulations, a 
partnership should obtain either a Form W-8BEN, ``Certificate of 
Foreign Status of Beneficial Owner for U.S. Tax Withholding,'' Form W-
8IMY, ``Certificate of Foreign Intermediary, Flow Through Entity, or 
Certain U.S. Branches for United States Tax Withholding,'' or Form W-9, 
``Request for Taxpayer Identification Number and Certification,'' from 
each of its partners. Additionally, special rules are provided with 
respect to domestic and foreign trusts all or a portion of which are 
treated as owned by a grantor or another person under subpart E of 
subchapter J of the Code. The documentation requirement set forth in 
the proposed regulations will allow a partnership required to withhold 
under both section 1441 and section 1446 to receive one form instead of 
two from each of its partners, and thus will reduce the paperwork and 
recordkeeping burden imposed upon partners and partnerships. Further, 
the required documentation will also serve to establish a uniform basis 
for determining the foreign or non-foreign status of partners and to 
reduce the instances where a partnership receives inconsistent 
documentation.
    In the absence of a valid Form W-8BEN, Form W-8IMY, or Form W-9 
from a partner (or upon the receipt of a form that the partnership has 
actual knowledge or reason to know is incorrect or unreliable), the 
proposed regulations contain a presumption that the partner is a 
foreign person and that the partnership must pay 1446 tax on ECTI 
allocable to the partner. However, this presumption does not apply, and 
the partnership shall not be liable for 1446 tax with respect to a 
partner, to the extent the partnership relies on other means to 
ascertain the non-foreign status of a partner, and the partnership is 
correct in its determination that such partner is a U.S. person. This 
approach is similar to Rev. Proc. 89-31, which permitted partnerships 
to rely on other means to ascertain the non-foreign status of a 
partner. See Rev. Proc. 89-31, Sec.  5.03. Under the proposed 
regulations, when the presumption of foreign status applies, the 
following rules apply for purposes of determining the applicable rate 
that will apply in computing the 1446 tax. If the partnership knows 
that the partner is an individual and not an entity, the partnership 
shall compute the 1446 tax with respect to such partner using the 
highest rate in section 1. If the partnership knows that the partner is 
an entity that is a corporation under Sec.  301.7701-2(b)(8) (included 
on the per se list of entities under the entity classification 
regulations), the partnership shall treat the partner as a foreign 
corporation and compute the 1446 tax with respect to such partner using 
the highest rate in section 11(b)(1). In all other cases, including 
where the partnership cannot reliably determine the status of the 
partner, the proposed regulations presume that the partner is either a 
corporate or non-corporate partner, based upon whichever classification 
results in a higher 1446 tax being due. This presumption is necessary 
to prevent a partner from obtaining a more favorable withholding result 
than would have been achieved if the partner complied with the 
documentation requirements. The duration and validity of the forms 
required for purposes of section 1446 is intended to be consistent with 
the standards applicable when these forms are submitted in the context 
of sections 1441, 1442, and 3406. These forms and their instructions 
will be modified as necessary to facilitate their use under section 
1446.

D. Determining a Foreign Partner's Allocable Share of Partnership 
ECTI--Sec.  1.1446-2

    The proposed regulations contain rules for computing partnership 
ECTI allocable to foreign partners. Consistent with Rev. Proc. 89-31, 
the partnership determines its ECTI allocable to a foreign partner 
using an aggregate approach. The partnership first determines the 
effectively connected partnership items allocable to each of the 
partnership's foreign partners. Partnership ECTI allocable to all 
foreign partners then is computed by combining all of the foreign 
partners' allocable shares of partnership ECTI.
    The proposed regulations also provide guidance concerning capital 
losses, suspended losses, and loss carryovers and carrybacks when 
determining a foreign partner's allocable share of partnership ECTI. 
The proposed regulations permit capital losses allocable to a foreign 
partner to offset such partner's allocable share of capital gains 
consistent with section 1211(a). Solely for purposes of section 1446, 
the proposed regulations do not permit the partnership to consider 
section 1211(b), which permits an individual to use capital losses in 
excess of capital gains to the extent of $3,000 per taxable year. 
Further, the proposed regulations do not permit the partnership to take 
into account in determining a foreign partner's allocable share of 
partnership ECTI any losses of a partner that are carried over or back 
or are suspended.
    A number of issues arise under section 1446 where the partnership 
has cancellation of indebtedness income under section 61(a)(12), 
including difficulties arising because the exclusion of cancellation of 
indebtedness income under section 108 is applied at the partner level 
rather than at the partnership level. See section 108(d)(6). These 
proposed regulations do not specifically address the treatment of 
cancellation of indebtedness income of a partnership under section 
1446. Comments are requested concerning the appropriate treatment under 
section 1446 of such income allocable to a foreign partner.

E. Calculating, Paying Over, and Reporting the 1446 Tax--Sec.  1.1446-3

    Section 1446(f)(2) provides that the Secretary shall prescribe such 
regulations as may be necessary to carry out the purposes of section 
1446, including regulations providing (1) that, for purposes of section 
6655, the withholding tax imposed under section 1446 be treated as a 
tax imposed by section 11 and any partnership required

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to pay such tax be treated as a corporation, and (2) appropriate 
adjustments in applying section 6655 with respect to such withholding. 
Section 6655 generally requires a corporation to make estimated tax 
payments throughout its taxable year, and determines an addition to tax 
for any underpayment of the required installments.
    Rev. Proc. 89-31 generally requires a partnership, other than a 
publicly traded partnership, to determine its ECTI allocable to foreign 
partners, and, ultimately, its 1446 tax obligation, by annualizing its 
effectively connected items under one of the three options generally 
available to corporations under section 6655 when paying estimated 
taxes. As an alternative, Rev. Proc. 89-31 permits a partnership to 
determine its 1446 tax obligation based upon a safe harbor. Under both 
the safe harbor and the annualization methods, a partnership must pay 
the 1446 tax on an installment basis.
    The proposed regulations adopt, with some modifications, the 
estimated tax payment rules set forth in section 6655, including the 
imposition of an addition to tax for an underpayment of the 1446 tax. 
Consistent with Rev. Proc. 89-31, the proposed regulations require a 
partnership to pay its 1446 tax obligation on an installment basis, and 
pay its 1446 tax either based upon annualizing its income or based upon 
a safe harbor. The proposed regulations broaden the approaches 
available in Rev. Proc. 89-31 in certain circumstances. Under the 
proposed regulations, a partnership that chooses to annualize its 
income may use certain methods in section 6655 that address the 
seasonality of income earned by a partnership. See section 6655(e). 
Further, the proposed regulations modify the safe harbor set forth in 
Rev. Proc. 89-31 so that a partnership does not need to have filed Form 
1065, ``U.S. Return of Partnership Income,'' and Form 8804, ``Annual 
Return for Partnership Withholding Tax (Section 1446),'' at the time it 
makes an installment payment. Instead, it is sufficient if the 
partnership timely files these forms (taking into account extensions).

F. Special Rule for Tiered Trust or Estate Structures--Sec.  1.1446-
3(d)(2)(iii)

    Treasury and the IRS are concerned about the potential abuse of 
tiered trust structures to claim inappropriate refunds of the 1446 tax, 
to avoid reporting by a beneficiary of ECTI earned by a partnership, or 
to avoid section 1446 entirely. Existing provisions contemplate that 
entitlement to a credit or refund of any section 1446 withholding tax 
follows the liability for tax. Section 1446(d) provides that each 
foreign partner of a partnership shall be allowed a credit under 
section 33 for such partner's share of the 1446 tax paid by the 
partnership. A foreign partner's share of any 1446 tax paid by the 
partnership is treated as distributed to the partner by such 
partnership. Section 1462 provides that income on which any tax is 
required to be withheld at the source under chapter 3 of the Code, 
including section 1446, shall be included in the return of the 
recipient of such income, and any amount of tax so withheld may be 
credited against the amount of income tax as computed in such return. 
The regulations under section 1462 explain that an amount withheld on a 
payment to a fiduciary, partnership, or intermediary is deemed to have 
been paid by the taxpayer ultimately liable for the tax upon such 
income. See Sec.  1.1462-1(b). Sections 702(b), 652(b), and 662(b) 
ensure that the character of income (e.g., income that is effectively 
connected income) of a partnership allocated to a trust (whether 
domestic or foreign) is preserved in the hands of a beneficiary (see 
Rev. Rul. 85-60 (1985-1 C.B. 187)).
    The proposed regulations include clarification of the regulations 
under section 1462 to coordinate with section 1446(d) to provide that a 
foreign trust's or estate's allocable share of ECTI is deemed to have 
been paid by the taxpayer ultimately liable for tax upon such income. 
In the case of a foreign grantor trust, the taxpayer ultimately liable 
for the tax upon such income is the grantor of such trust.
    Further, Sec.  1.1446-3 of the proposed regulations includes two 
rules and several examples pertaining to tiered trust or estate 
structures. The rules are intended to match the credit claimed under 
section 33 with the taxpayer that reports and pays tax on the ECTI upon 
which the credit is based. The first rule applies where a foreign trust 
or estate is a partner in a partnership required to pay the 1446 tax 
and the beneficiary of the foreign trust or estate is either another 
foreign trust (with a foreign person as a beneficiary of such trust) or 
a foreign person. In such a circumstance, the proposed regulations 
provide that the foreign trust or estate is only entitled to claim the 
portion of the credit under section 33 that corresponds to the portion 
of the associated effectively connected income on which it bears the 
tax liability.
    The second rule addresses the use of a domestic trust. The second 
rule applies where a partnership knows or has reason to know that a 
foreign person that is the ultimate beneficial owner of the effectively 
connected income holds its interest in the partnership through a 
domestic trust, and such domestic trust was formed or availed of with a 
principal purpose of avoiding the 1446 tax. The use of a domestic trust 
in a tiered trust structure may have a principal purpose of avoiding 
the 1446 tax even though the tax avoidance purpose is outweighed by 
other purposes when taken together. Where applicable, this rule allows 
the IRS to impose the 1446 tax obligation on such partnership as if 
each domestic trust in the chain is a foreign trust.

G. Publicly Traded Partnerships--Sec.  1.1446-4

    Section 1446(f)(1) provides that the Secretary shall prescribe 
regulations to apply section 1446 in the case of publicly traded 
partnerships. In this regard, the legislative history to section 1446 
specifically notes that special rules may be necessary in identifying a 
publicly traded partnership's partners as U.S. or foreign. See H.R. 
Rep. No. 100-795, 100th Cong., 2d Sess. 291 (1988); S. Rep. No. 100-
445, 100th Cong., 2d Sess. 305 (1988).
    Rev. Proc. 89-31 provides special rules for publicly traded 
partnerships. Under Rev. Proc. 89-31, the term publicly traded 
partnership means a regularly traded partnership within the meaning of 
the regulations under section 1445(e)(1), but not a publicly traded 
partnership treated as a corporation under the general rules of section 
7704(a). Generally, publicly traded partnerships with effectively 
connected income, gain or loss are required to withhold based upon 
distributions made to foreign partners. Rev. Proc. 92-66 modified the 
applicable percentage for withholding on distributions to the highest 
rate of tax imposed under section 1, and applied that percentage to 
both corporate and non-corporate partners.
    Under Rev. Proc. 89-31, a publicly traded partnership generally 
determines the tax status of its partners by receiving either a 
certificate of non-foreign status, a Form W-8, or a Form W-9 from its 
partners, or by relying on other means. Further, nominees that hold 
interests in a publicly traded partnership on behalf of one or more 
foreign partners may be responsible for the 1446 tax liability for 
foreign partners under certain circumstances. Finally, Rev. Proc. 89-31 
permits publicly traded partnerships to elect to apply the general 
rules that determine the 1446 tax based on a foreign partner's 
allocable share of partnership ECTI rather than on distributions to 
foreign partners. Under

[[Page 52470]]

Rev. Proc. 89-31, the publicly traded partnership makes this election 
by complying with the payment and reporting requirements of the general 
rules and attaching a statement to its annual return of withholding tax 
indicating that the election is being made.
    The proposed regulations modify several of the rules for publicly 
traded partnerships set forth in Rev. Proc. 89-31. First, the proposed 
regulations define publicly traded partnership solely by reference to 
the definition in section 7704. Second, the proposed regulations 
provide that the documentation requirements and presumptions of Sec.  
1.1446-1 apply to publicly traded partnerships, thereby requiring such 
partnerships to obtain a Form W-8BEN, Form W-8IMY, or Form W-9 from 
each of their partners if they do not rely on other means to determine 
the status of their partners. Third, the proposed regulations provide 
that the applicable percentage for withholding on distributions is the 
rate applicable under section 1446(b).
    Comments are requested as to whether the special rules applicable 
to publicly traded partnerships should be extended to other 
partnerships. Specifically, Treasury and the IRS are considering 
whether these special rules should apply to partnerships that make an 
election under section 775 of the Code or partnerships with a specified 
minimum number of partners.

H. Tiered Partnership Structures--Sec.  1.1446-5

    Special concerns arise when a foreign partnership (upper-tier 
partnership) is a partner in a second partnership (lower-tier 
partnership) that is subject to section 1446. Section 1446(f) provides 
the Secretary with regulatory authority to prescribe rules necessary to 
carry out the purposes of the section. The legislative history to 
section 1446 notes that in the context of tiered partnership 
structures, ``rules may be necessary to prevent the imposition of more 
tax than will be properly due (for example, rules to prevent the tax 
from being imposed on more than one partnership and rules to determine 
the applicable percentages).'' H.R. Rep. No. 100-795, 100th Cong., 2d 
Sess. 291 (1988); S. Rep. No. 100-445, 100th Cong., 2d Sess. 305 
(1988).
    Rev. Proc. 89-31 employs an entity approach in computing the 1446 
tax obligation of a partnership that has a foreign partnership as one 
of its partners. Under the entity approach, a lower-tier partnership 
must pay a 1446 tax at the highest rate in section 1 on an upper-tier 
foreign partnership's allocable share of ECTI, regardless of the 
composition of the upper-tier partnership. Rev. Proc. 89-31 provides 
the upper-tier partnership a credit for a portion of the 1446 tax paid 
by the lower-tier partnership to avoid multiple application of the 1446 
tax. This approach may result in a partnership paying a 1446 tax that 
is greater in amount than would have been required if the partners of 
the upper-tier partnership had been direct partners of the lower-tier 
partnership, for example, where some of the partners of the upper-tier 
partnership are U.S. persons.
    The proposed regulations modify the rules in Rev. Proc. 89-31 with 
respect to certain tiered partnership structures to address this 
situation. The proposed regulations provide that if a partner in a 
partnership that is required to pay the 1446 tax is a foreign 
partnership, it may submit a completed Form W-8IMY to the lower-tier 
partnership. If the upper-tier foreign partnership completes and 
submits Form W-8IMY to the lower-tier partnership, and passes along the 
Form W-8BEN, Form W-8IMY, or Form W-9 it received for some or all of 
its partners, as well as information describing how effectively 
connected items are allocated among its partners, the lower-tier 
partnership shall look through the upper-tier partnership to the 
partners of the upper-tier partnership (to the extent that it has 
received the appropriate documentation and allocation information and 
can reliably associate the allocation of its effectively connected 
items to the partners of the upper-tier partnership) to determine its 
1446 tax obligation. To the extent the lower-tier partnership receives 
a valid Form W-8IMY from the upper-tier partnership but cannot reliably 
associate the upper-tier partnership's allocable share of effectively 
connected partnership items with a withholding certificate for each of 
the upper-tier partnership's partners, the lower-tier partnership shall 
withhold at the higher of the applicable percentages in section 
1446(b).
    Therefore, in appropriate circumstances, the lower-tier partnership 
may determine its 1446 tax obligation based on the status of its 
indirect partners. This approach generally is consistent with the 
paperwork requirements under section 1441 applicable to a 
nonwithholding foreign partnership and will ensure that the 1446 tax 
paid by the partnership more closely approximates the actual tax 
liability of the beneficial owner of the income in the case of a tiered 
partnership structure. An upper-tier foreign partnership with foreign 
partners remains obligated to file and report with respect to its 1446 
tax obligation. Accordingly, the upper-tier partnership must comply 
with the general rules of section 1446, including requiring payment in 
installments, and reporting and passing along the credit under section 
33 to its partners, which in these situations will also include the tax 
paid at the lower-tier partnership level.
    Comments are requested on the general approach taken in these 
proposed regulations for situations involving two or more tiers of 
partnerships. Further, comments are requested as to the desirability 
and administrability of an alternative approach that allows a domestic 
upper-tier partnership with foreign partners to elect to pass 
information regarding its partners to the lower-tier partnership and 
have the lower-tier partnership pay the 1446 tax based upon the 
composition of the partners of the upper-tier partnership.

I. Withholding in Excess of Partner's Actual Tax Liability

    Since the enactment of section 1446, Treasury and the IRS have 
received and considered several comments regarding the potential for 
section 1446 to require a partnership to pay a withholding tax in an 
amount that exceeds a foreign partner's actual tax liability for a 
taxable year. This situation may occur for several reasons, including 
that: (1) Section 1446 does not take into account a partner's losses 
from outside the partnership during the year, or a partner's loss 
carryovers; and (2) section 1446 requires withholding at the maximum 
statutory rates generally applicable to a foreign partner with 
effectively connected income. Section 1446 does not contain provisions 
for reducing or eliminating the general withholding obligation like the 
provisions contained in section 1445 (which impose a withholding tax in 
the case of the disposition of an interest in United States real 
property). See section 1445(c). Rev. Proc. 89-31 provides that section 
1446 applies instead of section 1445(e)(1) where the two sections 
overlap, and, accordingly, partnerships owning U.S. real property are 
not permitted to reduce withholding on gains from the disposition of 
such property through the use of the procedures available under section 
1445. See also Sec.  8.01 of Rev. Proc. 2000-35 (2000-2 C.B. 211).
    Treasury and the IRS considered comments regarding alternative 
approaches for adjusting the withholding tax obligation under section 
1446 to more closely approximate a foreign partner's actual

[[Page 52471]]

U.S. tax liability. These proposed regulations contain provisions aimed 
at mitigating the potential for withholding in excess of the partner's 
actual tax liability (see e.g., Sec.  1.1446-5). These proposed 
regulations do not contain other provisions that have been suggested 
because, among other reasons, of concerns regarding the 
administrability of such approaches. Comments are requested with 
respect to approaches that would permit an adjustment to the amount of 
1446 tax obligation that are consistent with the statute and 
legislative history and administrable by partnerships, partners and the 
IRS. In particular, comments are requested on whether the rules 
coordinating sections 1445 and 1446 should be modified to address these 
concerns.

J. Effective Date

    These regulations are proposed to apply to partnership taxable 
years beginning after the date these regulations are published as final 
regulations in the Federal Register.

Effect on Other Documents

    The following publications will be obsolete for partnership taxable 
years beginning after the date these regulations are published as final 
regulations in the Federal Register:

Rev. Proc. 89-31 (1989-1 C.B. 895)
Rev. Proc. 92-66 (1992-2 C.B. 428)

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. It also has been determined that section 533(b) of the 
Administrative Procedures Act (5 U.S.C. chapter 5) does not apply to 
these regulations. With respect to the collections of information 
contained in Sec.  1.871-10, Sec.  1.1446-1 (pertaining to domestic 
grantor trusts), and Sec.  1.1446-3 (pertaining to foreign trusts), it 
is hereby certified that these collections of information will not have 
a significant economic impact on a substantial number of small 
entities. This certification is based upon the fact that only limited 
small entities are impacted by these collections and the burden 
associated with such collections is .5 hours. With respect to the 
collections of information in Sec. Sec.  1.1446-3 (pertaining to a 
partnership required to notify its foreign partners of an installment 
payment of 1446 tax paid on behalf of such partner) and 1.1446-4, it is 
hereby certified that these sections will not impose a significant 
economic impact on a substantial number of small entities. This 
certification is based upon the fact that while approximately 15,000 
small entities will be impacted by these sections, the estimated annual 
burden associated with these sections is only .5 hours per respondent. 
Moreover, the information collection in Sec.  1.1446-4 is voluntary. 
Therefore, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to 
section 7805(f) of the Code, this notice of proposed rulemaking will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. 
Alternatively, taxpayers may submit comments electronically directly to 
the IRS Internet Site at http://www.irs.gov/regs. All comments will be 
available for public inspection and copying. The Treasury Department 
and IRS request comments on the clarity of the proposed regulations and 
how they may be made easier to understand.
    A public hearing has been scheduled for December 4, 2003, beginning 
at 10 a.m. in the IRS Auditorium of the Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. All visitors must come to the 
Constitution Avenue entrance and present photo identification to enter 
the building. Because of access restrictions, visitors will not be 
admitted beyond the immediate entrance area more than 30 minutes before 
the hearing starts. For information about having your name placed on 
the building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit electronic or 
written comments and an outline of the topics to be discussed and the 
time to be devoted to each topic (signed original and eight (8) copies) 
by November 13, 2003. A period of 10 minutes will be allotted to each 
person for making comments. An agenda showing the schedule of speakers 
will be prepared after the deadline for receiving outlines has passed. 
Copies of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is David J. 
Sotos, Office of the Associate Chief Counsel (International). However, 
other personnel from the Treasury Department and IRS participated in 
their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and Recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as 
follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

Sec.  1.1446-3 also issued under 26 U.S.C. 1446(f). * * *
Sec.  1.1446-4 also issued under 26 U.S.C. 1446(f). * * *

    Par. 2. In Sec.  1.871-10, paragraph (d)(3) is amended by adding a 
sentence at the end of that paragraph, and paragraph (e) is amended by 
revising the first sentence to read as follows:


Sec.  1.871-10  Election to treat real property income as effectively 
connected with U.S. business.

* * * * *
    (d) * * *
    (3) Election by partnership. * * * If the nonresident alien or 
foreign corporation makes an election, such person must provide the 
partnership a Form W-8BEN, ``Certificate of Foreign Status of 
Beneficial Owner for U.S. Withholding,'' and must indicate that the 
nonresident alien or foreign corporation has made the election under 
this section to treat real property income as effectively connected 
income.
    (e) Effective date. This section shall apply for taxable years 
beginning after December 31, 1966, except the last sentence of 
paragraph (d)(3) shall apply to partnership taxable years beginning 
after the date these regulations are published as final regulations in 
the Federal Register. * * *
    Par. 3. Sec.  1.1443-1 is amended by:
    1. Revising the first sentence of paragraph (a) and adding a 
sentence at the end of the paragraph.
    2. Revising paragraph (c)(1).
    The revision and additions read as follows:

[[Page 52472]]

Sec.  1.1443-1  Foreign tax-exempt organizations.

    (a) Income includible in computing unrelated business taxable 
income. In the case of a foreign organization that is described in 
section 501(c), amounts paid or effectively connected taxable income 
allocable to the organization that are includible under section 512 in 
computing the organization's unrelated business taxable income are 
subject to withholding under Sec. Sec.  1.1441-1, 1.1441-4, 1.1441-6, 
and 1.1446-1 through 1.1446-5, in the same manner as payments or 
allocations of effectively connected taxable income of the same amounts 
to any foreign person that is not a tax-exempt organization. * * * See 
also Sec.  1.1446-3(c)(3).
* * * * *
    (c) * * *
    (1) In general. This section applies to payments made after 
December 31, 2000, except that the references in paragraph (a) of this 
section to effectively connected taxable income and withholding under 
section 1446 shall apply to partnership taxable years beginning after 
the date these regulations are published as final regulations in the 
Federal Register.
* * * * *
    Par. 4. Sections 1.1446-0 through 1.1446-6 are added to read as 
follows.


Sec.  1.1446-0  Table of contents.

    This section lists the captions contained in Sec. Sec.  1.1446-1 
through 1.1446-6.

Sec.  1.1446-1 Withholding tax on foreign partners' share of 
effectively connected taxable income.

    (a) In general.
    (b) Steps in determining 1446 tax obligation.
    (c) Determining whether a partnership has a foreign partner.
    (1) In general.
    (2) Forms W-8BEN, W-8IMY, and W-9.
    (i) In general.
    (ii) Effect of Forms W-8BEN, W-8IMY, W-9, and statement.
    (iii) Requirements for certificates to be valid.
    (A) When period of validity expires.
    (B) Required information for Forms W-8BEN and W-8IMY.
    (iv) Partner must provide new withholding certificate when there 
is a change in circumstances.
    (v) Partnership must retain withholding certificates.
    (3) Presumption of foreign status in absence of valid Form W-
8BEN, Form W-8IMY, Form W-9, or statement.
    (4) Consequences when partnership knows or has reason to know 
that Form W-8BEN, Form W-8IMY, or Form W-9 is incorrect or 
unreliable and does not withhold.
Sec.  1.1446-2 Determining a partnership's effectively connected 
taxable income allocable to foreign partners under section 704.
    (a) In general.
    (b) Computation.
    (1) In general.
    (2) Income and gain rules.
    (i) Application of the principles of section 864.
    (ii) Income treated as effectively connected.
    (iii) Exempt income.
    (3) Deduction and losses.
    (i) Oil and gas interests.
    (ii) Charitable contributions.
    (iii) Net operating losses and other suspended or carried 
losses.
    (iv) Interest deductions.
    (v) Limitation on capital losses.
    (vi) Other deductions.
    (vii) Limitations on deductions.
    (4) Other rules.
    (i) Exclusion of items allocated to U.S. partners.
    (ii) Partnership credits.
    (5) Examples.
Sec.  1.1446-3 Time and manner of calculating and paying over the 
1446 tax.
    (a) In general.
    (1) Calculating 1446 tax.
    (2) Applicable percentage.
    (b) Installment payments.
    (1) In general.
    (2) Calculation.
    (i) General application of the principles of section 6655.
    (ii) Annualization methods.
    (iii) Partner's estimated tax payments.
    (iv) Partner whose interest terminates during the partnership's 
taxable year.
    (v) Exceptions and modifications to the application of the 
principles under section 6655.
    (A) Inapplicability of special rules for large corporations.
    (B) Inapplicability of special rules regarding early refunds.
    (C) Period of underpayment.
    (D) Other taxes.
    (E) 1446 tax treated as tax under section 11.
    (F) Prior year tax safe harbor.
    (3) 1446 tax safe harbor.
    (i) In general.
    (ii) Permission to change to standard annualization method.
    (c) Coordination with other withholding rules.
    (1) Fixed or determinable, annual or periodical income.
    (2) Real property gains.
    (i) Domestic partnerships.
    (ii) Foreign partnerships.
    (3) Coordination with section 1443.
    (d) Reporting and crediting the 1446 tax.
    (1) Reporting 1446 tax.
    (i) Reporting of installment tax payments, installment tax 
payment due dates, and notification to partners of installment tax 
payments.
    (ii) Payment due dates.
    (iii) Annual return and notification to partners.
    (iv) Information provided to beneficiaries of foreign trusts and 
estates.
    (v) Attachments required of foreign trusts and estates.
    (vi) Attachments required of beneficiaries of foreign trusts and 
estates.
    (vii) Information provided to beneficiaries of foreign trusts 
and estates that are partners in certain publicly traded 
partnerships.
    (2) Crediting 1446 tax against a partner's U.S. tax liability.
    (i) In general.
    (ii) Substantiation for purposes of claiming the credit under 
section 33.
    (iii) Tiered structures including trusts or estates.
    (A) Foreign estates and trusts.
    (B) Use of domestic trusts to circumvent section 1446.
    (iv) Refunds to withholding agent.
    (v) 1446 tax treated as cash distribution to partners.
    (vi) Examples.
    (e) Liability of partnership for failure to withhold.
    (1) In general.
    (2) Proof that tax liability has been satisfied.
    (3) Liability for interest and penalties.
    (f) Effect of withholding on partner.
Sec.  1.1446-4 Publicly traded partnerships.
    (a) In general.
    (b) Definitions.
    (1) Publicly traded partnership.
    (2) Applicable percentage.
    (3) Nominee.
    (4) Qualified notice.
    (c) Time and manner of payment.
    (d) Rules for designation of nominees to withhold tax under 
section 1446.
    (e) Determining foreign status of partners.
    (1) In general.
    (2) Presumptions regarding payee's status in absence of 
documentation.
    (f) Distributions subject to withholding.
    (1) In general.
    (2) In-kind distributions.
    (3) Ordering rule relating to distributions.
    (4) Coordination with section 1445.
    (g) Election to withhold based upon ECTI allocable to foreign 
partners instead of withholding on distributions.
Sec.  1.1446-5 Tiered partnership structures.
    (a) In general.
    (b) Reporting requirements.
    (1) In general.
    (2) Publicly traded partnerships.
    (c) Look through rules for foreign upper-tier partnerships.
    (d) Examples.
Sec.  1.1446-6 Effective date.


Sec.  1.1446-1  Withholding tax on foreign partners' share of 
effectively connected taxable income.

    (a) In general. If a domestic or foreign partnership has 
effectively connected taxable income as computed under Sec.  1.1446-2 
(ECTI), for any partnership tax year, and any portion of such taxable 
income is allocable under section 704 to a foreign partner, then the 
partnership must pay a withholding tax under section 1446 (1446 tax) at 
the time and in the manner set forth in this section and Sec. Sec.  
1.1446-2 through 1.1446-5.
    (b) Steps in determining 1446 tax obligation. In general, a 
partnership determines its 1446 tax as follows. The partnership 
determines whether it has any foreign partners in accordance with

[[Page 52473]]

paragraph (c) of this section. If the partnership does not have any 
foreign partners (including any person presumed to be foreign under 
paragraph (c) of this section and any domestic trust treated as foreign 
under Sec.  1.1446-3(d)) during its taxable year, it generally will not 
have a 1446 tax obligation. If the partnership has one or more foreign 
partners, it then determines under Sec.  1.1446-2 whether it has ECTI 
any portion of which is allocable to one or more of the foreign 
partners. If the partnership has ECTI allocable to one or more of its 
foreign partners, the partnership computes its 1446 tax, pays over 1446 
tax, and reports the amount paid in accordance with the rules in Sec.  
1.1446-3. For special rules applicable to publicly traded partnerships, 
see Sec.  1.1446-4. For special rules applicable to tiered partnership 
structures, see Sec.  1.1446-5.
    (c) Determining whether a partnership has a foreign partner--(1) In 
general. Except as otherwise provided in Sec.  1.1446-3, only a 
partnership that has at least one foreign partner during the 
partnership's taxable year can have a 1446 tax liability. The term 
foreign partner means any partner of the partnership who is not a U.S. 
person within the meaning of section 7701(a)(30). Thus, a partner of 
the partnership is a foreign partner if the partner is a nonresident 
alien individual, foreign partnership, foreign corporation, foreign 
estate or trust, as those terms are defined under section 7701 and the 
regulations thereunder, or a foreign government within the meaning of 
section 892 and the regulations thereunder. For purposes of this 
section, a partner that is treated as a U.S. person for all income tax 
purposes (by election or otherwise, see e.g., sections 953(d), 1504(d)) 
will not be a foreign partner, provided the partner has provided the 
partnership a valid Form W-9, ``Request for Taxpayer Identification 
Number and Certification,'' or if the partnership uses other means to 
determine that the partner is not a foreign partner (see paragraph 
(c)(3) of this section). A partner that is treated as a U.S. person 
only for certain specified purposes is considered a foreign partner for 
purposes of section 1446, and a partnership must pay a withholding tax 
on the portion of ECTI allocable to that partner. For example, a 
partnership must generally pay 1446 tax on ECTI allocable to a foreign 
corporate partner that has made an election under section 897(i).
    (2) Forms W-8BEN, W-8IMY, and W-9--(i) In general. Except as 
otherwise provided in this paragraph (c)(2) or paragraph (c)(3) of this 
section, a partnership must determine whether a partner is a foreign 
partner, and the partner's tax classification (e.g., corporate or non-
corporate), by obtaining from the partner a Form W-8BEN, ``Certificate 
of Foreign Status of Beneficial Owner for United States Tax 
Withholding,'' Form W-8IMY, ``Certificate of Foreign Intermediary, 
Flow-Through Entity, or Certain U.S. Branches for United States Tax 
Withholding,'' or a Form W-9, as applicable. Specifically, a foreign 
partner that is a nonresident alien individual, a foreign estate or 
trust (other than a grantor trust described in this paragraph (c)(2)), 
a foreign corporation, or a foreign government should provide a valid 
Form W-8BEN. A partner that is a foreign partnership should provide a 
valid Form W-8IMY. A partner that is a U.S. person (other than a 
grantor trust described in this paragraph (c)(2)), including a domestic 
partnership, should provide a valid Form W-9. An entity that is 
disregarded as an entity separate from its owner under Sec.  301.7701-3 
of this chapter may not submit a Form W-8BEN, W-8IMY, or Form W-9. See 
Sec. Sec.  301.7701-1 through 301.7701-3 of this chapter for 
determining the U.S. Federal tax classification of a partner. To the 
extent that a grantor or another person is treated as the owner of any 
portion of a trust under subpart E of subchapter J of the Internal 
Revenue Code, such trust shall not provide a Form W-8BEN or Form W-9 to 
the partnership, except to the extent that such trust is providing 
documentation on behalf of the grantor or other person treated as the 
owner of a portion of such trust as required by this paragraph (c)(2). 
Instead, if such trust is a foreign trust, the trust shall submit Form 
W-8IMY to the partnership identifying itself as a grantor trust and 
shall provide such documentation (e.g., Forms W-8BEN, W-8IMY, or W-9) 
and information pertaining to its owner(s) to the partnership that 
permits the partnership to reliably associate (within the meaning of 
Sec.  1.1441-1(b)(2)(vii)) such portion of the trust's allocable share 
of partnership ECTI with the grantor or other person that is the owner 
of such portion of the trust. If such trust is a domestic trust, the 
trust shall furnish the partnership a statement under penalty of 
perjury that the trust is, in whole or in part, a grantor trust and 
identifying that portion of the trust that is treated as owned by a 
grantor or another person under subpart E of subchapter J of the 
Internal Revenue Code. The trust shall also provide such documentation 
and information (e.g., Forms W-8BEN, W-8IMY, or W-9) pertaining to its 
owner(s) to the partnership that permits the partnership to reliably 
associate such portion of the trust's allocable share of partnership 
ECTI with the grantor or other person that is the owner of such portion 
of the trust. With respect to nominees, only nominees described in 
Sec.  1.1446-4(b)(3) holding interests in publicly traded partnerships 
subject to Sec.  1.1446-4 may submit a Form W-9. See Sec.  1.1446-4 for 
additional documentation that may be submitted by such a nominee. In 
all other cases where a nominee holds an interest in a partnership, the 
beneficial owner of the partnership interest, not the nominee, shall 
submit Form W-8BEN, Form W-8IMY, or Form W-9. A partnership that has 
obtained a valid Form W-8BEN, Form W-8IMY, or Form W-9 from a partner, 
nominee, or beneficial owner prior to the due date for paying any 1446 
tax may rely on it to the extent provided in this paragraph (c)(2).
    (ii) Effect of Forms W-8BEN, W-8IMY, W-9, and Statement. In 
general, for purposes of this section, a partnership may rely on a 
valid Form W-8BEN, Form W-8IMY, Form W-9, statement described in Sec.  
1.1446-4(e)(1), or statement described in this paragraph (c)(2) from a 
partner, nominee, beneficial owner, or grantor trust to determine 
whether that person, beneficial owner, or the owner of a grantor trust, 
is a domestic or foreign partner or a nominee, and if such person is a 
foreign partner, to determine whether or not such person is a 
corporation for U.S. tax purposes. To the extent a partnership receives 
a Form W-8IMY from a foreign grantor trust or a statement described in 
this paragraph (c)(2) from a domestic grantor trust, but does not 
receive a Form W-8BEN, Form W-8IMY, or Form W-9 identifying such 
grantor or other person, the rules of paragraph (c)(3) of this section 
shall apply. Further, a partnership may not rely on a Form W-8BEN, Form 
W-8IMY, Form W-9, or statement described in Sec.  1.1446-4(e)(1) or 
this paragraph (c)(2), and such form or statement is therefore not 
valid, if the partnership has actual knowledge or has reason to know 
that any information on the withholding certificate or statement is 
incorrect or unreliable and, if based on such knowledge or reason to 
know, it should pay a 1446 tax in an amount greater than would be the 
case if it relied on the information or certifications. A partnership 
has reason to know that information on a withholding certificate or 
statement is incorrect or unreliable if its knowledge

[[Page 52474]]

of relevant facts or statements contained on the form or other 
documentation is such that a reasonably prudent person in the position 
of the withholding agent would question the claims made. See Sec. Sec.  
1.1441-1(e)(4)(viii) and 1.1441-7(b)(1) and (2). If the partnership 
does not know or have reason to know that a Form W-8BEN, Form W-8IMY, 
Form W-9, or statement received from a partner, nominee, beneficial 
owner, or grantor trust contains incorrect or unreliable information, 
but it subsequently determines that it does contain incorrect or 
unreliable information, and, based on such knowledge the partnership 
should pay 1446 tax in an amount greater than would be the case if it 
relied on the information or certification, the partnership will not be 
subject to penalties for its failure to pay the 1446 tax in reliance on 
such form or statement for any installment payment date prior to the 
date that the determination is made. See Sec. Sec.  1.1446-1(c)(4) and 
1.1446-3 concerning penalties for failure to pay the withholding tax 
when a partnership knows or has reason to know that the form or 
statement is incorrect or unreliable.
    (iii) Requirements for certificates to be valid. Except as 
otherwise provided in this paragraph (c), for purposes of this section, 
the validity of a Form W-9 shall be determined under section 3406 and 
Sec.  31.3406(h)-3(e) of this chapter which establish when such form 
may be reasonably relied upon. A Form W-8BEN, or Form W-8IMY is only 
valid for purposes of this section if its validity period has not 
expired, the partner submitting the form has signed it under penalties 
of perjury, and it contains all the required information.
    (A) When period of validity expires. For purposes of this section, 
a Form W-8BEN or W-8IMY submitted by a partner shall be valid until the 
end of the period of validity determined for such form under Sec.  
1.1441-1(e). With respect to a foreign partnership submitting Form W-
8IMY, the period of validity of such form shall be determined under 
Sec.  1.1441-1(e) as if such foreign partnership submitted the form 
required of a nonwithholding foreign partnership. See Sec.  1.1441-
1(e)(4)(ii).
    (B) Required information for Forms W-8BEN and W-8IMY. Forms W-8BEN 
and W-8IMY submitted under this section must contain the partner's 
name, permanent address and Taxpayer Identification Number (TIN), the 
country under the laws of which the partner is formed, incorporated or 
governed (if the person is not an individual), the classification of 
the partner for U.S. federal tax purposes (e.g., partnership, 
corporation), and any other information required to be submitted by the 
forms or instructions to Form W-8BEN or Form W-8IMY, as applicable.
    (iv) Partner must provide new withholding certificate when there is 
a change in circumstances. The principles of Sec.  1.1441-
1(e)(4)(ii)(D) shall apply when a change in circumstances has occurred 
(including situations where the status of a U.S. person changes) that 
requires a partner to provide a new withholding certificate.
    (v) Partnership must retain withholding certificates. A partnership 
or nominee who has responsibility for paying the withholding tax under 
this section or Sec.  1.1446-4, must retain each withholding 
certificate and other documentation received from its direct and 
indirect partners (including nominees) for as long as it may be 
relevant to the determination of the withholding agent's tax liability 
under section 1461 and the regulations thereunder.
    (3) Presumption of foreign status in absence of valid Form W-8BEN, 
Form W-8IMY, Form W-9, or statement. Except as otherwise provided in 
this paragraph (c)(3), a partnership that does not receive a valid Form 
W-8BEN, Form W-8IMY, Form W-9, statement described in Sec.  1.1446-
4(e)(1), or statement required by paragraph (c)(2) of this section from 
a partner, nominee, beneficial owner, or grantor trust, or a 
partnership that receives a withholding certificate or statement but 
has actual knowledge or reason to know that the information on the 
certificate or statement is incorrect or unreliable, must presume that 
the partner is a foreign person. If the partnership knows that the 
partner is an individual and not an entity, the partnership shall treat 
the partner as a nonresident alien individual. If the partnership knows 
that the partner is an entity, the partnership shall treat the partner 
as a corporation if the entity is a corporation as defined in Sec.  
301.7701-2(b)(8) of this chapter. In all other cases, the partnership 
shall treat the partner as either a nonresident alien individual or a 
foreign corporation, whichever classification results in a higher 1446 
tax being due, and shall pay the 1446 tax in accordance with this 
presumption. The presumption set forth in this paragraph (c)(3) that a 
partner is a foreign person (either because a Form W-9 was not 
furnished by such partner or the partnership determines that such form 
is incorrect or unreliable) shall not apply to the extent that the 
partnership relies on other means to ascertain the non-foreign status 
of a partner and the partnership is correct in its determination that 
such partner is a U.S. person. A partnership is in no event required to 
rely upon other means to determine the non-foreign status of a partner 
and may demand that a partner furnish a Form W-9. If a certification is 
not provided in such circumstances, the partnership may presume that 
the partner is a foreign partner, and for purposes of sections 1461 
through 1463, will be considered to have been required to pay 1446 tax 
on such partner's allocable share of partnership ECTI.
    (4) Consequences when partnership knows or has reason to know that 
Form W-8BEN, Form W-8IMY, or Form W-9 is incorrect or unreliable and 
does not withhold. If a partnership knows or has reason to know that a 
Form W-8BEN, Form W-8IMY, Form W-9, statement described in Sec.  
1.1446-4(e)(1), or statement required by paragraph (c)(2) of this 
section submitted by a partner, nominee, beneficial owner, or grantor 
trust contains incorrect or unreliable information (either because the 
certificate or statement when given to the partnership contained 
incorrect information or because there has been a change in facts that 
makes information on the certificate or statement incorrect), and the 
partnership pays less than the full amount of withholding tax due on 
ECTI allocable to that partner, the partnership shall be fully liable 
under section 1461 and Sec.  1.1461-3 (Sec.  1.1461-1 for publicly 
traded partnerships subject to Sec.  1.1446-4), Sec.  1.1446-3, and for 
all applicable penalties and interest, for any failure to pay the 1446 
tax for the period during which the partnership knew or had reason to 
know that the certificate contained incorrect or unreliable information 
and for all subsequent installment periods. If a partner, nominee, 
beneficial owner, or grantor trust, submits a new valid Form W-8BEN, 
Form W-8IMY, Form W-9, or statement, as applicable, the partnership may 
rely on that form for paying installments of 1446 tax beginning with 
the installment period during which such form is received.


Sec.  1.1446-2  Determining a partnership's effectively connected 
taxable income allocable to foreign partners under section 704.

    (a) In general. A partnership's effectively connected taxable 
income (ECTI) is generally the partnership's taxable income as computed 
under section 703, with adjustments as provided in section 1446(c) and 
this section, and computed with

[[Page 52475]]

consideration of only those partnership items which are effectively 
connected (or treated as effectively connected) with the conduct of a 
trade or business in the United States. For purposes of determining the 
section 1446 withholding tax (1446 tax) under Sec.  1.1446-3, 
partnership ECTI allocable under section 704 to foreign partners is the 
sum of the allocable shares of ECTI of each of the partnership's 
foreign partners as determined under paragraph (b) of this section. The 
calculation of partnership ECTI allocable to foreign partners as set 
forth in paragraph (b) of this section, and the determination of the 
partnership's withholding tax obligation, is a partnership-level 
computation solely for purposes of determining the 1446 tax. Therefore, 
any deduction that is not taken into account in calculating a partner's 
allocable share of partnership ECTI (e.g., percentage depletion), but 
which is a deduction that under U.S. tax law the foreign partner is 
otherwise entitled to claim, can still be claimed by the foreign 
partner when computing its U.S. tax liability and filing its U.S. 
income tax return, subject to any restriction or limitation that 
otherwise may apply.
    (b) Computation--(1) In general. A foreign partner's allocable 
share of partnership ECTI for the partnership's taxable year that is 
allocable under section 704 to a particular foreign partner is equal to 
that foreign partner's distributive share of partnership gross income 
and gain for the partnership's taxable year that is effectively 
connected and properly allocable to the partner under section 704 and 
the regulations thereunder, reduced by the foreign partner's 
distributive share of partnership deductions for the partnership 
taxable year that are connected with such income under section 873 or 
882(c) and properly allocable to the partner under section 704 and the 
regulations thereunder, in each case, after application of the rules of 
this section. For these purposes, a foreign partner's distributive 
share of effectively connected gross income and gain and the deductions 
connected with such income shall be computed by considering allocations 
that are respected under the rules of section 704 and Sec.  1.704-
1(b)(1), including special allocations in the partnership agreement (as 
defined in Sec.  1.704-1(b)(2)(ii)(h)), and adjustments to the basis of 
partnership property described in section 743 pursuant to an election 
by the partnership under section 754 (see Sec.  1.743-1(j)). The 
character of effectively connected partnership items (capital versus 
ordinary) shall be separately considered only to the extent set forth 
in paragraph (b)(3)(v) of this section.
    (2) Income and gain rules. For purposes of computing a foreign 
partner's allocable share of partnership ECTI under this paragraph (b), 
the following rules with respect to partnership income and gain shall 
apply.
    (i) Application of the principles of section 864. The determination 
of whether a partnership's items of gross income are effectively 
connected shall be made by applying the principles of section 864 and 
the regulations thereunder.
    (ii) Income treated as effectively connected. A partnership's items 
of gross income that are effectively connected includes any income that 
is treated as effectively connected income, including partnership 
income subject to a partner's election under section 871(d) or section 
882(d), any partnership income treated as effectively connected with 
the conduct of a U.S. trade or business pursuant to section 897, and 
any other items of partnership income treated as effectively connected 
under another provision of the Code, without regard to whether those 
amounts are taxable to the partner.
    (iii) Exempt income. A foreign partner's allocable share of 
partnership ECTI does not include income or gain exempt from U.S. tax 
by reason of a provision of the Internal Revenue Code. A foreign 
partner's allocable share of partnership ECTI also does not include 
income or gain exempt from U.S. tax by operation of any U.S. income tax 
treaty or reciprocal agreement. In the case of income excluded by 
reason of a treaty provision, such income must be derived by a resident 
of an applicable treaty jurisdiction, the resident must be the 
beneficial owner of the item, and all other requirements for benefits 
under the treaty must be satisfied. The partnership must have received 
from the partner a valid withholding certificate, that is Form W-8BEN 
or Form W-8IMY (see Sec.  1.1446-1(c)(2)(iii) regarding when a Form W-
8BEN or Form W-8IMY is valid for purposes of this section), containing 
the information necessary to support the claim for treaty benefits 
required in the forms and instructions to those forms. In addition, for 
purposes of this section, the withholding certificate must contain the 
beneficial owner's taxpayer identification number.
    (3) Deduction and losses. For purposes of computing a foreign 
partner's allocable share of partnership ECTI under this paragraph (b), 
the following rules with respect to deductions and losses shall apply.
    (i) Oil and gas interests. The deduction for depletion with respect 
to oil and gas wells shall be allowed, but the amount of such deduction 
shall be determined without regard to sections 613 and 613A.
    (ii) Charitable contributions. The deduction for charitable 
contributions provided in section 170 shall not be allowed.
    (iii) Net operating losses and other suspended or carried losses. 
The net operating loss deduction of any foreign partner provided in 
section 172 shall not be taken into account. Further, the partnership 
shall not take into account any suspended losses (e.g., losses in 
excess of a partner's basis in the partnership, see section 704(d)) or 
any capital loss carrybacks or carryovers available to a foreign 
partner.
    (iv) Interest deductions. The rules of this paragraph (b)(3)(iv) 
shall apply for purposes of determining the amount of interest expense 
that is allocable to income which is (or is treated as) effectively 
connected with the conduct of a trade or business for purposes of 
calculating the foreign partner's allocable share of partnership ECTI. 
In the case of a non-corporate foreign partner, the rules of Sec.  
1.861-9T(e)(7) shall apply. In the case of a corporate foreign partner, 
the rules of Sec.  1.882-5 shall apply by treating the partnership as a 
foreign corporation and using the partner's pro-rata share of the 
partnership's assets and liabilities for these purposes. For these 
purposes, the rules governing elections under Sec.  1.882-5(a)(7) shall 
be made at the partnership level.
    (v) Limitation on capital losses. Losses from the sale or exchange 
of capital assets allocable under section 704 to a partner shall be 
allowed only to the extent of gains from the sale or exchange of 
capital assets allocable under section 704 to such partner.
    (vi) Other deductions. No deduction shall be allowed for personal 
exemptions provided in section 151 or the additional itemized 
deductions for individuals provided in part VII of subchapter B of the 
Internal Revenue Code (section 211 and following).
    (vii) Limitations on deductions. Except as provided in paragraph 
(b)(3) or (4) of this section, any limitations on losses or deductions 
that apply at the partner level when determining ECTI allocable to a 
foreign partner shall not be taken into account.
    (4) Other rules--(i) Exclusion of items allocated to U.S. partners. 
In computing ECTI allocable to a foreign partner, the partnership shall 
not take into account any item of income, gain, loss, or deduction to 
the extent allocable to any

[[Page 52476]]

partner that is not a foreign partner, as that term is defined in Sec.  
1.1446-1(c) of this section.
    (ii) Partnership credits. See Sec.  1.1446-3(a) providing that the 
1446 tax is computed without regard to a partner's distrubutive share 
of the partnership's tax credits.
    (5) Examples. The following examples illustrate the application of 
this section:

    Example 1. Limitation on capital losses. PRS partnership has two 
equal partners, A and B. A is a nonresident alien individual and B 
is a U.S. citizen. A provides PRS with a valid Form W-8BEN, and B 
provides PRS with a valid Form W-9. PRS has the following annualized 
tax items for the relevant installment period, all of which are 
effectively connected with its U.S. trade or business and are 
allocated equally between A and B: $100 of long-term capital gain, 
$400 of long-term capital loss, $300 of ordinary income, and $100 of 
ordinary deductions. Assume that these allocations are respected 
under section 704(b) and the regulations thereunder. Accordingly, 
A's allocable share of PRS's effectively connected items includes 
$50 of long-term capital gain, $200 of long-term capital loss, $150 
of ordinary income, and $50 of ordinary deductions. In determining 
A's allocable share of partnership ECTI, the amount of the long-term 
capital loss that may be taken into account pursuant to paragraph 
(b)(3)(v) of this section is limited to A's allocable share of gain 
from the sale or exchange of capital assets. The amount of 
partnership ECTI allocable under section 704 to A is $100 ($150 of 
ordinary income less $50 of ordinary deductions, plus $50 of capital 
gains less $50 of capital loss).
    Example 2.  Limitation on capital losses--special allocations. 
PRS partnership has two equal partners, A and B. A and B are both 
nonresident alien individuals. A and B each provide PRS with a valid 
Form W-8BEN. PRS has the following annualized tax items for the 
relevant installment period, all of which are effectively connected 
with its U.S. trade or business: $200 of long-term capital gain, 
$200 of long-term capital loss, and $400 of ordinary income. A and B 
have equal shares in the ordinary income, however, pursuant to the 
partnership agreement, capital gains and losses are subject to 
special allocations. The long-term capital gain is allocable to A, 
and the long-term capital loss is allocable to B. It is assumed that 
all of the partnership's allocations are respected under section 
704(b) and the regulations thereunder. Pursuant to paragraph 
(b)(3)(v) of this section, A's allocable share of partnership ECTI 
is $400 ($200 of ordinary income plus $200 of long-term capital 
gain), and B's allocable share of partnership ECTI is $200 ($200 of 
ordinary income).
    Example 3.  Withholding tax obligation where partner has net 
operating losses. PRS partnership has two equal partners, FC, a 
foreign corporation, and DC, a domestic corporation. FC and DC 
provide a valid Form W-8BEN and Form W-9, respectively, to PRS. Both 
FC and PRS are on a calendar taxable year. PRS is engaged in the 
conduct of a trade or business in the United States and for its 
first installment period during its taxable year has $100 of 
annualized ECTI that is allocable to FC. As of the beginning of the 
taxable year, FC had an unused effectively connected net operating 
loss carryover in the amount of $300. The net operating loss 
carryover is not taken into account in determining PRS's withholding 
tax liability for ECTI allocable under section 704 to FC. PRS must 
pay 1446 tax with respect to the $100 of ECTI allocable to FC.


Sec.  1.1446-3  Time and manner of calculating and paying over the 1446 
tax.

    (a) In general--(1) Calculating 1446 tax. This section provides 
rules for calculating, reporting, and paying over the section 1446 
withholding tax (1446 tax). A partnership's 1446 tax is equal to the 
amount determined under this section and shall be paid in installments 
during the partnership's taxable year (see paragraph (d)(1) of this 
section for installment payment due dates), with any remaining tax due 
paid with the partnership's annual return required to be filed pursuant 
to paragraph (d) of this section. For these purposes, a partnership 
shall not take into account either a partner's liability for any other 
tax imposed under any other provision of the Internal Revenue Code 
(e.g., section 55 or 884) or a partner's distributive share of the 
partnership's tax credits when determining the amount of the 
partnership's 1446 tax.
    (2) Applicable percentage. In the case of a foreign partner that is 
a corporation, the applicable percentage is the highest rate of tax 
specified in section 11(b)(1) for such taxable year. Except to the 
extent provided in Sec.  1.1446-5, in the case of a foreign partner 
that is not taxable as a corporation (e.g., partnership, individual, 
trust or estate), the applicable percentage is the highest rate of tax 
specified in section 1.
    (b) Installment payments--(1) In general. Except as provided in 
Sec.  1.1446-4 for certain publicly traded partnerships, a partnership 
must pay its 1446 tax by making installment payments of the 1446 tax 
based on the amount of partnership ECTI allocable under section 704 to 
its foreign partners, without regard to whether the partnership makes 
any distributions to its partners during the partnership's taxable 
year. The amount of the installment payments are determined in 
accordance with this paragraph (b), and the tax must be paid at the 
times set forth in paragraph (d) of this section. Subject to paragraph 
(b)(3) of this section, in computing its first installment of 1446 tax 
for a taxable year, a partnership must choose whether it will pay its 
1446 tax for the entire taxable year by using the safe harbor set forth 
in paragraph (b)(3) of this section, or by using one of several 
annualization methods available under paragraph (b)(2)(ii) of this 
section for computing partnership ECTI allocable to foreign partners. 
In the case of any underpayment of an installment payment of 1446 tax 
by a partnership, the partnership shall be subject to an addition to 
tax equal to the amount determined under section 6655, as modified by 
this section, as if such partnership were a domestic corporation, as 
well as any other applicable interest and penalties. See Sec.  1.1446-
3(f). Section 6425 (permitting an adjustment for an overpayment of 
estimated tax by a corporation) shall not apply to a partnership with 
respect to the payment of its 1446 tax.
    (2) Calculation--(i) General application of the principles of 
section 6655. Installment payments of 1446 tax required during the 
partnership's taxable year are based upon partnership ECTI for the 
portion of the partnership taxable year to which they relate, and, 
except as set forth in this paragraph (b)(2) or paragraph (b)(3) of 
this section, shall be calculated using the principles of section 6655. 
Under the principles of section 6655, the partnership's effectively 
connected items are annualized to determine each foreign partner's 
allocable share of partnership ECTI under Sec.  1.1446-2. Each foreign 
partner's allocable share of partnership ECTI is then multiplied by the 
applicable percentage for each foreign partner. This computation will 
yield an annualized 1446 tax with respect to such partner. The 
installment of 1446 tax due with respect to a foreign partner's 
allocable share of partnership ECTI equals the excess of the section 
6655(e)(2)(B)(ii) percentage of the annualized 1446 tax for that 
partner (or, if applicable, the adjusted seasonal amount) for the 
relevant installment period, over the aggregate of any amounts paid 
under section 1446 with respect to that partner in prior installments 
during the partnership's taxable year.
    (ii) Annualization methods. A partnership that chooses to annualize 
its income for the taxable year shall use one of the annualization 
methods set forth in section 6655(e) and the regulations thereunder, 
and as described in the forms and instructions for Form 8804, ``Annual 
Return for Partnership Withholding Tax (Section 1446),'' Form 8805, 
``Foreign Partner's Information Statement of Section 1446 Withholding 
Tax,'' and Form 8813, ``Partnership Withholding Tax Payment Voucher.''
    (iii) Partner's estimated tax payments. In computing its 
installment payments of 1446 tax, a partnership may not take

[[Page 52477]]

into account a partner's estimated tax payments.
    (iv) Partner whose interest terminates during the partnership's 
taxable year. With respect to a partner whose interest in the 
partnership terminates prior to the end of the period for which the 
partnership is making an installment payment, the partnership shall 
take into account the income that is allocable to the partner for the 
portion of the partnership taxable year that the person was a partner.
    (v) Exceptions and modifications to the application of the 
principles under section 6655. To the extent not otherwise modified in 
Sec. Sec.  1.1446-1 through 1.1446-6, or inconsistent with those rules, 
the principles of section 6655 apply to the calculation of the 
installment payments of 1446 tax made by a partnership, except that:
    (A) Inapplicability of special rules for large corporations. The 
principles of section 6655(d)(2), concerning large corporations (as 
defined in section 6655(g)(2)), shall not apply.
    (B) Inapplicability of special rules regarding early refunds. The 
principles of section 6655(h), applicable to amounts excessively 
credited or refunded under section 6425, shall not apply. See paragraph 
(b)(1) of this section providing that section 6425 shall not apply for 
purposes of the 1446 tax.
    (C) Period of underpayment. The period of the underpayment set 
forth in section 6655(b)(2) shall end on the earlier of the 15th day of 
the 4th month following the close of the partnership's taxable year 
(or, in the case of a partnership described in Sec.  1.6081-5(a)(1) of 
this chapter, the 15th day of the 6th month following the close of the 
partnership's taxable year), or with respect to any portion of the 
underpayment, the date on which such portion is paid.
    (D) Other taxes. Section 6655 shall be applied without regard to 
any references to alternative minimum taxable income and modified 
alternative minimum taxable income.
    (E) 1446 tax treated as tax under section 11. The principles of 
section 6655(g)(1) shall be applied to treat the 1446 tax as a tax 
imposed by section 11.
    (F) Prior year tax safe harbor. The safe harbor set forth in 
section 6655(d)(1)(B)(ii) shall not apply and instead the safe harbor 
set forth in paragraph (b)(3) of this section applies.
    (3) 1446 tax safe harbor--(i) In general. The addition to tax under 
section 6655 shall not apply to a partnership with respect to a current 
installment of 1446 tax if--
    (A) The average of the amount of the current installment and prior 
installments during the taxable year is at least 25 percent of the 
total 1446 tax that would be payable on the amount of the partnership's 
ECTI allocable under section 704 to foreign partners for the prior 
taxable year;
    (B) The prior taxable year consisted of twelve months;
    (C) The partnership timely files (including extensions) an 
information return under section 6031 for the prior year; and
    (D) The amount of ECTI for the prior taxable year is not less than 
50 percent of the ECTI shown on the annual return of section 1446 
withholding tax that is (or will be) timely filed for the current year.
    (ii) Permission to change to standard annualization method. Except 
as otherwise provided in this paragraph (b)(3), if a partnership 
chooses to pay its 1446 tax for the first installment period based upon 
the safe harbor method set forth in this paragraph (b)(3), the 
partnership must use the safe harbor method for each installment 
payment made during the partnership's taxable year. Notwithstanding the 
foregoing, if a partnership paying over 1446 tax during the taxable 
year pursuant to this paragraph (b)(3) determines during an installment 
period (based upon the standard option annualization method set forth 
in section 6655(e) and the regulations thereunder, as modified by the 
forms and instructions to Forms 8804, 8805, and 8813) that it will not 
qualify for the safe harbor in this paragraph (b)(3) because the prior 
year's ECTI will not meet the 50-percent threshold in paragraph 
(b)(3)(i)(D) of this section, then the partnership is permitted, 
without being subject to the addition to tax under section 6655, to pay 
over its 1446 tax for the period in which such determination is made, 
and all subsequent installment periods during the taxable year, using 
the standard option annualization method. A change pursuant to this 
paragraph shall be disclosed in a statement attached to the Form 8804 
the partnership files for the taxable year and shall include 
information to allow the Service to determine whether the change was 
appropriate.
    (c) Coordination with other withholding rules--(1) Fixed or 
determinable, annual or periodical income. Fixed or determinable, 
annual or periodical income subject to tax under section 871(a) or 
section 881 is not subject to withholding under section 1446, and such 
income is independently subject to the withholding requirements of 
sections 1441 and 1442 and the regulations thereunder.
    (2) Real property gains--(i) Domestic partnerships. A domestic 
partnership that is otherwise subject to the withholding requirements 
of sections 1445 and 1446 will be subject to the payment and reporting 
requirements of section 1446 only and not section 1445(e)(1) and the 
regulations thereunder, with respect to partnership gain from the 
disposition of a U.S. real property interest (as defined in section 
897(c)), provided that the partnership complies fully with the 
requirements under section 1446 and the regulations thereunder, 
including any reporting obligations, with respect to dispositions of 
U.S. real property interests. A partnership that has complied with such 
requirements will be deemed to satisfy the withholding requirements of 
section 1445 and the regulations thereunder. In the event that amounts 
are withheld under section 1445(a) at the time of the disposition of a 
U.S. real property interest, such amounts may be credited against the 
section 1446 tax.
    (ii) Foreign partnerships. A foreign partnership that is subject to 
withholding under section 1445(a) during its taxable year may credit 
the amount withheld under section 1445(a) against its section 1446 tax 
liability for that taxable year only to the extent such gain is 
allocable to foreign partners.
    (3) Coordination with section 1443. A partnership that has ECTI 
allocable under section 704 to a foreign organization described in 
section 1443(a) shall be required to withhold under this section.
    (d) Reporting and crediting the 1446 tax--(1) Reporting 1446 tax. 
This paragraph (d) sets forth the rules for reporting and crediting the 
1446 tax paid by a partnership. To the extent that 1446 tax is paid on 
behalf of a domestic trust (including a grantor or other person treated 
as an owner of a portion of such trust) or a grantor or other person 
treated as the owner of a portion of a foreign trust, the rules of this 
paragraph (d) applicable to a foreign trust or its beneficiaries shall 
be applied to such domestic or foreign trust and its beneficiaries or 
owners, as applicable, so that appropriate credit for the 1446 tax may 
be claimed by the trust, beneficiary, grantor, or other person.
    (i) Reporting of installment tax payments and notification to 
partners of installment tax payments. Each partnership required to make 
an installment payment of 1446 tax must file Form 8813, ``Partnership 
Withholding Tax Payment Voucher (Section 1446),'' in accordance with 
the instructions of that form. When making a payment of 1446 tax, a 
partnership must notify each foreign partner of the

[[Page 52478]]

1446 tax paid on its behalf. A foreign partner generally may credit a 
1446 tax paid by the partnership on the partner's behalf against the 
partner's estimated tax that the partner must pay during the partner's 
own taxable year. No particular form is required for a partnership's 
notification to a foreign partner, but each notification must include 
the partnership's name, the partnership's Taxpayer Identification 
Number (TIN), the partnership's address, the partner's name, the 
partner's TIN, the partner's address, the annualized ECTI estimated to 
be allocated to the foreign partner, and the amounts of tax paid on 
behalf of the partner for the current and prior installment periods 
during the partnership's taxable year.
    (ii) Payment due dates. The 1446 tax is calculated based on 
partnership ECTI allocable under section 704 to foreign partners during 
the partnership's taxable year, as determined under section 706. 
Payments of the 1446 tax generally must be made during the 
partnership's taxable year in which such income is derived. A 
partnership must pay to the Internal Revenue Service a portion of its 
estimated annual 1446 tax in installments on or before the 15th day of 
the fourth, sixth, ninth, and twelfth months of the partnership's 
taxable year as provided in section 6655. Any additional amount 
determined to be due is to be paid with the filing of the annual return 
of tax required under this section and clearly designated as for the 
prior taxable year. Form 8813 should not be submitted for a payment 
made under the preceding sentence.
    (iii) Annual return and notification to partners. Every partnership 
(except a publicly traded partnership that has not elected to apply the 
general withholding tax rules under section 1446) that has effectively 
connected gross income for the partnership's taxable year allocable 
under section 704 to one or more of its foreign partners (or is treated 
as having paid 1446 tax under Sec.  1.1446-5(a)), must file Form 8804, 
``Annual Return for Partnership Withholding Tax (Section 1446).'' 
Additionally, every partnership that is required to file Form 8804 also 
must file Form 8805, ``Foreign Partner's Information Statement of 
Section 1446 Withholding Tax,'' and furnish this form to the Internal 
Revenue Service and to each of its partners with respect to which the 
1446 tax was paid. Forms 8804 and 8805 are separate from Form 1065, 
``U.S. Return of Partnership Income,'' and the attachments thereto, and 
are not to be filed as part of the partnership's Form 1065. A 
partnership must generally file Forms 8804 and 8805 on or before the 
due date for filing the partnership's Form 1065. See Sec.  1.6031(a)-
1(c) for rules concerning the due date of a partnership's Form 1065. 
However, with respect to partnerships described in Sec.  1.6081-
5(a)(1), Forms 8804 and 8805 are not due until the 15th day of the 
sixth month following the close of the partnership's taxable year. Any 
additional tax owed under section 1446 for the prior taxable year of 
the partnership must be paid to the Internal Revenue Service with the 
Form 8804.
    (iv) Information provided to beneficiaries of foreign trusts and 
estates. A foreign trust or estate that is a partner in a partnership 
subject to withholding under section 1446 shall be provided Form 8805 
by the partnership. The foreign trust or estate must provide to each of 
its beneficiaries a copy of the Form 8805 furnished by the partnership. 
In addition, the foreign trust or estate must provide a statement for 
each of its beneficiaries to inform each beneficiary of the amount of 
the credit that may be claimed under section 33 (as determined under 
this section) for the 1446 tax paid by the partnership. Until an 
official IRS form is available, the statement from a foreign trust or 
estate that is described in this paragraph (d)(1)(iv) shall contain the 
following information--
    (A) Name, address, and TIN of the foreign trust or estate;
    (B) Name, address, and TIN of the partnership;
    (C) The amount of the partnership's ECTI allocated to the foreign 
trust or estate for the partnership taxable year (as shown on the Form 
8805 provided to the trust or estate);
    (D) The amount of 1446 tax paid by the partnership on behalf of the 
foreign trust or estate;
    (E) Name, address, and TIN of the beneficiary of the foreign trust 
or estate;
    (F) The amount of the partnership's ECTI allocated to the trust or 
estate for purposes of section 1446 that is to be included in the 
beneficiary's gross income; and
    (G) The amount of 1446 tax paid by the partnership on behalf of the 
foreign trust or estate that the beneficiary is entitled to claim on 
its return as a credit under section 33.
    (v) Attachments required of foreign trusts and estates. The 
statement furnished to each foreign beneficiary under this paragraph 
(d)(1) must also be attached to the foreign trust or estate's U.S. 
Federal income tax return filed for the taxable year including the 
installment period to which the statement relates.
    (vi) Attachments required of beneficiaries of foreign trusts and 
estates. The beneficiary of the foreign trust or estate must attach the 
statement provided by the trust or estate, along with a copy of the 
Form 8805 furnished by the partnership to such trust or estate, to its 
U.S. income tax return for the year in which it claims a credit for the 
1446 tax. See Sec.  1.1446-3(d)(2)(ii) for additional rules regarding a 
partner or beneficial owner claiming a credit for 1446 tax.
    (vii) Information provided to beneficiaries of foreign trusts and 
estates that are partners in certain publicly traded partnerships. A 
statement similar to the statement required by paragraph (d)(1)(iv) of 
this section shall be provided by trusts or estates that hold interests 
in publicly traded partnerships subject to Sec.  1.1446-4.
    (2) Crediting 1446 tax against a partner's U.S. tax liability--(i) 
In general. A partnership's payment of 1446 tax on the portion of ECTI 
allocable to a foreign partner relates to the partner's U.S. income tax 
liability for the partner's taxable year in which the partner is 
subject to U.S. tax on that income. Subject to paragraphs (d)(2)(ii) 
and (iii) of this section, a partner may claim as a credit under 
section 33 the 1446 tax paid by the partnership with respect to ECTI 
allocable to that partner. The partner may not claim an early refund of 
these amounts under the estimated tax rules.
    (ii) Substantiation for purposes of claiming the credit under 
section 33. A partner may credit the amount paid under section 1446 
with respect to such partner against its U.S. income tax liability only 
if it attaches proof of payment to its U.S. income tax return for the 
partner's taxable year in which the items comprising such partner's 
allocable share of partnership ECTI are included in the partner's 
income. Except as provided in the next sentence, proof of payment 
consists of a copy of the Form 8805 the partnership provides to the 
partner (or in the case of a beneficiary of a foreign trust or estate, 
the statement required under paragraph (d)(1)(iv) of this section to be 
provided by such trust or estate and the related Form 8805 furnished to 
such trust or estate), but only if the name and TIN on the Form 8805 
(or the statement provided by a foreign trust or estate) match the name 
and TIN on the partner's U.S. tax return, and such form (or statement) 
identifies the partner (or beneficiary) as the person entitled to the 
credit under section 33. In the case of a partner of a publicly traded 
partnership that is subject to withholding on distributions under Sec.  
1.1446-4, proof of payment consists of

[[Page 52479]]

a copy of the Form 1042-S, ``Foreign Person's U.S. Source Income 
Subject to Withholding,'' provided to the partner by the partnership.
    (iii) Tiered structures including trusts or estates--(A) Foreign 
trusts and estates. Section 1446 tax paid on the portion of ECTI 
allocable under section 704 to a foreign trust or estate that the 
foreign trust or estate may claim as a credit under section 33 shall 
bear the same ratio to the total 1446 tax paid on behalf of the trust 
or estate as the total ECTI allocable to such trust or estate and not 
distributed (or treated as distributed) to the beneficiaries of such 
trust or estate, and, accordingly not deducted under section 651 or 
section 661 in calculating the trust or estate's taxable income, bears 
to the total ECTI allocable to such trust or estate. Any 1446 tax that 
a foreign trust or estate is not entitled to claim as a credit under 
this paragraph (d)(2) may be claimed as a credit by the beneficiary or 
beneficiaries of such trust or estate that includes the partnership's 
ECTI (distributed or deemed distributed) allocated to the trust or 
estate in gross income under section 652 or section 662 (with the same 
character as effectively connected income as in the hands of the trust 
or estate). The trust or estate must provide each beneficiary with a 
copy of the Form 8805 provided to it by the partnership and prepare the 
statement required by paragraph (d)(1)(iv) of this section.
    (B) Use of domestic trusts to circumvent section 1446. This 
paragraph (d)(2)(iii)(B) shall apply if a partnership knows or has 
reason to know that a foreign person that is the ultimate beneficial 
owner of the ECTI holds its interest in the partnership through a 
domestic trust (and possibly other entities), and such domestic trust 
was formed or availed of with a principal purpose of avoiding the 1446 
tax. The use of a domestic trust in a tiered trust structure may have a 
principal purpose of avoiding the 1446 tax even though the tax 
avoidance purpose is outweighed by other purposes when taken together. 
In such case, a partnership is required to pay 1446 tax under this 
paragraph as if the domestic trust was a foreign trust for purposes of 
section 1446 and the regulations thereunder. Accordingly, all 
applicable penalties and interest shall apply to the partnership for 
its failure to pay 1446 tax under this paragraph (d)(2)(iii)(B), 
commencing with the installment period during which the partnership 
knew or had reason to know that this paragraph (d)(2)(iii)(B) applied.
    (iv) Refunds to withholding agent. A partnership (or nominee 
pursuant to Sec.  1.1446-4) may apply for a refund of the 1446 tax paid 
only to the extent allowable under section 1464 and the regulations 
thereunder.
    (v) 1446 tax treated as cash distribution to partners. Amounts paid 
by a partnership under section 1446 with respect to a partner are 
treated as distributed to that partner on the earliest of the day on 
which such tax was paid by the partnership, the last day of the 
partnership taxable year for which the tax was paid, or, the last day 
during the partnership's taxable year on which the partner owned an 
interest in the partnership. Thus, for example, 1446 tax paid by a 
partnership after the close of a partnership taxable year that relates 
to ECTI allocable to a foreign partner for the prior taxable year will 
be considered distributed by the partnership to the respective foreign 
partner on the last day of the partnership's prior taxable year.
    (vi) Examples. The following examples illustrate the application of 
this section:

    Example 1. Simple trust that reports entire amount of ECTI. PRS 
is a partnership that has two partners, FT, a foreign trust, and A, 
a U.S. person. FT is a simple trust under section 651. FT and A each 
provide PRS with a valid Form W-8BEN and Form W-9, respectively. FT 
has one beneficiary, NRA, a nonresident alien individual. In 
computing its installment obligation during the 2004 taxable year, 
PRS has $200 of annualized income, all of which is ordinary ECTI. 
The $200 of income will be allocated equally to FT and A under 
section 704 and it is assumed that such an allocation will be 
respected under section 704(b) and the regulations thereunder. FT's 
allocable share of ECTI is $100. PRS withholds $35 under section 
1446 with respect to the $100 of ECTI allocable to FT. FT's only 
income for its tax year is the $100 of income from PRS. Pursuant to 
the terms of the trust's governing instrument and local law, the 
$100 of ECTI is not included in FT's fiduciary accounting income and 
the deemed distribution of the $35 withholding tax paid under 
paragraph (d)(2)(v) of this section is not included in FT's 
fiduciary accounting income. Accordingly, the $100 of ECTI is not 
income required to be distributed by FT, and FT may not claim a 
deduction under section 651 for this amount. FT must report the $100 
of ECTI in its gross income and may claim a credit under section 33 
in the amount of $35 for the 1446 tax paid by PRS. NRA is not 
required to include any of the ECTI in gross income and accordingly 
may not claim a credit for any amount of the $35 of 1446 tax paid by 
PRS.
    Example 2. Simple trust that distributes a portion of ECTI to 
the beneficiary.
    Assume the same facts as in Example 1, except that PRS 
distributes $60 to FT, which is included in FT's fiduciary 
accounting income under local law. FT will report the $100 of ECTI 
in its gross income and may claim a deduction for the $60 required 
to be distributed under section 651(a) to NRA. Pursuant to paragraph 
(d)(2)(iii) of this section, FT may claim a credit under section 33 
in the amount of $14 for the 1446 tax paid by PRS ($40/$100 
multiplied by $35). NRA is required to include the $60 of the ECTI 
in gross income under section 652 (as ECTI) and may claim a credit 
under section 33 in the amount of $21 for the 1446 tax paid by PRS 
($35 less $14 or $60/$100 multiplied by $35).
    Example 3. Complex trust that distributes entire ECTI to the 
beneficiary. Assume the same facts as in Example 1, except that FT 
is a complex trust under section 661. PRS distributes $60 to FT, 
which is included in FT's fiduciary accounting income. FT 
distributes the $60 of fiduciary accounting income to NRA and also 
properly distributes an additional $40 to NRA from FT's principal. 
FT will report the $100 of ECTI in its gross income and may deduct 
the $60 required to be distributed to NRA under section 661(a)(1) 
and may deduct the $40 distributed to NRA under section 661(a)(2). 
FT may not claim a credit under section 33 for any of the $35 of 
1446 tax paid by PRS. NRA is required to include $100 of the ECTI in 
gross income under section 662 (as ECTI) and may claim a credit 
under section 33 in the amount of $35 for the 1446 tax paid by PRS 
($35 less $0).

    (e) Liability of partnership for failure to withhold--(1) In 
general. Every partnership required to pay a 1446 tax is made liable 
for that tax by section 1461. Therefore, a partnership that is required 
to pay a 1446 tax but fails to do so, or pays less than the amount 
required under this section, is liable under section 1461 for the 
payment of the tax required to be withheld under chapter 3 of the 
Internal Revenue Code and the regulations thereunder unless the 
partnership can demonstrate pursuant to paragraph (e)(2) of this 
section, to the satisfaction of the Commissioner or his delegate, that 
the full amount of effectively connected taxable income allocable to 
such partner was included in income on the partner's U.S. Federal 
income tax return and the full amount of tax due on such return was 
paid by such partner to the Internal Revenue Service. See paragraph 
(e)(3) of this section and section 1463 regarding the partnership's 
liability for penalties and interest even though a foreign partner has 
satisfied the underlying tax liability. See Sec.  1.1461-3 for 
applicable penalties when a partnership fails to pay 1446 tax. See 
paragraph (b) of this section for an addition to tax under section 6655 
when there is an underpayment of 1446 tax.
    (2) Proof that tax liability has been satisfied. Proof of payment 
of tax may be established for purposes of paragraph (e)(1) of this 
section on the basis of a Form 4669, ``Statement of Payments 
Received,'' or such other form as the Internal Revenue Service may 
prescribe

[[Page 52480]]

in published guidance (see Sec.  601.601(d)(2) of this chapter), 
establishing the amount of tax, if any, actually paid by the partner on 
the income. Such partnership's liability for tax, and the requirement 
that such partnership file Forms 8804 and 8805 shall be deemed to have 
been satisfied with respect to such partner as of the date on which the 
partner's income tax return was filed and all tax required to be shown 
on the return is paid in full.
    (3) Liability for interest and penalties. Notwithstanding paragraph 
(e)(2) of this section, a partnership that fails to pay over tax under 
section 1446 is not relieved from liability under section 6655 or for 
interest under section 6601. See Sec.  1.1463-1. Such liability may 
exist even if there is no underlying tax liability due from a foreign 
partner on its allocable share of partnership ECTI. The addition to tax 
under section 6655 or the interest charge under section 6601 that is 
required by those sections shall be imposed as set forth in those 
sections, as modified by this section. For example, under section 6601, 
interest shall accrue beginning on the last date for paying the tax due 
under section 1461 (which is the due date, without extensions, for 
filing the Forms 8804 and 8805). The interest shall stop accruing on 
the 1446 tax liability on the date, and to the extent, that the unpaid 
tax liability under section 1446 is satisfied. A foreign partner is 
permitted to reduce any addition to tax under section 6654 or 6655 by 
the amount of any section 6655 addition to tax paid by the partnership 
with respect to its failure to pay adequate installment payments of the 
1446 tax on ECTI allocable to the foreign partner.
    (f) Effect of withholding on partner. The payment of the 1446 tax 
by a partnership does not excuse a foreign partner to which a portion 
of ECTI is allocable from filing a U.S. tax or informational return, as 
appropriate, with respect to that income. Information concerning 
installment payments of 1446 tax paid during the partnership's taxable 
year on behalf of a foreign partner shall be provided to such foreign 
partner in accordance with paragraph (d) of this section and such 
information may be taken into account by the foreign partner when 
computing the partner's estimated tax liability during the taxable 
year. Form 1040NR, ``U.S. Nonresident Alien Income Tax Return,'' Form 
1065, ``U.S. Return of Partnership Income,'' Form 1120F, ``U.S. Income 
Tax Return of a Foreign Corporation,'' or such other return as 
appropriate, must be filed by the partner, and any tax due must be 
paid, by the filing deadline (including extensions) generally 
applicable to such person. Pursuant to Sec.  1.1446-3(d), a partner may 
generally claim a credit under section 33 for its share of any 1446 tax 
paid by the partnership against the amount of income tax (or 1446 tax 
in the case of tiers of partnerships) as computed in such partner's 
return.


Sec.  1.1446-4  Publicly traded partnerships.

    (a) In general. This section sets forth rules for applying the 
section 1446 withholding tax (1446 tax) to publicly traded 
partnerships. A publicly traded partnership (as defined in paragraph 
(b) of this section) that has effectively connected gross income, gain 
or loss must pay 1446 tax by withholding from distributions to a 
foreign partner. Publicly traded partnerships that withhold on 
distributions must pay over and report any 1446 tax as provided in 
paragraph (c), and generally are not to pay over and report the 1446 
tax under the rules in Sec.  1.1446-3. However, under paragraph (g) of 
this section, a publicly traded partnership may elect not to apply the 
rules of this section, and instead, to pay the 1446 tax based on the 
effectively connected taxable income (ECTI) allocable under section 704 
to foreign partners under the general rules of Sec. Sec.  1.1446-1 
through 1.1446-3. The amount of the withholding tax on distributions, 
other than distributions excluded under paragraph (f) of this section, 
that are made during any partnership taxable year, equals the 
applicable percentage (defined in paragraph (b)(2) of this section) of 
such distributions.
    (b) Definitions--(1) Publicly traded partnership. For purposes of 
this section, the term publicly traded partnership has the same meaning 
as in section 7704 (including the regulations thereunder), but does not 
include a publicly traded partnership treated as a corporation under 
that section.
    (2) Applicable percentage. For purposes of this section, applicable 
percentage shall have the meaning as set forth in Sec.  1.1446-3(a)(2).
    (3) Nominee. For purposes of this section, the term nominee means a 
domestic person that holds an interest in a publicly traded partnership 
on behalf of a foreign person.
    (4) Qualified notice. For purposes of this section, a qualified 
notice is a notice given by a publicly traded partnership regarding a 
distribution that is attributable to effectively connected income, gain 
or loss of the partnership, and in accordance with the notice 
requirements with respect to dividends described in 17 CFR 240.10b-
17(b)(1) or (3) issued pursuant to the Securities Exchange Act of 1934, 
15 U.S.C. section 78(a).
    (c) Time and manner of payment. The withholding tax required under 
this section is to be paid pursuant to the rules and procedures of 
section 1461, Sec. Sec.  1.1461-1, 1.1461-2, and 1.6302-2. However, the 
reimbursement and set-off procedures set forth in those regulations 
shall not apply. A publicly traded partnership must use Form 1042, 
``Annual Withholding Tax Return for U.S. Source Income of Foreign 
Persons,'' and Form 1042-S, ``Foreign Person's U.S. Source Income 
Subject to Withholding,'' to report withholding from distributions 
under this section. See Sec.  1.1461-1(b). See Sec.  1.1446-
3(d)(1)(vii) requiring a foreign trust or estate that holds an interest 
in a publicly traded partnership to provide a statement to the 
beneficiaries of such foreign trust or estate with respect to the 
credit to be claimed under section 33. For penalties and additions to 
the tax for failure to comply with this section, see Sec. Sec.  1.1461-
1 and 1.1461-3.
    (d) Rules for designation of nominees to withhold tax under section 
1446. A nominee that receives a distribution from a publicly traded 
partnership subject to withholding under this section, and which is to 
be paid to (or for the account of) any foreign person, may be treated 
as a withholding agent under this section. A nominee is treated as a 
withholding agent under this section only to the extent of the amount 
specified in the qualified notice (as defined in paragraph (b)(4) of 
this section) that the nominee receives. Where a nominee is designated 
as a withholding agent with respect to a foreign partner of the 
partnership, then the obligation to withhold on distributions to such 
foreign partner in accordance with the rules of this section shall be 
imposed solely on the nominee. A nominee under this section shall 
identify itself as a nominee by providing Form W-9, ``Request for 
Taxpayer Identification Number and Certification,'' to the partnership, 
along with the statement required by paragraph (e)(1) of this section. 
If a nominee furnishes Form W-9 and the statement required by paragraph 
(e)(1) of this section to the partnership, but a qualified notice is 
not received by the nominee from the partnership, the nominee shall not 
be a withholding agent subject to the rules of this section and the 
partnership shall presume that such nominee is a nonresident alien 
individual or foreign corporation, whichever classification results in 
a higher 1446 tax being due, and pay a withholding tax consistent with 
such presumption. A nominee responsible for

[[Page 52481]]

withholding under the rules of this section shall be subject to 
liability under sections 1461 and 6655, as well as for all applicable 
penalties and interest, as if such nominee was a partnership 
responsible for withholding under this section.
    (e) Determining foreign status of partners--(1) In general. Except 
as provided in paragraph (d) of this section permitting nominees to 
submit a Form W-9 to a publicly traded partnership, the rules of Sec.  
1.1446-1 shall apply in determining whether a partner of a publicly 
traded partnership is a foreign partner for purposes of the 1446 tax 
(see Sec.  1.1446-4(a)) and a nominee obligated to withhold under this 
section shall be entitled to rely on a Form W-8BEN, ``Certificate of 
Foreign Status of Beneficial Owner for United States Tax Withholding,'' 
Form W-8IMY, ``Certificate of Foreign Intermediary, Flow-Through 
Entity, or Certain U.S. Branches for United States Tax Withholding,'' 
or Form W-9, ``Request for Taxpayer Identification Number,'' received 
from persons on whose behalf it holds interests in the partnership to 
the same extent a partnership is entitled to rely on such forms under 
those rules. In addition to the rules stated in Sec. Sec.  1.1446-1 
through 1.1446-3 with respect to certificates establishing a partner as 
a domestic or foreign person, a nominee shall attach a brief statement 
to the Form W-9 that it furnishes to the partnership, informing the 
partnership that the nominee holds interests in the partnership on 
behalf of one or more foreign persons, including information that 
permits the partnership to determine the partnership interest held on 
behalf of such foreign persons. A statement furnished by a nominee 
pursuant to Sec.  1.6031(c)-1T satisfies the requirements of the 
previous sentence.
    (2) Presumptions regarding payee's status in absence of 
documentation. The rules of Sec.  1.1446-1(c)(3) shall apply to 
determine a partner's status in the absence of documentation.
    (f) Distributions subject to withholding--(1) In general. Except as 
provided in this paragraph (f)(1), a publicly traded partnership must 
withhold at the applicable percentage with respect to any actual 
distribution made to a foreign partner. The amount of a distribution 
subject to 1446 tax includes the amount of any 1446 tax required to be 
withheld on the distribution and, in the case of a partnership that 
receives a partnership distribution from another partnership in which 
it is a partner (i.e., a tiered structure described in Sec.  1.1446-5), 
any 1446 tax that was withheld from such distribution. For example, a 
foreign publicly traded partnership, UTP, owns an interest in domestic 
publicly traded partnership, LTP. UTP does not provide LTP any 
documentation with respect to its domestic or foreign status. LTP and 
UTP each have a calendar taxable year. LTP makes a distribution subject 
to section 1446 of $100 to UTP during its taxable year beginning 
January 1, 2004, and withholds 35 percent (the highest rate in section 
1) of that distribution under section 1446. UTP receives a net 
distribution of $65 which it immediately redistributes to its partners. 
UTP has a liability to pay 35 percent of the total actual and deemed 
distribution it makes to its foreign partners as a section 1446 
withholding tax. UTP may credit the $35 withheld by LTP against this 
liability as if it were paid by UTP. When UTP distributes the $65 it 
actually receives from LTP to its partners, UTP is treated for purposes 
of section 1446 as if it made a distribution of $100 to its partners 
($65 actual distribution and $35 deemed distribution). UTP's partners 
(U.S. and foreign) may claim a credit against their U.S. income tax 
liability for their allocable share of the $35 of 1446 tax paid on 
their behalf.
    (2) In-kind distributions. If a publicly traded partnership 
distributes property other than money, the partnership shall not 
release the property until it has funds sufficient to enable the 
partnership to pay over in money the required 1446 tax.
    (3) Ordering rule relating to distributions. Distributions from 
publicly traded partnerships are deemed to be paid out of the following 
types of income in the order indicated--
    (i) Amounts attributable to income described in section 1441 or 
1442 that are not effectively connected, without regard to whether such 
amounts are subject to withholding because of a treaty or statutory 
exemption;
    (ii) Amounts attributable to recurring dispositions of crops and 
timber that are subject to withholding under Sec.  1.1445-5(c)(3)(iv) 
of the regulations, which continue to be subject to the rules of Sec.  
1.1445-5(c)(3);
    (iii) Amounts effectively connected with a U.S. trade or business, 
but not subject to withholding under section 1446 (e.g., exempt by 
treaty);
    (iv) Amounts subject to withholding under section 1446; and
    (v) Amounts not listed in paragraphs (f)(3)(i) through (iv) of this 
section.
    (4) Coordination with section 1445(e)(1). Except as otherwise 
provided in this section, a publicly traded partnership that complies 
with the requirements of withholding under section 1446 and this 
section will be deemed to have satisfied the requirements of section 
1445(e)(1) and the regulations thereunder. Notwithstanding the excluded 
amounts set forth in paragraph (f)(3) of this section, distributions 
subject to withholding at the applicable percentage shall include the 
following--
    (i) Amounts subject to withholding under section 1445(e)(1) upon 
distribution pursuant to an election under Sec.  1.1445-5(c)(3); and
    (ii) Amounts not subject to withholding under section 1445 because 
the distributee is a partnership or is a foreign corporation that has 
made an election under section 897(i).
    (g) Election to withhold based upon ECTI allocable to foreign 
partners instead of withholding on distributions. A publicly traded 
partnership may elect to comply with the requirements of Sec. Sec.  
1.1446-1 through 1.1446-3 (relating to withholding on ECTI allocable to 
foreign partners) and Sec.  1.1446-5 (relating to tiered partnership 
structures) instead of the rules of this section. A publicly traded 
partnership shall make the election described in this paragraph (g) by 
complying with the payment and reporting requirements of Sec. Sec.  
1.1446-1 through 1.1446-3 and by complying with the information 
reporting requirements of this paragraph (g). The election is made by 
attaching a statement to a timely filed Form 8804, ``Annual Return for 
Partnership Withholding Tax (Section 1446),'' that is required to be 
filed by the partnership for the taxable year, indicating that the 
partnership is a publicly traded partnership that is electing to pay 
the 1446 tax under section 1446 based upon ECTI allocable under section 
704 to its foreign partners. Once made, an election under this 
paragraph (g) may be revoked only with the consent of the Commissioner.


Sec.  1.1446-5  Tiered partnership structures.

    (a) In general. The rules of this section shall apply in cases 
where a partnership (lower-tier partnership) that has effectively 
connected taxable income (ECTI), has a partner that is itself a 
partnership (upper-tier partnership). A partnership that directly or 
indirectly (through a chain of partnerships) owns a partnership 
interest in a lower-tier partnership shall be allowed a credit against 
its own section 1446 withholding tax (1446 tax) for the tax paid by the 
lower-tier partnership on its behalf. If an upper-tier domestic 
partnership directly owns an interest in a lower-tier partnership, the 
lower-tier partnership is not required to pay a withholding tax with 
respect to the upper-tier partnership's allocable share

[[Page 52482]]

of effectively connected taxable income (ECTI), regardless of whether 
the upper-tier domestic partnership's partners are foreign.
    (b) Reporting requirements--(1) In general. To the extent that an 
upper-tier partnership that is a foreign partnership is a partner in a 
lower-tier partnership, and the lower-tier partnership has made 1446 
tax installment payments on ECTI allocable to the upper-tier 
partnership, the upper-tier partnership shall receive a copy of the 
statements and forms filed by the lower-tier partnership allocable to 
its partnership interest in the lower-tier partnership under Sec. Sec.  
1.1446-1 through 1.1446-3 (e.g., Form 8805, ``Foreign Partner's 
Information Statement of Section 1446 Withholding Tax''). The upper-
tier partnership may treat the 1446 tax paid by the lower-tier 
partnership on its behalf as a credit against its liability to pay 1446 
tax, as if the upper-tier partnership actually paid over the amounts at 
the time that the amounts were paid by the lower-tier partnership. See 
Sec.  1.1462-1(b). However, the upper-tier partnership may not obtain a 
refund for the amounts paid by the lower-tier partnership, but instead, 
must file such forms as prescribed by Sec.  1.1446-3 and this section 
to allow the credits under section 33 to be properly claimed by the 
beneficial owners of such income. See Sec.  1.1462-1. The upper-tier 
partnership must file Form 8804, ``Annual Return for Partnership 
Withholding Tax (Section 1446),'' and Form 8805, ``Foreign Partner's 
Information Statement of Section 1446 Withholding Tax,'' with respect 
to its 1446 tax obligation, passing the credit for 1446 tax paid by the 
lower-tier partnership to its partners.
    (2) Publicly traded partnerships. In the case of an upper-tier 
foreign partnership that is a publicly traded partnership, the rules of 
Sec.  1.1446-4(c) shall apply.
    (c) Look through rules for foreign upper-tier partnerships. For 
purposes of computing the 1446 tax obligation of a lower-tier 
partnership, if an upper-tier partnership owns an interest in the 
lower-tier partnership, the upper-tier partnership's allocable share of 
the lower-tier partnership's ECTI shall be treated as allocable to the 
partners of the upper-tier partnership (as if they were direct partners 
in the lower-tier partnership) to the extent that--
    (1) The upper-tier partnership furnishes the lower-tier partnership 
with a valid Form W-8IMY, ``Certificate of Foreign Intermediary, Flow 
Through Entity, or Certain U.S. Branches for United States Tax 
Withholding,'' indicating that it is a look-through foreign partnership 
for purposes of section 1446, and
    (2) The lower-tier partnership can reliably associate (within the 
meaning of Sec.  1.1441-1(b)(2)(vii)) the effectively connected 
partnership items allocable to the upper-tier partnership with a Form 
W-8BEN, ``Certificate of Foreign Status of Beneficial Owner for U.S. 
Tax Withholding,'' Form W-8IMY, or Form W-9, ``Request for Taxpayer 
Identification Number and Certification,'' for each of the upper-tier 
partnership's partners. The principles of Sec.  1.1441-1(b)(2)(vii) 
shall apply to determine whether a lower-tier partnership can reliably 
associate effectively connected partnership items allocable to the 
upper-tier partnership to the partners of the upper-tier partnership. 
The upper-tier partnership shall provide the lower-tier partnership 
with a withholding certificate for each partner in the upper-tier 
partnership and information regarding the allocation of effectively 
connected items to the respective partners of the upper-tier 
partnership. To the extent the lower-tier partnership receives a valid 
Form W-8IMY from the upper-tier partnership but cannot reliably 
associate the upper-tier partnership's allocable share of effectively 
connected partnership items with a withholding certificate for each of 
the upper-tier partnership's partners, the lower-tier partnership shall 
withhold at the higher of the applicable percentages in section 
1446(b). If a lower-tier partnership has not received a valid Form W-
8IMY from the upper-tier partnership, the lower-tier partnership shall 
withhold at the higher of the applicable percentages in section 
1446(b). See Sec.  1.1446-1(c)(3). The approach set forth in this 
paragraph (c) shall not apply to partnerships whose interests are 
publicly traded. See Sec.  1.1446-4.
    (d) Examples. The following examples illustrate the provisions of 
Sec.  1.1446-5:

    Example 1. Sufficient documentation--tiered partnership 
structure. (i) Nonresident alien (NRA) and foreign corporation (FC) 
are partners in PRS, a foreign partnership, and share profits and 
losses in PRS 70 and 30 percent, respectively. All of PRS's 
partnership items are allocated based upon each partner's respective 
ownership interest and it is assumed that these allocations are 
respected under section 704(b) and the regulations thereunder. NRA 
and FC each furnish PRS with a valid Form W-8BEN establishing 
themselves as a foreign individual and foreign corporation, 
respectively. PRS holds a 40 percent interest in the profits, losses 
and capital of LTP, a lower-tier partnership. NRA holds the 
remaining 60 percent interest in profits, losses and capital of LTP. 
LTP has $100 of annualized ECTI for the relevant installment period. 
PRS has no income other than the income allocated from LTP. PRS 
provides LTP with a valid Form W-8IMY indicating that it is a 
foreign partnership and attaches the valid Form W-8BENs executed by 
NRA and FC, as well as a statement describing the allocation of 
PRS's effectively connected items among its partners. Further, NRA 
provides a valid Form W-8BEN to LTP.
    (ii) LTP must pay 1446 tax on the $60 allocable to its direct 
partner NRA using the highest rate in section 1.
    (iii) With respect to the effectively connected partnership 
items that LTP can reliably associate with NRA through PRS (70 
percent of PRS's allocable share, or $28), LTP will pay 1446 tax on 
NRA's allocable share of LTP's partnership ECTI (as determined by 
looking through PRS) using the applicable percentage for non-
corporate partners (the highest rate in section 1).
    (iv) With respect to the effectively connected partnership items 
that LTP can reliably associate with FC through PRS (30 percent of 
PRS's allocable share, or $12), LTP will pay 1446 tax on FC's 
allocable share of LTP's ECTI (as determined by looking through PRS) 
using the applicable percentage for corporate partners.
    (v) LTP's payment of the 1446 tax is treated as a distribution 
to NRA and PRS, its direct partners, that those partners may credit 
against their respective tax obligations. PRS will report its 1446 
tax obligation with respect to its direct foreign partners, NRA and 
FC, on the Form 8804 and Form 8805 that it files with the Internal 
Revenue Service and will credit the amount withheld by LTP. Thus, 
PRS will pass along to NRA and FC the credit for the 1446 tax 
withheld by LTP which will be treated as a distribution to them.
    Example 2. Insufficient documentation--tiered partnership 
structure. PRS is a domestic partnership that has two equal partners 
A and UTP. A is a nonresident alien individual and UTP is a foreign 
partnership that has two equal foreign partners, C and D. Neither A 
nor UTP provide PRS with a valid Form W-8BEN, Form W-8IMY, or Form 
W-9. Neither C nor D provide UTP with a valid Form W-8BEN, Form W-
8IMY, or Form W-9. PRS must presume that UTP is a foreign person 
subject to withholding under section 1446 at the higher of the 
highest rate under section 1 or 11(b)(1). PRS has also not received 
any documentation with respect to A. PRS must presume that A is a 
foreign person, and, if PRS knows that A is an individual, compute 
and pay 1446 tax based on that knowledge.


Sec.  1.1446-6  Effective date.

    Sections 1.1446-1 through 1.1446-5 shall apply to partnership 
taxable years beginning after the date that these regulations are 
published as final regulations in the Federal Register.
    Par. 5. Section 1.1461-1 is amended as follows:
    1. Paragraph (a)(1) is amended by adding three sentences at the end 
of the paragraph.
    2. The second sentence of paragraph (c)(1)(i) is removed and two 
sentences are added in its place.

[[Page 52483]]

    3. Paragraph (c)(1)(ii)(A)(8) is redesignated as paragraph 
(c)(1)(ii)(A)(9), and a new paragraph (c)(1)(ii)(A)(8) is added.
    4. The first sentence of paragraph (c)(2)(i) is removed and two 
sentences are added in its place.
    5. The first sentence of paragraph (c)(3) is removed and two 
sentences are added in its place.
    6. Paragraph (i) is revised.
    The additions and revisions read as follows:


Sec.  1.1461-1  Payment and returns of tax withheld.

    (a) * * *
    (1) * * * With respect to withholding under section 1446, this 
section shall only apply to publicly traded partnerships that have not 
made an election under Sec.  1.1446-4(g). See Sec.  1.1461-3 for 
penalties applicable to partnerships that fail to withhold under 
section 1446 on effectively connected taxable income allocable to 
foreign partners, including a publicly traded partnership that has made 
an election under Sec.  11446-4(g). The previous two sentences shall 
apply to partnership taxable years beginning after the date that these 
regulations are published as final regulations in the Federal Register.
* * * * *
    (c) * * *
    (1) * * *
    (i) * * * Notwithstanding the preceding sentence, any person that 
withholds or is required to withhold an amount under sections 1441, 
1442, 1443, or Sec.  1.1446-4(a) must file a Form 1042-S, ``Foreign 
Person's U.S. Source Income Subject to Withholding,'' for the payment 
withheld upon whether or not that person is engaged in a trade or 
business and whether or not the payment is an amount subject to 
reporting. The reference in the previous sentence to withholding under 
Sec.  1.1446-4 shall apply to partnership taxable years beginning after 
the date that these regulations are published as final regulations in 
the Federal Register. * * *
    (ii) * * *
    (A) * * *
    (8) A partner receiving a distribution from a publicly traded 
partnership subject to withholding under section 1446 and Sec.  1.1446-
4. This paragraph (c)(1)(ii)(A)(8) shall apply to partnership taxable 
years beginning after the date that these regulations are published as 
final regulations in the Federal Register.
* * * * *
    (2) Amounts subject to reporting--(i) In general. Subject to the 
exceptions described in paragraph (c)(2)(ii) of this section, amounts 
subject to reporting on Form 1042-S are amounts paid to a foreign payee 
or partner (including persons presumed to be foreign) that are amounts 
subject to withholding as defined in Sec.  1.1441-2(a) or Sec.  1.1446-
4(a). The reference in the previous sentence to withholding under Sec.  
1.1446-4 shall apply to partnership taxable years beginning after the 
date that these regulations are published as final regulations in the 
Federal Register. * * *
* * * * *
    (3) Required information. The information required to be furnished 
under this paragraph (c)(3) shall be based upon the information 
provided by or on behalf of the recipient of an amount subject to 
reporting (as corrected and supplemented based on the withholding 
agent's actual knowledge) or the presumption rules of Sec. Sec.  
1.1441-1(b)(3), 1.1441-4(a); 1.1441-5(d) and (e); 1.1441-9(b)(3), 
1.1446-1(c)(3) or 1.6049-5(d). The reference in the previous sentence 
to presumption rules applicable to withholding under section 1446 shall 
apply to partnership taxable years beginning after the date that these 
regulations are published as final regulations in the Federal Register. 
* * *
* * * * *
    (i) Effective date. Unless otherwise provided in this section, this 
section shall apply to returns required for payments made after 
December 31, 2000.
    Par. 6. Section 1.1461-2 is amended by:
    1. Removing the first sentence of paragraph (a)(1) and adding two 
sentences in its place.
    2. Revising paragraphs (b) and (d).
    The revisions and addition read as follows:


Sec.  1.1461-2  Adjustments for overwithholding or underwithholding of 
tax.

    (a) Adjustments of overwithheld tax--(1) In general. Except for 
partnerships or nominees required to withhold under section 1446, a 
withholding agent that has overwithheld under chapter 3 of the Internal 
Revenue Code, and made a deposit of the tax as provided in Sec.  
1.6302-2(a) may adjust the overwithheld amount either pursuant to the 
reimbursement procedure described in paragraph (a)(2) of this section 
or pursuant to the set-off procedure described in paragraph (a)(3) of 
this section. References in the previous sentence excepting from this 
section certain partnerships withholding under section 1446 shall apply 
to partnership taxable years beginning after the date that these 
regulations are published as final regulations in the Federal Register. 
* * *
* * * * *
    (b) Withholding of additional tax when underwithholding occurs. A 
withholding agent may withhold from future payments (or a partner's 
allocable share of ECTI under section 1446) made to a beneficial owner 
the tax that should have been withheld from previous payments (or paid 
under section 1446 with respect to a partner's allocable share of ECTI) 
to such beneficial owner under chapter 3 of the Internal Revenue Code. 
In the alternative, the withholding agent may satisfy the tax from 
property that it holds in custody for the beneficial owner or property 
over which it has control. Such additional withholding or satisfaction 
of the tax owed may only be made before the date that the annual return 
(e.g. Form 1042, Form 8804) is required to be filed (not including 
extensions) for the taxable year in which the underwithholding 
occurred. See Sec.  1.6302-2 for making deposits of tax or Sec.  
1.1461-1(a) for making payment of the balance due for a calendar year. 
See also Sec. Sec.  1.1461-1, 1.1461-3, and 1.1446-1 through 1.1446-5 
for rules relating to withholding under section 1446. References in 
this paragraph (b) to withholding under section 1446 shall apply to 
partnership taxable years beginning after the date that these 
regulations are published as final regulations in the Federal Register.
* * * * *
    (d) Effective date. Unless otherwise provided in this section, this 
section applies to payments made after December 31, 2000.
    Par. 7. Section 1.1461-3 is added to read as follows.


Sec.  1.1461-3  Withholding under section 1446.

    For rules relating to the withholding tax liability of a 
partnership or nominee under section 1446, see Sec. Sec.  1.1446-1 
through 1.1446-6. For penalties and additions to the tax for failure to 
timely pay the tax required to be paid under section 1446, see sections 
6655 (in the case of publicly traded partnerships that have not made an 
election under Sec.  1.1446-4(g), see section 6656), 6672, and 7202 and 
the regulations under those sections. For penalties and additions to 
the tax for failure to file returns or furnish statements in accordance 
with the regulations under section 1446, see sections 6651, 6662, 6663, 
6721, 6722, 6723, 6724(c), 7201, 7203, and the regulations under those 
sections. This section shall apply to partnership taxable years 
beginning after the date that these regulations are

[[Page 52484]]

published as final regulations in the Federal Register.
    Par. 8. Section 1.1462-1 is amended by revising paragraphs (b) and 
(c) to read as follows:


Sec.  1.1462-1  Withheld tax as credit to recipient of income.

* * * * *
    (b) Amounts paid to persons who are not the beneficial owner. 
Amounts withheld at source under chapter 3 of the Internal Revenue Code 
on payments to (or effectively connected taxable income allocable to) a 
fiduciary, partnership, or intermediary is deemed to have been paid by 
the taxpayer ultimately liable for the tax upon such income. Thus, for 
example, if a beneficiary of a trust is subject to the taxes imposed by 
section 1, 2, 3, or 11 upon any portion of the income received from a 
foreign trust, the part of any amount withheld at source which is 
properly allocable to the income so taxed to such beneficiary shall be 
credited against the amount of the income tax computed upon the 
beneficiary's return, and any excess shall be refunded. See Sec.  
1.1446-3 for examples applying this rule in the context of a 
partnership interest held through a foreign trust or estate. Further, 
if a partnership withholds an amount under chapter 3 of the Internal 
Revenue Code with respect to the distributive share of a partner that 
is a partnership or with respect to the distributive share of partners 
in an upper-tier partnership, such amount is deemed to have been 
withheld by the upper-tier partnership. See Sec.  1.1446-5 for rules 
applicable to tiered partnership structures. References in this 
paragraph (b) to withholding under section 1446 shall apply to 
partnership taxable years beginning after the date that these 
regulations are published as final regulations in the Federal Register.
    (c) Effective date. Unless otherwise provided in this section, this 
section applies to payments made after December 31, 2000.
    Par. 9. Section 1.1463-1 is amended by:
    1. Adding two sentences at the end of paragraph (a).
    2. Revising paragraph (b).
    The addition and revision read as follows:


Sec.  1.1463-1  Tax paid by recipient of income.

    (a) * * * See Sec.  1.1446-3(f) for additional rules where the tax 
was required to be withheld under section 1446. The reference in the 
previous sentence to withholding under section 1446 shall apply to 
partnership taxable years beginning after the date that these 
regulations are published as final regulations in the Federal Register.
    (b) Effective date. Unless otherwise provided in this section, this 
section applies to failures to withhold occurring after December 31, 
2000.

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 10. The authority for 26 CFR part 301 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 11. In Sec.  301.6109-1 is amended as follows:
    1. In paragraph (b)(2)(vi), remove the word ``and''.
    2. In paragraph (b)(2)(vii), remove the period at the end of the 
paragraph and add ``; and'' in its place.
    3. Paragraph (b)(2)(viii) is added.
    4. In paragraph (c), the first three sentences are revised and a 
sentence is added at the end of the paragraph.
    The amendments and additions read as follows:


Sec.  301.6109-1  Identifying numbers.

* * * * *
    (b) * * *
    (2) * * *
    (viii) A foreign person that furnishes a withholding certificate 
described in Sec.  1.1446-1(c)(2) or (3) of this chapter. This 
paragraph (b)(2)(viii) shall apply to partnership taxable years 
beginning after the date these regulations are published as final 
regulations in the Federal Register.
    (c) Requirement to furnish another's number. Every person required 
under this title to make a return, statement, or other document must 
furnish such taxpayer identifying numbers of other U.S. persons and 
foreign persons that are described in paragraph (b)(2)(i), (ii), (iii), 
(vi), (vii), or (viii) of this section as required by the forms and the 
accompanying instructions. The taxpayer identifying number of any 
person furnishing a withholding certificate referred to in paragraph 
(b)(2)(vi) or (viii) of this section shall also be furnished if it is 
actually known to the person making a return, statement, or other 
document described in this paragraph (c). If the person making the 
return, statement, or other document does not know the taxpayer 
identifying number of the other person, and such other person is one 
that is described in paragraph (b)(2)(i), (ii), (iii), (vi), (vii), or 
(viii) of this section, such person must request the other person's 
number. * * * References in this paragraph (c) to paragraph 
(b)(2)(viii) of this section shall apply to partnership taxable years 
beginning after the date these regulations are published as final 
regulations in the Federal Register.
* * * * *
    Par. 12. In Sec.  301.6721-1, paragraph (g)(4) is revised to read 
as follows:


Sec.  301.6721-1  Failure to file correct information returns.

* * * * *
    (g) * * *
    (4) Other items. The term information return also includes any 
form, statement, or schedule required to be filed with the Internal 
Revenue Service with respect to any amount from which tax is required 
to be deducted and withheld under chapter 3 of the Internal Revenue 
Code (or from which tax would be required to be so deducted and 
withheld but for an exemption under the Internal Revenue Code or any 
treaty obligation of the United States), generally Forms 1042-S, 
``Foreign Person's U.S. Source Income Subject to Withholding,'' and 
8805, ``Foreign Partner's Information Statement of Section 1446 
Withholding Tax.'' The provisions of this paragraph (g)(4) referring to 
Form 8805, shall apply to partnership taxable years beginning after the 
date these regulations are published as final regulations in the 
Federal Register.

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 03-22175 Filed 9-2-03; 8:45 am]
BILLING CODE 4830-01-P