[Federal Register Volume 70, Number 95 (Wednesday, May 18, 2005)]
[Rules and Regulations]
[Pages 28702-28742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-9424]



[[Page 28701]]

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Part III





Department of the Treasury





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Internal Revenue Service



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26 CFR Parts 1, 301, and 602



Section 1446 Regulations; Witholding on Effectively-Connected Taxable 
Income Allocable to Foreign Partners; Final Rule and Proposed Rule

  Federal Register / Vol. 70, No. 95 / Wednesday, May 18, 2005 / Rules 
and Regulations  

[[Page 28702]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 301, and 602

[TD 9200]
RIN 1545-AY28, 1545-BD80


Section 1446 Regulations; Withholding on Effectively-Connected 
Taxable Income Allocable to Foreign Partners

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final regulations regarding a 
partnership's obligation to pay withholding tax under section 1446 on 
effectively connected taxable income allocable under section 704 to a 
foreign partner. The regulations interpret the rules added to the 
Internal Revenue Code by section 1246(a) of the Tax Reform Act of 1986 
(1986 Act), as amended by section 1012(s)(1)(A) of the Technical and 
Miscellaneous Revenue Act of 1988 (1988 Act), and section 7811(i)(6) of 
the Omnibus Budget Reconciliation Act of 1989 (1989 Act). The 
regulations will affect partnerships engaged in a trade or business in 
the United States that have one or more foreign partners. The final 
regulations also include conforming amendments to sections 871, 1443, 
1461, 1462, 1463, 6109, and 6721. This document also contains temporary 
regulations under section 1446 that may apply to reduce or eliminate a 
partnership's obligation to pay withholding tax in certain 
circumstances.

DATES: Effective Date: This rule is effective May 18, 2005.
    Applicability Dates: The final and temporary regulations included 
in this document are applicable to partnership taxable years beginning 
after May 18, 2005. However, a partnership may elect to apply the 
provisions of the final regulations to partnership taxable years 
beginning after December 31, 2004. Further, a partnership may elect to 
apply the temporary regulations to partnership taxable years beginning 
after December 31, 2004, provided the partnership also elects to apply 
the final regulations to partnership taxable years beginning after 
December 31, 2004.

FOR FURTHER INFORMATION CONTACT: Ronald M. Gootzeit at (202) 622-3860 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in the final regulations 
have been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control numbers 1545-1852 and 1545-1934. Responses to 
these collections of information are required to determine the extent 
to which a partnership is required to pay a withholding tax with 
respect to a foreign partner, to 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. The estimated annual burden per respondent/
recordkeeper for the collections in the final regulation varies from 15 
minutes to 1 hour, depending on individual circumstances, with an 
estimated average of 30 minutes.
    The collections of information contained in the temporary 
regulation have been reviewed, and pending public comment, approved by 
the Office of Management and Budget in accordance with the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-
1934. To comment on the collection of information in the temporary 
regulation, please refer to the cross-referenced NPRM (REG-108524-00) 
published elsewhere in this issue of the Federal Register.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information 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

    On September 3, 2003, the IRS and Treasury Department published in 
the Federal Register a notice of proposed rulemaking [REG-108524-00; 
2003-42 I.R.B. 869; 68 FR 52466], corrected at 68 FR 62553 (November 5, 
2003)) under sections 871, 1443, 1446, 1461, 1462, 1463, 6109, and 6721 
of the Internal Revenue Code (Code). The regulations interpret rules 
added to the Code by the 1986 Act, as amended by the 1988 Act and the 
1989 Act. The regulations provide guidance for partnerships required to 
pay withholding tax under section 1446 of the Code (1446 tax). Written 
comments were received in response to the notice of proposed 
rulemaking, and a public hearing was held on December 4, 2003. After 
consideration of all the comments, the proposed regulations under 
sections 871, 1443, 1446, 1461, 1462, 1463, 6109, and 6721 are adopted, 
as revised by this Treasury Decision. The comments received and the 
revisions are discussed below.
    In addition, this document contains temporary regulations that set 
forth rules to reduce or eliminate a partnership's 1446 tax obligation 
with respect to a foreign partner in certain circumstances. 
Specifically, the temporary regulations address when a partnership is 
permitted to consider partner-level deductions and losses when 
computing its 1446 tax (or any installment of such tax) with respect to 
a foreign partner's allocable share of partnership effectively 
connected taxable income (ECTI). The temporary regulations are also 
being issued as proposed regulations in another section of this 
bulletin. The temporary regulations apply to partnership taxable years 
beginning after May 18, 2005. However, a partnership may elect to apply 
the temporary regulations to partnership taxable years beginning after 
December 31, 2004, provided the partnership also elects to apply the 
final regulations to partnership taxable years beginning after December 
31, 2004.

Explanation of Provisions

A. Determining the Status and Classification of Partners--Sec.  1.1446-
1

    Under Sec.  1.1446-1 of the proposed regulations, a partnership 
generally determines the status of its partners based upon Form W-8BEN, 
``Certificate of Foreign Status of Beneficial Owner,'' 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,'' 
submitted by its partners. A partnership may also rely on other means 
to determine the non-foreign status of its partners, provided that the 
partnership's determination is correct. As described below, several 
commentators suggest that the final regulations permit the submission 
of additional forms to more closely align the section 1446 
documentation requirements with the requirements under the section 1441 
withholding regime.
1. Recognition of Form W-8ECI
    Under section 6.01 of Rev. Proc. 89-31 (1989-1 C.B. 895), as 
modified by

[[Page 28703]]

Rev. Proc. 92-66 (1992-2 C.B. 428), a partnership is required to 
include income subject to a partner's election under section 871(d) or 
section 882(d) (relating to the treatment of real property income as 
effectively connected income) in its computation of partnership ECTI 
when determining its 1446 tax obligation. Rev. Proc. 89-31 also 
provides that if a partner submits Form 4224 (predecessor form to Form 
W-8ECI, ``Certificate of Foreign Person's Claim for Exemption From 
Withholding on Income Effectively Connected With the Conduct of a Trade 
or Business in the United States''), the partner's allocable share of 
income and gain is deemed to be effectively connected income for 
purposes of section 1446 (deemed ECI rule). Under the section 1441 
withholding regime, a payee may provide Form W-8ECI to a withholding 
agent and thereby be exempt from withholding under section 1441 because 
the income paid is effectively connected income to the payee. 
Accordingly, under Rev. Proc. 89-31, a foreign partner that has made an 
election under section 871(d) or section 882(d) can submit Form W-8ECI 
to a partnership to satisfy its documentation requirements under 
section 1441 and section 1446.
    Consistent with Rev. Proc. 89-31, the proposed regulations require 
a partnership to include income subject to a partner's election under 
section 871(d) or section 882(d) in its computation of partnership ECTI 
for purposes of section 1446. However, the proposed regulations do not 
explicitly recognize Form W-8ECI as a form establishing the status of a 
partner. One commentator notes that the deemed ECI rule in Rev. Proc. 
89-31 is useful and provides a clear mechanism for a partnership to 
discharge its 1446 tax obligation. Accordingly, the commentator 
suggests that the final regulations recognize Form W-8ECI and the 
deemed ECI rule for purposes of section 1446.
    Treasury and the IRS agree with the commentator's suggestion. 
Accordingly, the final regulations allow a partner to submit Form W-
8ECI to satisfy the documentation requirements of section 1446. Thus, 
if a partner provides Form W-8ECI to a partnership to claim exemption 
from withholding under sections 1441 and 1442, then the form will be 
accepted for purposes of section 1446, and will operate, consistent 
with the information on such form, to cause the partnership to consider 
the partner's allocable share of income as effectively connected and 
subject to withholding under section 1446.
2. Recognition of Form W-8EXP
    The proposed regulations do not recognize Form W-8EXP, 
``Certificate of Foreign Government or Other Foreign Organization for 
United States Tax Withholding,'' as a form that can establish the 
foreign status of a partner for purposes of section 1446. However, 
under the section 1441 withholding regime, for example, a foreign tax-
exempt organization may submit Form W-8EXP to a payer of income to 
claim that the organization is a foreign tax-exempt organization that 
is exempt from withholding under sections 1441 and 1443(a) because the 
income being paid will not be includible in the organization's 
computation of its unrelated business taxable income (UBTI). One 
commentator notes that a foreign tax-exempt organization may be 
required to provide Form W-8EXP to a partnership for purposes of the 
section 1441 withholding regime, and Form W-8BEN for purposes of the 
section 1446 withholding regime. We note that the same issue exists 
with respect to other foreign persons (e.g., foreign governments) that 
may provide Form W-8EXP for purposes of sections 1441 through 1443. The 
commentator suggests that the final regulations permit a foreign tax-
exempt organization (and other applicable persons) to provide Form W-
8EXP to a partnership to establish the foreign status of such partner 
for purposes of section 1446 to eliminate the circumstances where such 
person has to be ``double documented.''
    The final regulations adopt this suggestion. Treasury and the IRS 
believe that the documentation requirements of sections 1441 and 1446 
should be coordinated where feasible. As a result, a partner seeking to 
be relieved from withholding under sections 1441 through 1443 that 
provides Form W-8EXP to a partnership, will not be required to submit 
an additional form to establish foreign status for purposes of section 
1446. Except with respect to certain tax-exempt organizations described 
in section 501(c) (see part A.5. of this preamble), the submission of a 
Form W-8EXP shall have no effect on whether there is a 1446 tax due 
with respect to such partner's allocable share of partnership ECTI. For 
example, a partnership must still pay 1446 tax with respect to a 
foreign government partner's allocable share of ECTI because such 
partner is treated as a foreign corporation under section 892(a)(3).
3. Acceptable Substitute Form for Identification of Partners
    As noted above, the proposed regulations permit a partnership to 
use other means to ascertain the non-foreign status of its partners, 
provided that the partnership is correct in its determination. Further, 
under the proposed regulations, a partnership must generally presume 
that a partner that does not furnish a Form W-8BEN, Form W-8IMY, or 
Form W-9 is a foreign person. One commentator requests that the final 
regulations permit a partnership to use a substitute form to identify 
its partners, provided the information given to the partnership is 
substantially the same as that found on the above-mentioned forms.
    Treasury and the IRS agree with the commentator's proposed change 
to the extent that the section 1441 regime would generally permit the 
acceptable substitute form. As a result, the final regulations adopt 
this comment and permit a partnership or nominee required to pay 1446 
tax to develop its own form, consistent with Sec.  1.1441-1(e)(4)(vi), 
to serve as its substitute form upon which partners will submit 
information.
4. Clarification of Miscellaneous Documentation Issues
    Several commentators request that the final regulations clarify 
certain issues regarding a partnership's obligation to identify its 
foreign partners. One commentator requests that the final regulations 
address a partnership's duty, if any, to inquire as to whether a 
partner has made an election under section 871(d) or 882(d), or whether 
the partner is a dealer in securities. As described in part A.1. of 
this preamble, the proposed regulations provide that income subject to 
a partner's election under section 871(d) or 882(d) shall be considered 
in the partnership's computation of the partner's allocable share of 
partnership ECTI. Further, the proposed regulations require a partner 
that has made an election under section 871(d) or section 882(d) to 
notify the partnership that the election has been made so that the 
partnership can correctly determine the partner's allocable share of 
ECTI. The proposed regulations do not address when a partner is a 
dealer.
    The final regulations retain the requirement that a partner notify 
the partnership of an election it has made (or will make) under section 
871(d) or section 882(d). Further, to the extent that an election has 
been made, the partner is required to provide the partnership a copy of 
such election. However, the final regulations do not

[[Page 28704]]

explicitly require a partner to notify the partnership that it is a 
dealer. Further, the final regulations do not impose an affirmative 
duty on the partnership to inquire as to a partner's status as a dealer 
or whether an election under section 871(d) or section 882(d) has been 
made.
    Another commentator requests clarification regarding the ability of 
a lower-tier partnership (LTP) to use other means to identify partners 
of an upper-tier partnership (UTP). Under proposed regulation Sec.  
1.1446-5, an LTP may be required to look through a UTP to the partners 
of such partnership if adequate documentation is provided to the LTP 
and the LTP can reliably associate (within the meaning of Sec.  1.1441-
1(b)(2)(vii)) all or a portion of the UTP's allocable share of ECTI 
with one or more partners of the UTP. To the extent that a UTP has not 
provided adequate documentation as to the status of its partners to the 
LTP, the LTP is to treat the UTP as an entity and withhold at the 
highest applicable rate under section 1446(b). In this regard, the 
regulations cross reference proposed regulation Sec.  1.1446-1(c)(3), 
which allows a partnership to rely on other means to determine the non-
foreign status of its partners, provided that the partnership is 
correct in its determination. The commentator requests clarification as 
to whether an LTP that has not received adequate documentation from a 
UTP regarding the status of one or more partners of the UTP may, 
nevertheless, rely on other means to determine that certain partners of 
the UTP are U.S. persons.
    In response to the commentator's question, the final regulations 
remove the cross reference to Sec.  1.1446-1(c)(3). The look-through 
rules of Sec.  1.1446-5 are intended to be consistent with the section 
1441 regulations and the concept of reliable association through 
documentation. Accordingly, an LTP may not rely on other means and look 
through a UTP to the partners of the UTP to the extent that the UTP has 
failed to provide adequate documentation regarding the status of its 
partners. Rather, to the extent the documentation submitted is 
insufficient to permit the LTP to look through, the LTP is to treat the 
UTP as a foreign entity and pay 1446 tax at the higher of the rates in 
section 1 or section 11.
    Another commentator notes that proposed regulation Sec.  1.1446-1 
provides that a foreign partnership is treated as a foreign partner 
under section 1446(e). The commentator then notes that Sec.  1.1446-5 
of the proposed regulations provides that all or a portion of the 
allocable share of a UTP shall be treated as allocable to the partners 
of the UTP to the extent that the LTP can reliably associate the ECTI 
allocable to the UTP with the partners of such partnership. The effect 
of this rule is that for purposes of the LTP's 1446 tax computation, 
the UTP is not treated as the partner of the LTP. The commentator 
requests clarification regarding coordination of the above two sections 
of the proposed regulations. We note that the issue the commentator 
raises also arises under the proposed regulations with respect to 
trusts part or all of which are treated as owned by a grantor or other 
owner under subpart E of Subchapter J of the Code.
    In response to this question, Sec.  1.1446-1 of the final 
regulations includes a cross reference to Sec.  1.1446-5 and language 
clarifying that the partners of a UTP are considered the direct 
partners of an LTP only to the extent the LTP is applying the look 
through rules of Sec.  1.1446-5 in computing its 1446 tax obligation. 
This treatment is only for purposes of computing the LTP's 1446 tax 
liability and has no effect on LTP's reporting. Thus, whether or not an 
LTP computes its 1446 tax by looking through a UTP, the LTP shall 
furnish Form 8805 with respect to the 1446 tax it pays to and in the 
name of the UTP so that such UTP may then, in turn, take such amounts 
into account in computing its 1446 tax obligation. UTP will then claim 
a credit for the 1446 tax LTP paid and will allocate the credit to its 
partners (or claim a refund), as appropriate, and report the allocation 
of the tax on the Forms 8805 it furnishes to its foreign partners. 
Similarly, the final regulations clarify that a grantor or other owner 
under subpart E of subchapter J of the Code of a domestic or foreign 
trust is the beneficial owner of income and it (rather than the trust) 
is considered the partner only for purposes of computing the 
partnership's 1446 tax liability.
5. Coordination With Section 1443 and Foreign Tax-Exempt Organizations
    Section 1443(a) provides that withholding under chapter 3 of the 
Code shall apply to income includible under section 512 in computing 
the UBTI of a foreign organization subject to the tax imposed by 
section 511 only to the extent and subject to such conditions as may be 
provided by regulations. The proposed regulations provide that if an 
amount is allocable from a partnership to an entity described in 
section 1443(a), then the partnership must withhold under section 1446. 
One commentator notes that section 1443(a) only applies to the extent 
that an item of income is includible in the computation of UBTI, and 
that the proposed regulations fail to recognize that some income items 
comprising part of the partnership's ECTI will not be includible by a 
partner in computing its UBTI. See Sec. Sec.  1.512(b)-1 and 1.512(c)-
1. Further, the commentator notes that in the context of section 1441, 
section 1443(a) is enforced by a presumption contained in Sec.  1.1441-
9(b)(3) that income will be includible in computing a foreign tax-
exempt organization's UBTI if the documentation the payee provides is 
unreliable or is lacking, and that the final regulations should include 
a similar presumption in the case of section 1446 with respect to 
foreign tax-exempt partners.
    In response to the commentator's suggestions, the final regulations 
clarify that only the portion of a tax-exempt partner's allocable share 
of partnership ECTI that is includible in the partner's computation of 
UBTI is subject to section 1446. The final regulations also provide 
that the procedures in Sec.  1.1441-9 for claiming an exemption from 
withholding under section 1441 will apply for claiming an exemption 
from withholding under section 1446. Under those procedures, the 
organization may specify the portion of its allocable share of 
partnership income that will not be includible in the organization's 
computation of its UBTI. Thereafter, the partnership may determine that 
a partner's representation as to amounts not includible in the 
organization's UBTI is unreliable or lacking. If such a determination 
is made, the partnership must then presume, consistent with Sec.  
1.1441-9(b)(3) as applied for purposes of section 1446, that the 
partnership item will be includible in computing the partner's UBTI.
    In response to another comment, the language of the final 
regulations has been changed to follow more closely the language of 
section 1443(a) and the regulations thereunder.
6. Corresponding Changes to Forms
    The IRS intends to modify several forms (e.g., Forms W-8, 8804, 
8805, 8813) to accommodate the adoption of the final and temporary 
regulations set forth in this document. Until such time as the forms 
are modified, partners, nominees, and partnerships may use the current 
version of a form and attach a statement to such form, to the extent 
necessary, to explain the use of the form for purposes of section 1446.

[[Page 28705]]

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

1. Cancellation of Indebtedness Income and Gain From Foreclosure and 
Deed in Lieu of Foreclosure
    The proposed regulations requested comments on the appropriate 
treatment under section 1446 of partnership cancellation of 
indebtedness income (COD). Several comments, discussed below, were 
received.
    One commentator suggests that a partnership should be relieved of 
its 1446 tax obligation with respect to COD income allocable to foreign 
partners provided the partnership files with the IRS an explanatory 
statement that substantiates its financial hardship. A second 
commentator cites the rules set forth in Sec.  1.1445-2(d)(3), 
applicable to a foreclosure that results in a disposition of a United 
States real property interest. Consistent with Sec.  1.1445-2(d)(3), 
the commentator proposes that so long as the partnership receives no 
cash or other property as part of the cancellation of indebtedness or 
the foreclosure on property (or deed in lieu of foreclosure), income 
attributable to such amounts should be excluded from partnership ECTI 
and the partnership should not be required to withhold on such amounts. 
However, the commentator states that to the extent that the partnership 
makes a distribution within the same taxable year that the COD income 
or gain arising from a foreclosure (or deed in lieu of foreclosure) is 
realized, the partnership ECTI for the year of realization should 
include the COD income or gain from foreclosure up to the amount of the 
distribution. Finally, one commentator focuses on a partnership in a 
Chapter 11 bankruptcy proceeding and cites a potential conflict between 
the deemed distribution rule of section 1446(d) and the prohibition on 
preferential treatment of non-creditors found in the Bankruptcy Code. 
This commentator recommends that a partnership in a Chapter 11 
bankruptcy proceeding that incurs COD income should be relieved from 
paying 1446 tax on such income.
    Treasury and the IRS believe that section 1446 requires a 
partnership to pay 1446 tax on COD income and gain recognized by reason 
of a foreclosure or deed in lieu of foreclosure on property when such 
income or gain is allocated to foreign partners. The purpose of the 
statute is to collect taxes that foreign persons may not otherwise pay, 
regardless of the liquidity or financial situation of the withholding 
agent. Further, unlike section 1441, section 1446 does not require that 
a partnership have control, receipt, custody, disposal, or payment over 
the income that is subject to withholding. As a result, no exception is 
mandated. In addition, Treasury and the IRS do not believe that a 
deemed distribution under section 1446(d) would violate any provisions 
of the Bankruptcy Code. Accordingly, the final regulations do not adopt 
the commentators' suggestions regarding COD income or gain arising from 
the foreclosure (or deed in lieu of foreclosure) on property. However, 
Treasury and the IRS are issuing temporary and proposed regulations 
that permit a foreign partner, in certain circumstances, to certify to 
the partnership that it has deductions and losses it reasonably expects 
to be available to reduce the partner's U.S. income tax liability on 
the partner's allocable share of effectively connected income or gain 
from the partnership. This certification procedure may apply to reduce 
the partnership's 1446 tax obligation with respect to COD income 
allocable to a foreign partner in appropriate circumstances. Treasury 
and the IRS believe that this approach, which is consistent with the 
statute and legislative history, appropriately balances the interests 
of taxpayers and the government.
2. Consideration of a Foreign Partner's Deductions and Losses in 
Computing the Partner's Share of Partnership ECTI
    See Sec.  1.1446-6T and part G. of this preamble regarding when a 
partnership may consider partner-level deductions and losses in 
determining its 1446 tax due with respect to a partner.

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

1. Applicable Percentage for Computing 1446 Tax
    The proposed regulations require a partnership to pay withholding 
tax (1446 tax) using the highest rate of tax specified in section 1 
(with respect to ECTI allocable to a non-corporate foreign partner) or 
section 11(b)(1) (with respect to ECTI allocable to a corporate foreign 
partner). Several commentators note that the proposed regulations 
effectively require a partnership to pay 1446 tax in excess of a 
partner's actual tax liability because the partnership is not permitted 
to consider preferential tax rates that apply to long-term capital gain 
or other special items of income or gain at the partner-level (e.g., 
unrecaptured section 1250 gain). The commentators note that at the time 
that Congress enacted and amended section 1446 there was no difference 
between the tax rate for capital gains and ordinary income and, 
therefore, section 1446 should not be read to prohibit consideration of 
the highest rate that may apply to special items of income or gain. The 
commentators request that the final regulations permit a partnership to 
consider the character of income or gain allocable to a foreign partner 
and pay 1446 tax at the highest rate applicable to the type of income 
or gain allocable to a foreign partner.
    Treasury and the IRS have carefully considered these comments and 
generally believe that permitting a partnership to consider the highest 
rate of tax associated with particular partnership items of income and 
gain is a reasonable approach under the statute that would reduce the 
instances of overwithholding without undermining the purpose or 
effectiveness of the statute. In response, the final regulations 
provide that while a partnership is generally required to use the 
highest rate of tax in section 1 or section 11 (currently 35 percent) 
applicable to a partner, it may also consider (subject to exceptions 
discussed below) the type of income or gain allocable to a foreign 
partner during the taxable year when computing its 1446 tax obligation. 
As a result, a partnership can generally pay 1446 tax using the highest 
capital gains rate (currently 15 percent) to the extent long-term 
capital gain is allocable to a non-corporate foreign partner. 
Similarly, the highest rate of tax for collectibles gain under section 
1(h)(6) (currently 28 percent) may generally be considered when such 
gain is allocable to a non-corporate foreign partner. Further, a 
partnership can generally pay 1446 tax using the maximum tax rate for 
unrecaptured section 1250 gain (currently 25 percent) to the extent 
such gain is allocable to a non-corporate foreign partner. When 
applicable, the partnership must use the highest preferential rate for 
a particular type of income or gain without regard to the amount of the 
foreign partner's allocable share of such income or gain, or the 
foreign partner's other income.
    As discussed above, several preferential rates depend upon the 
status of the person (corporate or non-corporate) allocated the income 
or gain (e.g., long-term capital gain). Further, in some circumstances 
under the final regulations documentation may be lacking as to the 
corporate or non-corporate status of a partner. Accordingly, the final 
regulations include a rule that prohibits a partnership from using a 
preferential rate in computing its 1446 tax on income or gain allocable 
to a foreign partner where the preferential rate depends upon the 
corporate or non-

[[Page 28706]]

corporate status of the partner and either such status has not been 
established by documentation or the regulations otherwise instruct the 
partnership to pay 1446 tax at the higher of the applicable rates in 
section 1446(b).
    For example, under Sec.  1.1446-1(c)(3) a partnership that has not 
received documentation from a partner must presume that the partner is 
a foreign person, unless the partnership relies on other means to 
determine the non-foreign status of the partner. Further, the 
regulations instruct that if the partnership knows that the partner is 
an individual, then the partnership must pay 1446 tax using the 
applicable percentage appropriate for a non-corporate foreign partner 
(highest rate in section 1). Notwithstanding the foregoing, under the 
rule in the final regulations, the partnership may not consider the 
preferential rate applicable to any net long-term capital gain 
allocable to such partner because the preferential rate applicable to 
that type of gain depends on the status of the person reporting such 
gain, and the partner has failed to provide documentation in accordance 
with Sec.  1.1446-1.
    Similarly, under Sec.  1.1446-5 a partnership may not be able to 
reliably associate 100 percent of an upper-tier partnership's allocable 
share of ECTI with the partners of the upper-tier partnership. In such 
circumstances, Sec.  1.1446-5(c)(2) requires the lower-tier partnership 
to pay 1446 tax on the portion it cannot reliably associate with 
partners of the upper-tier partnership at the higher of the rates in 
section 1446(b). Even though the upper-tier partnership has provided 
documentation on its own behalf (e.g., Form W-8IMY), and the lower-tier 
partnership therefore knows that the upper-tier partnership is a non-
corporate entity, the lower-tier partnership may not consider any 
preferential rate when computing its 1446 tax due on the portion of the 
ECTI the lower-tier partnership cannot reliably associate with partners 
of the upper-tier partnership.
2. Deemed Cash Distributions Under Section 1446(d)
    Section 1446(d) states that, except as provided in regulations, a 
partnership's payment of 1446 tax with respect to a foreign partner is 
treated as a distribution to the partner on the earlier of the day the 
partnership paid the tax or the last day of the partnership's taxable 
year for which such tax was paid. The legislative history provides that 
the above rule may be altered by regulations to account for mid-year 
dispositions of partnership interests. See H.R. Rep., 101-247, 101st 
Cong., 1st Sess. (Sept. 20, 1989). Under Rev. Proc. 89-31 (1989-1 C.B. 
895), if the 1446 tax is paid in a subsequent taxable year with respect 
to ECTI allocable to the preceding taxable year, the deemed 
distribution is considered to have occurred on the last day of the 
preceding taxable year or the last day during such year that the person 
was a partner. The proposed regulations follow the rules outlined 
above.
    Several commentators note that the deemed distribution under 
section 1446(d) may cause a partner to recognize gain under sections 
731 and 741. Under section 731, a partner recognizes gain on a 
partnership distribution only to the extent the partner receives cash 
in excess of its basis in the partnership. To the extent a partner 
receives cash in excess of the partner's basis in its partnership 
interest, section 731 considers the partner to have engaged in a sale 
or exchange of the interest, the tax consequences of which are 
described in section 741. Under section 1446(d), if the partnership is 
deemed to distribute cash during the taxable year (i.e., on the date 
the 1446 tax is paid), before the date that the partner may consider an 
increase in the partner's basis in the partnership under section 705 
for income allocable from the partnership for the entire taxable year, 
then the partner may recognize gain under sections 731 and 741.
    One commentator proposes that, for purposes of section 1446(d), a 
partnership should look to the partnership agreement to determine 
whether a distribution under section 1446(d) has occurred. 
Specifically, the commentator states that a partnership should not 
treat a payment of 1446 tax on behalf of a foreign partner as a deemed 
distribution under section 1446(d) to the extent the partnership 
agreement prohibits a distribution to the partner, or the partner is 
required to pay back to the partnership part or all of the 1446 tax 
paid on the partner's behalf. The commentator suggests that the 
regulations should consider both explicit provisions of the partnership 
agreement that require a foreign partner to contribute to the 
partnership an amount equal to the 1446 tax the partnership paid on 
behalf of the partner and provisions that have the effect of requiring 
a contribution, though not explicitly referring to section 1446.
    Another commentator suggests that a deemed distribution under 
section 1446(d) that results from a partnership's installment payment 
of 1446 tax should be considered an advance or drawing against a 
partner's distributive share of income within the meaning of Sec.  
1.731-1(a)(1)(ii) and treated as a current distribution made on the 
last day of the partnership taxable year with respect to such partner. 
Adopting this suggestion would reduce the likelihood of a foreign 
partner recognizing gain because the deemed distribution would be 
measured against the partner's basis in its partnership interest after 
the partner's basis has been increased for income allocable to the 
partner for the partnership's taxable year under section 705.
    A third commentator notes a conflict with the deemed distribution 
rule in the context of a partnership in bankruptcy. See discussion at 
Part B.1. of this preamble.
    Treasury and the IRS believe that deemed distributions under 
section 1446(d) should not unnecessarily result in a foreign partner 
having to recognize gain under sections 731 and 741, and that the 
deemed distributions should be treated consistently with other 
distributions under subchapter K. Further, section 1446(d) provides 
Treasury and the IRS with explicit authority to alter the rules to 
accomplish the objectives of the section. Accordingly, the final 
regulations generally provide that a deemed distribution under section 
1446(d) is treated as an advance or drawing within the meaning of Sec.  
1.731-1(a)(1)(ii) against the partner's distributive share of income 
from the partnership. See also Rev. Rul. 94-4 (1994-1 C.B. 195). As a 
result, the tax ramifications of a partnership's payment of 1446 tax on 
a foreign partner's allocable share of ECTI will be considered by the 
partner at the end of the partnership's taxable year, or the last day 
of the partnership's taxable year during which such person was a 
partner in the partnership. The advance or drawing treatment applies 
only to installment payments of 1446 tax made during the partnership's 
taxable year with respect to ECTI earned in the same taxable year. Any 
1446 tax paid after the close of the partnership's taxable year, 
including amounts paid with the filing of Form 8804, ``Annual Return 
for Partnership Withholding Tax (Section 1446),'' that are on account 
of partnership ECTI allocated to partners for the prior taxable year 
shall be treated under section 1446(d) and the regulations as a 
distribution from the partnership on the earlier of the last day of the 
partnership's prior taxable year for which the tax is paid, or the last 
day in such prior taxable year on which such foreign partner held an 
interest in

[[Page 28707]]

the partnership. The rules in the final regulations apply only for 
purposes of determining the tax ramifications of the deemed 
distribution to a foreign partner under sections 705, 731, and 733, and 
do not affect the date that the partnership (or partner) is otherwise 
considered (or deemed) to have paid tax for purposes of section 6654 
and section 6655.
    The final regulations do not adopt the suggestion that a deemed 
distribution under section 1446(d) should occur only to the extent the 
partnership agreement permits a distribution to the foreign partner and 
does not require the foreign partner to contribute an amount to the 
partnership. Treasury and the IRS believe that the suggestion is 
inconsistent with section 1446(d) and the treatment of distributions 
under subchapter K of the Code. To the extent that 1446 tax has been 
paid on behalf of a partner and a Form 8805 has been issued to a 
partner, section 1446(d) requires that such amount be treated as a 
distribution. Further, such an approach would not be administrable 
because it would require the IRS to review each partnership agreement 
and interpret the provisions of the agreement for purposes of section 
1446. Moreover, Treasury and the IRS are concerned that the suggested 
approach would inappropriately result in different treatment for 
similarly situated foreign partners.
3. Overlap Between Section 1445 and 1446
    The proposed regulations provide that when section 1445 and section 
1446 both technically apply, a partnership is required to pay 
withholding tax on behalf of its foreign partners in accordance with 
section 1446. This rule, referred to as the trumping rule, primarily 
relates to a domestic partnership's disposition of a United States real 
property interest within the meaning of section 897, which is subject 
to withholding under section 1445(e)(1). The proposed regulations also 
permit a foreign partnership to credit the amount withheld by a 
transferee under section 1445(a) when computing its 1446 tax 
obligation.
    Several commentators note that the trumping rule has the effect of 
prohibiting a partnership and/or its partners from seeking a 
certificate from the IRS, where appropriate, that would reduce 
withholding to an amount more closely related to a partner's actual tax 
liability on the gain allocated. See Rev. Proc. 2000-35 (2000-2 C.B. 
211 Sec.  8.01). As a result, several commentators suggest that the 
final regulations remove the trumping rule and modify the section 1445 
withholding certificate program so that partnerships and partners 
subject to section 1446 can consider anticipated current year 
deductions and losses and obtain withholding certificates to reduce the 
withholding tax otherwise required to be paid. In addition, one 
commentator requests clarification of the consequences for failure to 
comply with section 1446 under the trumping rule.
    After consideration of the comments described above, the trumping 
rule is retained in the final regulations. Treasury and the IRS do not 
believe Congress intended for section 1445 to apply to the exclusion of 
section 1446 where the sections overlap. Treasury and the IRS believe 
that with the changes made in the final regulations (e.g., 
consideration of the character of income allocable to a foreign 
partner, see part C.1. of this preamble) and the issuance of the 
temporary regulations that permit foreign partners to certify available 
deductions and losses to a partnership, the section 1446 withholding 
regime will, in most circumstances, arrive at a withholding result that 
approximates the result that would otherwise be reached under section 
1445. The final regulations clarify that a partnership that fails to 
comply with section 1446 under the rule described above may be subject 
to all additions to the tax, interest, and penalties that otherwise 
apply to a failure to pay 1446 tax.
4. Notice to Foreign Partners of 1446 Tax Paid by Partnership
    The proposed regulations require a partnership that pays 1446 tax 
on behalf of a foreign partner to notify the partner when a payment of 
tax has been made. Because the 1446 tax installment due dates are the 
15th day of the 4th, 6th, 9th, and 12th months of the partnership's 
taxable year, a partnership must generally notify a foreign partner 
four times during the taxable year of the 1446 tax paid on the 
partner's behalf. The notice provided during the taxable year of the 
1446 tax paid is not required to be in any particular form but must 
contain, among other items, information sufficient to identify the 
partnership, the partner, the annualized amount of ECTI estimated to be 
allocated to the partner, and the amount of 1446 tax paid to the IRS on 
behalf of the foreign partner.
    After the close of the partnership taxable year, the partnership is 
required to file Forms 8804 and 8805 with the IRS and to provide a Form 
8805 to each foreign partner. The Form 8805 furnished to a foreign 
partner will set forth the 1446 tax paid on the partner's behalf for 
the entire taxable year. Each foreign partner receiving a Form 8805 
from the partnership is generally permitted to claim a tax credit under 
section 33 on its U.S. Federal income tax return in the amount shown on 
the form as paid on the partner's behalf. When completing its Form 8804 
and Form 8805, the partnership will use the actual results of the 
partnership's operations for the previous year. When completing its 
Form 8804, if the partnership determines that its 1446 tax is an amount 
greater than previously estimated, the partnership is required to pay 
any shortfall when filing the form.
    One commentator submits that it is administratively burdensome and 
costly to require a partnership to notify its foreign partners four 
times during the year when each installment of 1446 tax is paid on 
their behalf. The commentator also contends that it is burdensome on a 
partnership to have to explain to each foreign partner any discrepancy 
between the four notices provided during the taxable year, which are 
based on estimates, and the Form 8805 issued after the close of the 
taxable year, which is based on the partnership's actual operating 
results. Finally, the commentator contends that it is burdensome, 
costly, and inefficient in large non-publicly traded partnerships, 
where the net income to be allocated to a partner is often small, to 
have to provide notice to thousands of foreign partners four times 
during the taxable year and again after the taxable year.
    A second commentator makes two points concerning the requirement 
that a partnership provide notice during the taxable year for each 1446 
tax installment payment. First, the commentator suggests that because 
the section 1446 tax rate is the highest rate applicable to a foreign 
partner, most foreign partners do not need notice during the taxable 
year because they already assume the partnership's 1446 tax installment 
payments will exceed any estimated tax they might otherwise owe on 
their allocable share of ECTI. Second, the commentator submits that in 
practice the notices are often not received before a foreign partner's 
estimated tax due date for the same period and, therefore, provide 
little or no benefit to the foreign partner.
    Both commentators propose that unless a foreign partner requests 
information for each installment payment of 1446 tax, a partnership 
should only be required to report to the foreign partner the amounts 
paid to the IRS on behalf of the partner after the close of the taxable 
year on Form 8805.

[[Page 28708]]

    Treasury and the IRS believe that the notice requirement in the 
proposed regulations serves the useful function of advising a foreign 
partner of amounts paid on its behalf. The notice may aid a partner in 
computing its estimated tax liability either for the same installment 
period or a subsequent installment period during the taxable year. This 
is particularly true where the estimated tax payment dates of the 
foreign partner do not coincide with the 1446 tax installment dates. 
See section 6654(j). Based upon the foregoing, the final regulations 
retain the notice requirement set forth in the proposed regulations.
    However, Treasury and the IRS recognize that situations may exist 
where the notice requirement is particularly burdensome. Accordingly, 
the final regulations contain two exceptions to the requirement that 
the partnership provide notice during its taxable year as it pays each 
installment of 1446 tax. First, where an agent of the partnership 
charged with providing notice to the foreign partners of the 
partnership during the taxable year for each installment of 1446 tax is 
the same person that also acts as an agent on behalf of a foreign 
partner for purposes of filing the foreign partner's U.S. income tax 
return, the notice requirement is deemed to be satisfied with respect 
to such partner. Second, a partnership with 500 or more foreign 
partners is not required to provide notice to a foreign partner of 
amounts paid on such partner's behalf during the course of the taxable 
year, unless requested, if the partnership estimates that the 1446 tax 
on such partner's allocable share of partnership ECTI is less than 
$1,000. If one of the exceptions applies to a foreign partner for an 
installment payment of 1446 tax, then the partnership is not required 
to provide notice of the installment payment (and the tax paid on the 
partner's behalf) unless requested by the partner. However, in all 
events, the partnership is required to provide notice of the tax paid 
on the partner's behalf after the close of the taxable year by issuing 
Form 8805 to the partner.
5. Refunds by Partnership for Amounts Withheld
    Under the proposed regulations, a partnership is entitled to obtain 
a refund for 1446 tax paid over to the IRS only if a refund is 
permissible under section 1464 and the regulations thereunder. The 
position in the proposed regulations varies from the position in Rev. 
Proc. 92-66, which permits a partnership to obtain a refund of 1446 tax 
to the extent an amount paid to the IRS is not reflected on a Form 8805 
issued to a partner for the taxable year. One commentator notes that 
because actual operating results can vary significantly from the 
estimates the partnership uses during the year to calculate its 1446 
tax, withholding in excess of the partner's actual tax liability can 
occur. That is, where a partnership annualizes its income under one of 
the accepted methods but events occur that are not taken into account 
until the partnership files its Form 8804, and such events have the 
effect of reducing or eliminating the 1446 tax otherwise due, the 
partnership should be entitled to a refund of the overpaid amounts. The 
commentator proposes that the final regulations adopt the refund system 
set forth in Rev. Proc. 92-66.
    In response to the commentator's suggestion, the final regulations 
adopt the position taken in Rev. Proc. 92-66 with respect to refunds to 
withholding agents, thereby permitting non-publicly traded partnerships 
subject to section 1446 to obtain refunds for 1446 tax paid to the IRS 
to the extent that the amounts are not reflected on a Form 8805 issued 
to a partner. Publicly traded partnerships (and nominees) required to 
pay 1446 tax based on distributions of effectively connected income 
will continue to be subject to section 1464 and the regulations 
thereunder. The standard in the regulation is intended to follow the 
approach set forth in Rev. Proc. 92-66 in all respects.
6. Additions to the Tax, Interest and Penalties for Noncompliance With 
Section 1446
i. In General
    The proposed regulations provide that if a partnership fails to 
file and pay its 1446 tax, but a partner files a U.S. Federal income 
tax return for the taxable year and pays all tax required to be shown 
on that return, then the partnership is deemed to have filed Forms 8804 
and 8805 and paid its 1446 tax with respect to such foreign partner as 
of the date that the partner satisfied the aforementioned conditions. 
Therefore, the proposed regulations contain a deemed filing and payment 
rule applicable to a partnership that is based upon a foreign partner 
completing two actions: (1) Filing its U.S. Federal income tax return, 
and (2) paying all tax required to be shown on such return. Treasury 
and the IRS have modified the deemed filing and payment rules in the 
final regulations to better coordinate section 1446 with section 1463, 
as well as with any additions to the tax, interest, and penalties that 
may apply.
    First, the final regulations modify the rule in the proposed 
regulations that deems a partnership to have paid 1446 tax with respect 
to a partner. As modified, the final regulations make a partnership's 
deemed payment dependent only on the partner's payment of all the tax 
the partner is required to pay, and disregard the partner's actual 
filing of a U.S. Federal income tax return. As modified, the deemed 
payment rule is consistent with general principles of when a tax is 
considered paid.
    Second, the final regulations remove the deemed filing rule in the 
proposed regulations because of the administrative difficulties in such 
cases where there are multiple foreign partners. Therefore, under the 
final regulations, a partnership will not be deemed to have filed Forms 
8804 and 8805 at any time. As a result, once the failure to file 
penalty under section 6651(a)(1) begins to accrue, as discussed below, 
a partnership may affirmatively stop the accrual of the penalty only by 
filing Form 8804.
    Third, the final regulations clarify the date upon which a 
partnership will be deemed to have paid 1446 tax under the deemed 
payment rule. The rule applies for purposes of sections 1446, 1461, 
1463, 6601, 6651, 6655, and any other penalties or additions to the tax 
that may apply. The rule provides that a partnership will be deemed to 
have paid the 1446 tax associated with ECTI allocable to a particular 
partner on the later of the date that the partner is considered to have 
paid all its tax under section 6513(a) and (b)(2) (prescribing the date 
tax is considered paid for purposes of sections 6511(b)(2), (c), and 
6512), or the last date for paying the 1446 tax without extensions (the 
unextended due date for Form 8804). In application, the rule ensures 
that a partner's payments of estimated tax will have no effect on the 
computation of the partnership's underpayment addition to the tax under 
section 6655 and Sec.  1.1446-3 of the regulations.
    Fourth, the final regulations change the method required for a 
partnership to show that a partner has paid all tax required to be 
shown on the partner's U.S. Federal income tax return. In response to 
one commentator, the final regulations adopt the method set forth in 
Sec.  1.1445-1(e)(3) because such method is more familiar and easier 
for partnerships to apply than obtaining Form 4669, ``Statement of 
Payments Received,'' the method set forth in the proposed regulations. 
Under the final regulations, a partnership must provide sufficient 
information for the IRS to

[[Page 28709]]

determine that the partner's tax liability was satisfied or established 
to be zero.
    More specific discussion of various additions to the tax, interest, 
and penalties is provided below.
ii. Current Year Safe Harbor Under Section 6655 and Sec.  1.1446-3
    Section 1446 imposes a withholding regime that applies the 
principles of section 6655, as modified by these regulations. Under 
section 6655, a corporation is not liable for an underpayment addition 
to the tax if the corporation pays 25 percent of either the preceding 
year's or the current year's tax liability in each quarterly 
installment. These safe harbors are often referred to as the prior year 
safe harbor and the current year safe harbor. The proposed regulations 
provide for a modification of the prior year safe harbor that is 
consistent with Rev. Proc. 89-31, but do not mention the potential 
application of the current year safe harbor. The final regulations 
clarify that the current year safe harbor of section 6655(d)(1)(B)(i) 
can apply to a partnership subject to section 1446. Further, the final 
regulations retain the language in the proposed regulations that sets 
forth the prior year safe harbor.
iii. Accrual of Addition to the Tax Under Section 6655, Interest Under 
Section 6601, and Penalties
    One commentator requests clarification regarding the accrual of the 
addition to the tax under section 6655, interest under section 6601, 
and penalties under the proposed regulations. Specifically, the 
commentator requests that the final regulations clarify whether a 
partnership's deemed payment of 1446 tax under proposed regulation 
Sec.  1.1446-3(e)(2) will stop the accrual of the addition to the tax, 
interest, and penalties that may be applicable under proposed 
regulation Sec.  1.1446-3(e)(3) or other sections of the regulations. 
The commentator requests that the final regulations address the accrual 
of the addition to the tax, interest and penalties, and explicitly 
provide that such additions, penalties and interest will stop accruing 
on the date the partnership's liability is deemed paid.
    The final regulations do not explicitly address the accrual of all 
of the potential penalties that may apply to a partnership required to 
pay 1446 tax, but do include provisions and examples that illustrate 
the application of sections 6655 (relating to the addition to the tax 
for an underpayment of an installment of 1446 tax), 6601 (relating to 
interest), and 6651 (relating to failure to file and failure to pay 
penalties).
    Regarding the addition to the tax under section 6655, the final 
regulations provide that the addition to the tax will begin to accrue 
on the date that the partnership underpays an installment of 1446 tax 
and will stop accruing on the earlier of the date when all the 1446 tax 
is satisfied, or the 15th day of the 4th month following the close of 
the partnership's taxable year (15th day of the 6th month in the case 
of a partnership keeping its books and records outside the United 
States and Puerto Rico).
    As discussed in part C.6.i. of this preamble, the final regulations 
provide that a partner's payment of tax that deems a partnership to 
have paid 1446 tax will not be credited to the partnership's account 
until the later of the date that the tax is considered to have been 
paid by the partner under section 6513(a) and (b)(2) (prescribing the 
date tax is considered paid for purposes of sections 6511(b)(2), (c), 
and 6512), or the last date for paying 1446 tax without extensions 
(i.e., the unextended due date for Form 8804). Under this ``later of'' 
rule, the earliest that a partner's payments can be credited to the 
partnership is the last date for paying the 1446 tax without extensions 
(the unextended due date for Form 8804), the date that the accrual of 
the section 6655 addition to the tax would stop in any event. As a 
result, a partner's payments of estimated tax will not provide a 
partnership with any benefit with respect to the partnership's 
computation of the underpayment addition to the tax under section 6655, 
as applied in the regulations.
    Regarding interest under section 6601, if a partnership's 1446 
liability has not been satisfied, or deemed satisfied, by the last date 
prescribed for payment of the 1446 tax under section 1461 without 
extensions (see section 6601(b)(1)), then interest under section 6601 
will begin to accrue on the unpaid 1446 tax liability. The final 
regulations provide that interest will stop accruing on the date and to 
the extent that the partnership actually pays the 1446 tax or is deemed 
to have paid the 1446 tax under the deemed payment rule in the 
regulations.
    Section 6651(a)(1) generally applies to the failure to file any tax 
return by the due date (including extensions) prescribed therefore and 
applies in the context of section 1446 to a failure to file Form 8804. 
The penalty accrues at 5 percent of the amount of the tax that is 
required to be shown on the return for each month or fraction of a 
month during which the required return is not filed but not exceeding, 
in the aggregate, 25 percent of the amount required to be shown as tax 
on the return. Similarly, under section 6651(a)(2), for each month 
after the date prescribed for payment that a taxpayer fails to pay the 
amount shown as tax on any return, there is added to the amount shown 
as tax 0.5 percent of such tax not to exceed 25 percent in the 
aggregate. While section 6651(a)(1) applies upon a failure to file a 
return, and section 6651(a)(2) only applies if a return has been filed, 
there are circumstances where both penalties can apply. See 6651(c). 
Both penalties provide an exception if it is shown that such failure is 
due to reasonable cause and not due to willful neglect.
    Under the deemed payment rule of the final regulations, discussed 
above, a partnership that fails to pay 1446 tax with respect to a 
foreign partner will be deemed to have paid the 1446 tax associated 
with the ECTI allocable to such foreign partner on the later of the 
date that such partner is considered to have paid its U.S. income tax 
under section 6513(a) and (b)(2), or the last date for payment of the 
1446 tax without extensions. Section 6651(b)(1) reduces the base upon 
which the section 6651(a)(1) penalty is computed (the amount required 
to be shown as tax on the return) by the partnership's actual and 
deemed payment of tax, provided the actual or deemed payment occurs on 
or before the date prescribed for payment of the tax. To the extent the 
partnership has not paid (or been deemed to have paid) all 1446 tax due 
with respect to a partner as of the date prescribed for payment of the 
tax, the failure to file penalty under section 6651(a)(1) will begin to 
accrue on the Form 8804 filing due date and will continue to accrue 
until the earlier of the date that Form 8804 is actually filed, or the 
date that the maximum monthly accrual has occurred under the section; 
i.e., five months. Stated differently, if a partnership fails to file 
Form 8804 and the 1446 tax has not been paid or deemed paid by the date 
prescribed for payment of the tax, the failure to file penalty will 
begin to accrue and may only be stopped by the partnership filing such 
form or the statutory limit of the penalty being reached; payment of 
the 1446 tax (actual or deemed) after the date prescribed for payment 
of the tax, without actually filing Form 8804, will not stop the 
accrual of the penalty.
    A similar analysis applies to the accrual of the failure to pay 
penalty under section 6651(a)(2). However, the failure to pay penalty 
cannot be imposed unless Form 8804 is filed and the accrual of the 
penalty can be stopped by paying the 1446 tax. Once Form 8804 is filed, 
the penalty accrues at a rate of 0.5 percent of the amount of the 
unpaid 1446 tax beginning on the

[[Page 28710]]

due date for payment of such tax (with regard to extensions), 
regardless of when the form was filed, and continues to accrue each 
month on the unpaid 1446 tax until the earlier of the date the 1446 tax 
is completely paid, deemed paid, or the maximum monthly accrual of 25 
percent in the aggregate is reached. The time at which a partnership is 
deemed to have paid 1446 tax for purposes of sections 1446, 1461, 1463, 
6601, 6651, and 6655 is discussed above.
7. Application of De-Minimis Rule of Section 6655(f)
    The proposed regulations state that the principles of section 6655 
shall apply to a partnership computing its 1446 tax. Section 6655(f) 
provides that a corporation is not required to pay estimated tax when 
the amount of such tax is less than $500. However, the proposed 
regulations under section 1446 do not address the application of the 
principles of section 6655(f) in the context of section 1446.
    One commentator proposes that a partnership with more than 100 
nonresident alien partners should not be required to pay 1446 tax (or 
any installment of such tax) on behalf of a nonresident alien partner 
if the estimated ECTI allocable to the nonresident alien partner does 
not exceed the annual personal exemption provided to such partner under 
section 151 of the Internal Revenue Code. The commentator states that 
the administrative costs associated with the payment of 1446 tax for 
such partners is burdensome when considered in light of the fact that 
these foreign partners are often entitled to refunds of such amounts. 
Further, the commentator suggests that these nonresident alien 
partners, who otherwise have no presence in the United States, often 
have difficulty in securing refunds and, as a result, are discouraged 
from seeking such refunds because of the small dollar amounts involved.
    The final regulations describe the application of the principles of 
section 6655(f) for purposes of section 1446. The final regulations 
provide that a partnership shall apply the principles of section 
6655(f) by taking into account all foreign partners. That is, the 
partnership must compare its total 1446 tax liability for all foreign 
partners to the $500 threshold in section 6655(f). However, Treasury 
and the IRS believe that the section 1446 regime should operate so that 
it does not discourage investment in the United States by imposing 
administrative costs on partnerships that are unrelated to insuring 
that the appropriate amount of tax is collected. Consequently, the 
temporary regulations contain an exception to this rule that applies in 
certain circumstances. See part G.9. of this preamble, below.
8. Application of Section 6655(i)
    The proposed regulations under section 1446 state that the 
principles of section 6655 shall apply to a partnership required to pay 
1446 tax. Section 6655(i)(2) provides that section 6655 shall apply to 
taxable years of less than 12 months in accordance with regulations 
prescribed by the Secretary. However, the proposed regulations under 
section 1446 do not address the application of the principles of 
section 6655(i)(2).
    The final regulations provide that even if a partnership has a 
taxable year of less than 12 months, the partnership is required to pay 
1446 tax (including installments of such tax) if the partnership has 
ECTI allocable to foreign partners. In such a case, the partnership 
shall adjust its installment payments of 1446 tax in a reasonable 
manner (e.g., the annualized amounts of ECTI estimated to be allocable 
to a foreign partner, and the percentage of tax to be paid with each 
installment) to account for the short taxable year. However, if the 
partnership's taxable year is a period of less than four months, the 
partnership shall only be required to file Form 8804 in accordance with 
the regulations and report and pay the appropriate 1446 tax for the 
short taxable year.

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

1. Background
    The proposed regulations contain several rules applicable to 
domestic and foreign trusts and estates. First, the proposed 
regulations require that a domestic grantor trust provide a statement 
to the partnership that it is a grantor trust and also provide 
documentation (e.g., Form W-8BEN, Form W-9) of the grantor or other 
owner of the trust. A foreign grantor trust must provide Form W-8IMY to 
the partnership along with documentation of the grantor or other owner 
of the trust. In both of these situations, the partnership computes its 
1446 tax based on the status of the grantor or other owner, rather than 
the trust, to the extent of such grantor or other owner's interest. All 
other trusts are required to provide Form W-8BEN or Form W-9, as 
appropriate, to the partnership on their own behalf.
    Second, the proposed regulations require a foreign non-grantor 
trust (including an estate) to allocate the 1446 tax paid by the 
partnership with respect to the trust or estate's allocable share of 
ECTI between the trust or estate and its beneficiaries. This allocation 
is based upon the taxpayer (trust/estate or beneficiary) that will 
ultimately report and pay tax on the ECTI allocable from the 
partnership. The rule is designed to match the tax credit under section 
33 for the 1446 tax the partnership paid with the taxpayer that is 
ultimately responsible for bearing the income tax liability on the net 
income allocated from the partnership.
    Third, the proposed regulations contain a rule to backstop the rule 
described in the previous paragraph. This so-called domestic trust rule 
provides that 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 non-grantor trust, 
or possibly other entities, and such trust was formed or availed of 
with a principal purpose of avoiding the 1446 tax, then such domestic 
trust will be treated as a foreign trust and the rule described in the 
previous paragraph with respect to the allocation of the credit for 
1446 tax paid will apply. When applicable, this rule permits the IRS to 
impose the 1446 tax obligation on a partnership as if each domestic 
trust in the chain is a foreign trust. Several comments, discussed 
below, were received regarding the trust rules in the proposed 
regulations.
2. Documentation Requirement for Domestic Grantor Trusts
    One commentator notes a difference in the documentation 
requirements for domestic grantor trusts under sections 1441 and 1446. 
The commentator states that under section 1441, a domestic grantor 
trust can provide Form W-9 to the withholding agent in its own right, 
but under section 1446, the domestic grantor trust must provide the 
partnership a statement that it is a grantor trust and include the 
documentation of the grantor or other owner (e.g., Form W-8BEN). The 
commentator suggests that the final regulations eliminate this 
difference and allow a domestic grantor trust to provide Form W-9 in 
its own right for purposes of section 1446, just as the trust is 
entitled to do under section 1441.
    The final regulations do not adopt this suggestion. Treasury and 
the IRS believe that it is appropriate for a partnership to compute its 
1446 tax liability with respect to a grantor or other owner of a trust 
rather than the trust itself because it is the grantor or other owner 
that is

[[Page 28711]]

responsible for reporting the ECTI on its U.S. income tax return and 
paying tax with respect to the income. Further, unlike section 1441, 
the withholding obligation under section 1446 applies only to 
partnerships rather than to the last U.S. person in a chain leading to 
the foreign beneficial owner of income. As a result, if a partnership 
does not pay the 1446 tax there is no assurance that the foreign person 
will file an income tax return and pay the underlying tax liability.
3. Documentation Requirement for Foreign Simple Trusts
    One commentator notes a difference in the documentation 
requirements for foreign simple trusts under sections 1441 and 1446. 
The commentator states that under section 1441, a payer of income is 
required to look through a foreign simple trust and consider the 
documentation of the beneficiary of such trust, but under section 1446, 
the foreign simple trust is permitted to provide a Form W-8 (e.g., Form 
W-8BEN) on its own behalf to the partnership to establish its foreign 
status. The commentator suggests that the final regulations eliminate 
this difference and require a partnership to look through a foreign 
simple trust to the beneficiary of such trust; i.e., require the 
beneficiary of such trust to provide a Form W-8 or Form W-9 to 
establish its non-foreign or foreign status for purposes of section 
1446, just as the beneficiary is required to do under section 1441.
    The final regulations do not adopt this comment. Unlike most 
situations under section 1441 where the withholding tax arises by 
reason of a payment of income, the income subject to withholding under 
section 1446 is generally based upon an amount that may or may not be 
distributed. As a result, partnership income that is allocable to a 
foreign simple trust may not enter into a simple trust's computation of 
income it is required to distribute. The final regulations provide an 
example of this circumstance where a foreign simple trust does not act 
as a mere conduit between the partnership and the beneficiary with 
respect to the trust's allocable share of partnership ECTI. 
Consequently, Treasury and the IRS believe that it is appropriate for a 
partnership to compute its 1446 tax liability with respect to a foreign 
simple trust rather than the trust's beneficiary, and place the 
obligation on the trust to allocate the tax credit for 1446 tax paid on 
the trust's share of partnership ECTI between the trust and its 
beneficiary.
4. Domestic Trust Rule
    One commentator requests several modifications to the so-called 
domestic trust rule. The commentator suggests that the final 
regulations limit the application of the ``reason to know'' standard in 
the rule to situations where the partnership and the partner are 
related under section 707(b) or where the IRS has formally notified the 
partnership in writing that the claim of a named partner to be a 
domestic person exempt from section 1446 withholding is unreliable and 
must be disregarded. The commentator also suggests that the final 
regulations specifically provide that the rule does not apply to 
publicly traded partnerships, nominees, or paying agents that are 
financial institutions that are otherwise unrelated to the partnership.
    Treasury and the IRS believe that the domestic trust rule serves as 
an important backstop to the foreign trust rules in the regulation and 
should not be as narrowly limited as the commentator suggests. As a 
result, the final regulations do not limit the ``reason to know'' 
standard to situations where a minimum threshold of ownership can be 
shown. However, the final regulations provide that a publicly traded 
partnership within the meaning of Sec.  1.1446-4 (or a nominee required 
to pay 1446 tax under Sec.  1.1446-4) will not be considered to know or 
have reason to know that a domestic trust is formed or availed of to 
avoid the 1446 tax, provided the interest held in such entity by the 
domestic trust is publicly traded.
    Finally, the commentator suggests that the final regulations 
clarify the term other entities found in the domestic trust rule. In 
response to this comment, the final regulations have removed the 
reference to other entities to avoid confusion.

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

1. Background
    The proposed regulations contain special rules for publicly traded 
partnerships to pay withholding tax under section 1446. The rules 
generally require a publicly traded partnership to pay 1446 tax on 
distributions of effectively connected income (ECI) to its foreign 
partners, rather than based upon a foreign partner's allocable share of 
partnership ECTI. The rules also permit the withholding obligation to 
be assumed by a domestic nominee holding an interest in the partnership 
on behalf of one or more foreign partners. The procedural aspects for 
having the nominee assume this liability were the subject of several 
comments.
2. Receipt of a Qualified Notice and Assumption of the 1446 Tax 
Liability by a Nominee Holding an Interest in a Publicly Traded 
Partnership
    Under Sec.  1.1446-4(b)(4) of the proposed regulations, a nominee 
assumes the 1446 tax obligation for a foreign partner on whose behalf 
it holds an interest in the partnership if the nominee receives a 
qualified notice from a publicly traded partnership regarding a 
distribution that is attributable to effectively connected income, gain 
or loss of the partnership, and that is provided 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. 78a). The proposed regulations provide that a 
nominee shall be treated as a withholding agent only to the extent of 
the amount specified in the qualified notice. Further, the proposed 
regulations require a nominee to provide Form W-9, ``Request for 
Taxpayer Identification Number and Certification,'' to the partnership, 
along with a statement containing certain information regarding the 
foreign persons on whose behalf the nominee holds the interest. The 
proposed regulations provide that if a nominee furnishes Form W-9 and 
the statement 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 section 1446. Further, in 
such case the partnership shall presume that such nominee is a 
nonresident alien or foreign corporation, whichever classification 
results in a higher 1446 tax being due, and pay 1446 tax consistent 
with such presumption.
    One commentator states that a literal reading of proposed 
regulation Sec.  1.1446-4 requires that a publicly traded partnership 
provide notice directly to a nominee before the notice is considered a 
qualified notice under the regulations. The commentator states that if 
this interpretation of the regulations was intended, then the qualified 
notice requirement conflicts with standard practice under which a 
nominee would not receive the qualified notice directly from the 
partnership when the notice requirements of 17 CFR 240.10b-17(b)(1) or 
(3) are followed. Instead, under Sec.  1.1445-8 and standard practice, 
notice is deemed to have been received by the nominee when notice is 
given to the National Association of Securities Dealers (NASD) or the 
Securities Exchange on which the publicly traded partnership is 
registered, and such notice is published

[[Page 28712]]

following certain procedures. Accordingly, the commentator requests 
clarification as to whether a publicly traded partnership must directly 
notify a nominee to provide a qualified notice under the regulations, 
or whether the partnership can follow the general notice procedures of 
17 CFR 240.10b-17(b)(1) or (3).
    In response, the final regulations clarify when a qualified notice 
is received by a nominee. The final regulations do not require a 
publicly traded partnership to directly notify a nominee to provide a 
qualified notice under Sec.  1.1446-4. Rather, the regulations provide, 
consistent with Sec.  1.1445-8 and standard practice, that a publicly 
traded partnership can provide the qualified notice in accordance with 
the notice requirements with respect to dividends described in 17 CFR 
240.10b-17(1) or (3) issued pursuant to the Securities Exchange Act of 
1934, 15 U.S.C. Sec.  78a et. seq., and such notice will be sufficient 
notice to all nominees to designate them as withholding agents under 
Sec.  1.1446-4 when such notice is published in accordance with 17. CFR 
240.10b-17(b)(1) or (3).
3. Identification of Nominees Under Sec.  1.1446-4
    Under Sec.  1.1446-4(d) and (e) of the proposed regulations, a 
nominee is required to provide Form W-9 to the partnership to establish 
its status as a nominee and include a statement regarding the foreign 
persons on whose behalf it holds an interest in the partnership. In 
response to comments, the final regulations remove this requirement. 
Publicly traded partnerships are provided information concerning 
nominees in preparation of completing the Schedule K-1s issued for a 
taxable year. See Sec.  1.6031(c)-1T. Further, publicly traded 
partnerships are able to determine the nominees holding interests in 
the partnership by other means. Accordingly, Treasury and the IRS have 
determined that the notification requirement is not necessary to 
further the purposes of the statute and shift the withholding 
responsibility to a nominee.
4. Extension of Publicly Traded Partnership Regime to Other 
Partnerships
    The proposed regulations requested comments as to whether the 
special rules applicable to publicly traded partnerships should be 
extended to other partnerships. No comments were received in response 
to the request. Accordingly, no change has been made in the final 
regulations to extend these rules.
5. Election to Pay 1446 Tax Based Upon Partners' Allocable Share of 
ECTI
    The proposed regulations provide that a publicly traded partnership 
may elect to pay 1446 tax based upon its foreign partners' allocable 
share of ECTI, rather than based upon distributions. In response to 
comments, Treasury and the IRS agree that this election provision is 
not administrable as a practical matter. Accordingly, the final 
regulations remove this election so that all publicly traded 
partnerships will pay tax based upon distributions of effectively 
connected income under Sec.  1.1446-4 of the regulations.
    In addition to the change discussed above, the final regulations 
update the ordering rule with respect to distributions by removing two 
provisions that are no longer relevant.

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

1. Application of the Look Through Rules
    Under the proposed regulations, a lower-tier partnership (LTP) that 
has received documentation and information from a partner that is a 
foreign partnership (UTP) may look through the UTP to the partners of 
the UTP when computing its 1446 tax obligation. The touchstone of 
proposed regulation Sec.  1.1446-5 is that the LTP must be able to 
reliably associate (within the meaning of Sec.  1.1441-1(b)(2)(vii)) 
the UTP's allocable share of ECTI from the LTP with the partners of the 
UTP. Several commentators request clarification as to whether an LTP 
can look through a UTP if the LTP cannot reliably associate 100 percent 
of the UTP's allocable share with the partners of the UTP.
    In response to this comment, the final regulations modify the 
language found in proposed regulation Sec.  1.1446-5(c)(2) to clarify 
that the look through regime is not an all or nothing proposition. 
Rather, to the extent that an LTP can reliably associate a portion of a 
UTP's allocable share of ECTI with a partner of the UTP, the LTP will 
look through when computing its 1446 tax (or an installment of such 
tax). This result is consistent with the regime under section 1441. See 
Sec.  1.1441-1(b)(2)(vii)(B)(2), Example 3 and Example 4.
2. Upper-Tier Domestic Partnership Permitted To Elect To Have Look 
Through by LTP
    The proposed regulations requested comments on whether the final 
regulations should permit a domestic UTP to elect to have an LTP look 
through the UTP in accordance with the rules of Sec.  1.1446-5. Several 
commentators note that this alternative would be desirable and should 
be permitted in the final regulations. In addition, one commentator 
requests that, for administrative reasons, an LTP should be required to 
consent to the election and agree to undertake the look through.
    In response to the above comments, the final regulations permit a 
domestic UTP to elect to have the look through rules of Sec.  1.1446-5 
apply. Further, the final regulations require that the LTP consent in 
writing to the election and thereby agree to apply the rules. The UTP 
must provide a Form W-9 to the LTP to establish its non-foreign status. 
In addition, the UTP must attach to the Form W-9 its election to have 
the look through provisions apply. UTP's election must be in writing to 
the LTP and received by the LTP at least 15 days prior to any 
installment due date or Form 8804 filing due date for which it will be 
considered. The LTP must also consent to undertake the look through in 
writing. To make an election to which the LTP can consent, the domestic 
UTP must provide information, consistent with Sec.  1.1446-5, to the 
LTP to enable such partnership to reliably associate (within the 
meaning of Sec.  1.1441-1(b)(2)(vii)) at least a portion of the UTP's 
allocable share with a foreign partner of the UTP. If the LTP does not 
consent to the election then the LTP is to treat the domestic UTP as a 
U.S. person for purposes of section 1446. Whether the UTP is a domestic 
or foreign partnership, and regardless of whether the LTP looks through 
the UTP in computing its withholding tax, the UTP is still obligated to 
report and pay tax under section 1446.
3. Clarify the Application of the Look Through Rules to Publicly Traded 
Partnerships in Tiered Structures
    Section 1.1446-5 of the proposed regulations sets forth the look-
through regime applicable to UTPs. The last sentence of proposed 
regulation Sec.  1.1446-5(c)(2) states ``[t]he approach set forth in 
this paragraph (c) shall not apply to partnerships whose interests are 
publicly traded, See Sec.  1.1446-4.'' However, since the focus of 
Sec.  1.1446-5(c)(2) is on the UTP, one commentator requests 
clarification as to whether the look-through regime can apply if the 
LTP is publicly traded but the UTP is not publicly traded.
    In response to the request, the final regulations provide two new 
paragraphs to describe the application of the look through rules to 
publicly traded partnerships in tiered structures. The

[[Page 28713]]

rules are based upon whether the publicly traded partnership is an LTP 
or UTP. Under the final regulations, the look through rules of Sec.  
1.1446-5 apply to a publicly traded partnership (or its nominees 
required to pay 1446 tax) that is an LTP if all the requirements of 
Sec.  1.1446-5 are met. However, the final regulations also provide 
that the look through regime of Sec.  1.1446-5 will not apply to look 
through a publicly traded partnership where such partnership is a UTP.

G. Sec.  1.1446-6T and Withholding in Excess of a Partner's Actual Tax 
Liability

1. Background Regarding Withholding in Excess of a Foreign Partner's 
Tax Liability
    The preamble to the proposed regulations notes that a partnership 
may be required to pay 1446 tax in excess of a foreign partner's actual 
tax liability because section 1446 does not take into account a foreign 
partner's deductions and losses from outside the partnership during the 
year, or a foreign partner's loss carryovers and, as discussed above, 
section 1446 requires withholding at the highest statutory rates 
generally applicable to a foreign partner with effectively connected 
income. The preamble requested comments on approaches to adjust the 
amount of a partnership's 1446 tax obligation that would be consistent 
with the statute and legislative history and administrable by 
partnerships, partners, and the IRS. One such approach was discussed in 
part C.1. of this preamble, above.
2. Overview of Comments Received
    Treasury and the IRS received numerous comments requesting that a 
partnership be permitted to take into account a foreign partner's 
available deductions and losses that are connected with gross income 
that is effectively connected (effectively connected deductions and 
losses) when computing the partnership's 1446 tax liability. Most 
commentators propose that a partnership be permitted to rely on a 
certificate by a foreign partner regarding the partner's available 
effectively connected deductions and losses for the taxable year. 
However, each commentator proposes qualifications and limitations on a 
foreign partner's ability to certify such deductions and losses. The 
proposals are discussed below.
    Several commentators propose that a foreign partner with a 
substantial presence in the United States be permitted to certify 
deductions and losses to the partnership. The commentators differ on 
what constitutes substantial presence in the United States. For 
example, one commentator suggests that only foreign partners with a 10 
percent or greater interest in the capital or profits of the 
partnership be permitted to certify deductions and losses. Another 
commentator suggests that the final regulations permit a foreign 
partner to certify deductions and losses to the partnership only if the 
partner has substantial assets in the United States, defined as a 
multiple of the 1446 tax that the partnership otherwise would be 
required to pay. A third commentator proposes an exemption from paying 
1446 tax where ECTI is allocable to a publicly traded foreign 
corporation, a foreign corporation owned by a publicly traded 
corporation, or any other foreign partners with substantial assets, 
employees, or business activities in the United States to the extent 
such entity informs the partnership that overwithholding will occur. 
Finally, one commentator proposes that a U.S. branch of a foreign bank 
or insurance company be entitled to certify deductions and losses to 
the partnership, post a security, or otherwise reduce withholding 
because such banks and insurance companies typically have substantial 
investments in the United States.
    Most of the proposals also suggest some additional measure designed 
to provide security to the government that the appropriate partner-
level U.S. income tax due will be paid. One commentator's proposal 
conditions a foreign partner's certificate of deductions and losses on 
the tax book value of the partnership's assets being at least equal to 
the decrease in 1446 tax that results from considering all foreign 
partners' certified deductions and losses. This same commentator also 
suggests that a partnership remain liable for the 1446 tax if it is 
later determined that a foreign partner's deductions and losses were 
overstated. A second commentator proposes that at least a portion of a 
foreign partner's certified deductions and losses should have to be 
reviewed and approved by a certified tax professional, and considered 
by a partnership only if at least one U.S. person is involved in the 
partnership's activities (e.g., the Tax Matters Partner under section 
6231).
    With respect to which deductions and losses may be certified, most 
of the commentators propose that the final regulations permit a foreign 
partner to certify deductions and losses from preceding years, as 
reflected on a partner's prior U.S. income tax return. One commentator 
proposes that a partnership should be able to consider anticipated 
current year deductions and losses of a foreign partner, such as state 
and local taxes the partnership will pay on behalf of a foreign 
partner. Another commentator suggests that the prior year safe harbor 
in the proposed regulations should be broadened to permit a partnership 
to consider a foreign partner's actual partner-level deductions and tax 
liability for the prior year when the partner's only U.S. business 
activity is the partner's investment in the partnership. Further, one 
commentator proposes a tiered system where deductions related to the 
partnership could be certified to the partnership without IRS 
involvement, but deductions that arise from activities that are 
unrelated to the partnership would be subject to a more stringent 
procedure.
    With respect to other requirements, most of the commentators 
premise their proposals on a foreign partner having filed tax returns 
in previous years. There was no consensus regarding the appropriate 
filing history that should be required of a foreign partner. However, 
one commentator proposes a special category, so-called ``good driver'' 
partners; that is, foreign partners that have established that they 
have timely filed Federal income tax returns in the United States for 
the preceding three taxable years, who would be permitted to certify 
deductions and losses to the partnership without IRS involvement.
    Several commentators propose that partner certificates under 
section 1446 should be processed similar to the regime in Rev. Proc. 
2000-35 (2000-2 C.B. 211) (which permits taxpayers to receive a 
certificate from the IRS to reduce or eliminate withholding under 
section 1445). Other commentators suggest that Rev. Proc. 2000-35 
should be modified to accommodate a new section 1446 certificate 
regime.
    In response to the comments received, Treasury and the IRS are 
issuing temporary and proposed regulations on this matter with the 
final regulations. The temporary and proposed regulations address many 
of the concerns regarding the potential for section 1446 to require a 
partnership to pay 1446 tax in excess of a foreign partner's actual tax 
liability. The effective date of the temporary regulations coincides 
with the effective date of the final regulations issued in this 
publication. The temporary regulations contain rules that permit a 
partnership, in some circumstances, to consider a foreign partner's 
deductions and losses that are reasonably expected to be available to 
reduce the partner's U.S. income tax liability on the partner's 
allocable share of effectively connected

[[Page 28714]]

income or gain from the partnership in the taxable year. The temporary 
regulations contain elements of several of the suggested approaches. 
Treasury and the IRS believe that the regulations set forth a procedure 
that will be administrable by partnerships, partners, and the IRS. The 
provisions of the temporary regulations are outlined below.
3. General Overview of Temporary Regulations
    In general, under the temporary regulations, certain foreign 
partners may certify deductions and losses to a partnership to reduce 
the 1446 tax required to be paid by the partnership with respect to 
ECTI allocable to such partners. A foreign partner's certificate may 
only be considered for the partnership taxable year for which it is 
submitted. Therefore, a foreign partner that wants to certify its 
deductions and losses in consecutive years must submit a new 
certificate each partnership taxable year in accordance with the time 
requirements in the regulations (discussed in part G.7. of this 
preamble) for the certification provisions to apply. Before each 
installment date or Form 8804 filing date (without regard to 
extensions), the partnership will determine, on a partner-by-partner 
basis, whether the procedures of the temporary regulations may apply. A 
partnership receiving a valid certificate under the temporary 
regulations is not obligated to consider a partner's certified 
available deductions and losses (or may consider only a portion of such 
deductions and losses) in computing its withholding tax liability. 
Further, in some cases, the temporary regulations may prohibit a 
partnership from considering all of a partner's certified losses. For 
example, the temporary regulations provide that a partnership may only 
consider a foreign partner's certified net operating loss (NOL) to 
offset 90 percent of the partner's allocable share of ECTI.
    Under the temporary regulations, a partnership permitted to 
consider a foreign partner's certificate is generally not relieved from 
liability for the 1446 tax under section 1461, or for penalties or 
interest, if the partnership or the IRS, in its sole discretion, 
determines that the partner's certificate is defective, or the 
partner's certificate is updated and the 1446 tax due with respect to 
such partner increases. However, a partnership that reasonably relies 
on a foreign partner's certificate will not be subject to the addition 
to the tax under section 6655 (as applied through Sec.  1.1446-3) for 
failing to make installment payments with respect to the foreign 
partner during any period that the partnership reasonably relied on the 
partner's certificate. A partnership that does not have actual 
knowledge or reason to know that a foreign partner's certificate is 
defective may reasonably rely on such certificate. A partnership is not 
considered to have actual knowledge or reason to know that a foreign 
partner's certificate (first certificate) is defective if the partner 
submits an updated certificate that indicates that the reasonably 
expected deductions and losses are less than the amount set forth on 
the first certificate, provided such updated certificate cannot be 
considered for the installment period or unextended Form 8804 filing 
date because such updated certificate was received less than 10 days 
before such date. The temporary regulations set forth those 
circumstances under which a certificate will be considered defective, 
including, but not limited to, where the foreign partner is not 
eligible to submit the certificate, or the partnership or the IRS 
determines that the partner's actual available deductions and losses 
are less than the deductions and losses last certified to the 
partnership for the partnership taxable year.
    The regulations also contain rules and examples regarding the 
extent of the partnership's 1446 tax liability when a certificate is 
determined to be defective. The regulations provide that if a 
certificate is determined to be defective for a reason other than the 
amount or character of the deductions and losses set forth on such 
certificate (e.g., partner failed to timely file a U.S. income tax 
return), then the partnership shall be liable for the full 1446 tax (or 
any installment of such tax) due with respect to such partner, without 
regard to the certificate. However, this liability may be eliminated if 
the partnership can demonstrate that it is deemed to have paid 1446 tax 
with respect to the partner under the regulations. See part C.6. of 
this preamble. If it is determined that a certificate is defective 
because the actual deductions and losses available to the foreign 
partner are less than the amount certified to the partnership (other 
than when it is determined that the partner certified the same 
deduction or loss to more than one partnership), or that the character 
of the certified deductions and losses is erroneous, then the 
partnership shall be liable for 1446 tax (or any installment of such 
tax) with respect to such partner only to the extent the partnership 
considered the certified deductions and losses in an amount greater 
than the amount determined to be actually available to the partner and 
permitted to be used under Sec.  1.1446-1 through Sec.  1.1446-6T or to 
the extent the erroneous characterization of the certified deductions 
and losses affects the calculation of the partnership's 1446 tax 
liability.
    If the IRS notifies the partnership that a foreign partner's 
certificate is defective, even if such notice pertains to a certificate 
submitted for a prior partnership taxable year, the partnership will 
not be permitted to rely on any current certificate from the foreign 
partner then in its possession, or any certificate the foreign partner 
submits thereafter, until the IRS again notifies the partnership in 
writing and revokes or modifies the original notice.
    The procedures available under the temporary regulations are only 
available to a foreign partner that has provided adequate documentation 
to a partnership under Sec.  1.1446-1. Further, the procedures do not 
apply to a publicly traded partnership subject to Sec.  1.1446-4.
4. Partners Permitted To Certify Deductions and Losses Under Temporary 
Regulations
    Under the temporary regulations, only certain foreign partners may 
submit a certificate to a partnership for purposes of section 1446. In 
general, a foreign partner may submit a certificate only if the partner 
has submitted documentation to the partnership in compliance with Sec.  
1.1446-1 and, among other requirements, can represent that it timely 
filed, or will timely file, a U.S. Federal income tax return for each 
of the preceding four taxable years and the partner's taxable year 
during which the certificate is considered. The partner must also 
represent that it timely paid all tax shown on such returns (or will 
timely pay all tax shown on such returns). The filing and payment 
requirements ensure that the foreign partner is in the United States 
income tax system, has filed returns for a reasonable period of time, 
and provide some assurance that the partner will file its U.S. income 
tax return (and pay all tax shown on such return) for the year the 
certificate is considered. Although the temporary regulations are 
generally effective for partnership taxable years beginning after the 
date that the regulations are issued, a foreign partner's prior filing 
of U.S. Federal income tax returns may contribute to meet the filing 
requirement set forth in the temporary regulations.
    Because trusts and estates are not always pure conduits for tax 
purposes it is difficult for a partnership to determine the taxpayer 
(i.e., trust/estate

[[Page 28715]]

or beneficiary) that will pay tax on the ECTI allocated to the trust or 
estate. As a result, the temporary regulations generally do not permit 
foreign trusts or estates to submit a certificate to the partnership. 
However, the regulations provide an exception for a grantor trust under 
sections 671 through 679 of the Code where the grantor or other owner 
of such trust meets the documentation requirements set forth in Sec.  
1.1446-1 and the requirements for submitting a certificate under the 
temporary regulations.
    With respect to tiered partnership structures, the temporary 
regulations permit a lower-tier partnership to consider the certificate 
of a foreign partner of an upper-tier partnership only when the look 
through provisions of the regulations (section 1.1446-5) otherwise 
apply and the lower-tier partnership is treating the foreign partner of 
the upper-tier partnership as if the partner were a direct partner in 
the lower-tier partnership for purposes of computing its section 1446 
tax obligation. See Sec.  1.1446-5(c)(2). In that situation, the 
foreign partner's certificate would first be provided to the upper-tier 
partnership and then provided by the upper-tier partnership to the 
lower-tier partnership.
5. Deductions and Losses Permitted To Be Certified Under Temporary 
Regulations
    If a foreign partner meets the requirements of the temporary 
regulations, the foreign partner may submit a certificate to the 
partnership for the partnership taxable year that sets forth the 
deductions and losses (other than charitable deductions) the partner 
reasonably expects to be available to reduce the partner's U.S. income 
tax liability on the partner's allocable share of effectively connected 
income or gain from the partnership for such partnership taxable year. 
Except as otherwise provided in the regulations, all deductions and 
losses set forth in the certificate must generally be reflected on the 
partner's timely filed (or to be timely filed) U.S. income tax return 
for the partner's immediately preceding taxable year. That is, a 
foreign partner can only certify deductions and losses that are or will 
be reflected on the partner's U.S. income tax return filed for a 
taxable year ending prior to the installment due date or Form 8804 
filing date (without regard to extensions) for the partnership taxable 
year for which the certificate is considered (and no anticipated 
deduction or loss with respect to current operations may be 
considered). However, a partner that has a loss that is set forth on a 
Schedule K-1 issued by the partnership for a prior year, but is not 
reflected on a prior year return because the loss was suspended under 
section 704(d) and, therefore, not deductible, may certify such loss to 
the partnership that issued the Schedule K-1.
    Treasury and the IRS believe that limiting a partnership's 
consideration of deductions and losses to those reflected or to be 
reflected on a prior year return of the partner provides a bright line 
rule that facilitates administration, furthers the purposes of the 
statute, and avoids the uncertainty associated with fluctuations in 
estimates of current year activities. The approach is consistent with 
section 1445, another chapter 3 withholding regime. See Rev. Proc. 
2000-35, 2000-2 C.B. 211, Sec.  4.06. The temporary regulations contain 
additional limitations on the deductions and losses that may be 
certified.
6. Requirement Under Temporary Regulations That Partnerships Turn Over 
Certificates to IRS
    A partnership that considers a foreign partner's certificate to any 
extent when computing its 1446 tax (or any installment of such tax) 
must file Form 8813, ``Partnership Withholding Tax Payment Voucher 
(Section 1446),'' or Forms 8804 and 8805, whichever is applicable, for 
the period the partnership considers such certificate, even if there is 
no 1446 tax due with respect to such partner. The partnership must 
attach such partner's certificate to Form 8813 or Form 8805 filed for 
the period. The partnership must also attach its 1446 tax calculation 
for such foreign partner and such calculation must clearly demonstrate 
the use of the certified deductions and losses, and the effect on the 
1446 tax owed (or installment of such tax) with respect to such 
partner. A Form 8805 must be issued to each foreign partner whose 
certificate is considered by the partnership in computing the 
partnership's 1446 tax on Form 8804, regardless of whether the 
partnership must pay any 1446 tax.
7. Timing Requirements for Submitting Certificates, Updated 
Certificates, and Status Updates Under Temporary Regulations
    A foreign partner that desires to certify deductions and losses to 
a partnership under the temporary regulations must submit its first 
certificate for the partnership taxable year so that it is received by 
the partnership at least 30 days prior to the partnership installment 
due date or the Form 8804 filing date (without regard to extensions) 
for the partnership taxable year for which the partner would like the 
certificate to be considered in the partnership's computation of the 
1446 tax (or any installment of such tax) due with respect to the 
partner. A partner that has not yet filed a U.S. income tax return 
required to be timely filed under the regulations may generally 
represent that such return will be timely filed. However, the 
certificate submitted to the partnership must specify any taxable year 
for which no return has been filed and the partner must update the 
certificate no later than 10 days after the date that it files a U.S. 
Federal income tax return for any year specified. If the partner has 
not filed a prior year return when submitting its first certificate, 
and does not file such return and trigger the requirement to provide an 
updated certificate, then the foreign partner must provide a status 
update to the partnership so that it is received by such partnership at 
least ten days prior to the partnership's final installment payment 
date, setting forth such information regarding the filing due date of 
any U.S. income tax returns that have not been filed. If no status 
update is received, the partnership must disregard the certificate the 
partner submitted for the fourth installment due date and when 
completing its Form 8804 for the taxable year. In that case, provided 
the other requirements of the regulations were met, the partnership 
will still be considered to have reasonably relied on the certificate 
for the first three installment periods of the taxable year.
    A foreign partner that submits a certificate and later determines 
that the deductions and losses reasonably expected to be available are 
less than the corresponding amounts previously certified for the 
taxable year, or otherwise determines that the certificate is incorrect 
(e.g., a certified ordinary loss is actually capital in character), is 
required to provide an updated certificate to the partnership within 10 
days of the date that the foreign partner makes such determination. A 
partner submitting an updated certificate must attach a copy of the 
certificate that is being updated (superseded certificate).
    Consistent with the voluntary nature of the temporary regulations, 
a partnership may consider an updated certificate in its computation of 
1446 tax (or any installment of such tax) due with respect to a foreign 
partner for any period for which tax is otherwise due if the 
partnership receives the updated certificate at least 10 days prior to 
the installment payment or Form 8804 filing date (without regard to 
extensions) for the partnership taxable year for which the certificate 
and updated certificate are submitted. An updated certificate

[[Page 28716]]

that may be considered under the previous sentence supersedes all prior 
certificates submitted by the foreign partner for the same partnership 
taxable year, beginning with the installment period or Form 8804 filing 
date (without regard to extensions) for which the partnership may 
consider the updated certificate.
8. Additional Requirements for Certificates Under Temporary Regulations
    The temporary regulations require a foreign partner that submits a 
certificate to a partnership to provide certain information and make 
representations on the certificate provided. For example, a foreign 
partner must provide the partnership a certificate that includes the 
partnership's name, address, and Taxpayer Identification Number (TIN), 
the partner's name, address, and TIN, and the partnership taxable year 
for which the certificate is submitted. Further, a foreign partner must 
represent that any certified deductions and losses set forth on the 
certificate have been reflected on a timely filed U.S. income tax 
return, consistent with sections 874 and 882 and the regulations 
thereunder, and that the certified deductions and losses have not been 
certified to another partnership for the purpose of reducing the 1446 
tax of such other partnership for the same taxable year. Moreover, a 
foreign partner must set forth the character of any certified 
deductions and losses (e.g., long-term capital or ordinary) and 
identify any particular deductions and losses that have special 
characteristics (e.g., passive activity losses under section 469, 
suspended losses under section 704(d)) or that are subject to 
limitations that need to be considered by the partnership. Finally, a 
foreign partner must represent that the certified deductions and losses 
have not been disallowed by the IRS as part of a proposed adjustment 
described in Sec.  601.103(b) (relating to examination and 
determination of tax liability) or Sec.  601.105(b) (relating to 
examination of returns). A foreign partner's certificate, and any 
updated certificate, must be signed by the foreign partner, or its 
authorized representative, under penalties of perjury.
9. Exemption From Withholding Under the Temporary Regulations
    In addition to the provisions discussed above, the temporary 
regulations permit a nonresident alien partner to certify to the 
partnership that the partnership investment is (and will be) the only 
activity of the partner for the partner's taxable year that gives rise 
to effectively connected income, gain, deduction, or loss. In such a 
case, the partnership is not required to pay 1446 tax (or any 
installment of such tax) with respect to such partner if the 
partnership estimates that the annualized (or, in the case of a 
partnership completing its Form 8804, the actual) 1446 tax due with 
respect to such nonresident alien partner is less than $1,000. In 
determining whether the annualized (or actual) 1446 tax due with 
respect to the partner is less than $1,000, the partnership shall not 
take into account any of the partner's certified deductions or losses 
under the provisions of the temporary regulations. The submission of a 
certificate under this exception is subject to all the general rules in 
the temporary regulations (e.g., partner has (or will) timely file its 
U.S. income tax return for the preceding four years (and pay all tax 
shown on such returns), the timing rules for submission of the 
certificate are met) with respect to submitting a certificate. Further, 
a nonresident alien partner that submits such a certificate to the 
partnership must submit a statement in writing to the partnership 
revoking the certificate if the partner invests or otherwise engages in 
another activity during the partner's taxable year that may give rise 
to effectively connected items. A partnership receiving a statement 
that the partner's investment in the partnership is (and will be) the 
partner's only activity giving rise to effectively connected items may 
reasonably rely on such certificate provided it has no actual knowledge 
or reason to know that the certificate is defective. Further, the 
partnership remains liable for the 1446 tax, and all additions to the 
tax (other than the addition to the tax under section 6655 as applied 
through Sec.  1.1446-3 for such periods during which the partnership 
reasonably relied on the certificate), interest, and penalties if the 
IRS, in its sole discretion, determines that such partner's certificate 
is defective.
10. Effective Date of Temporary Regulations
    The temporary regulations are effective for partnership taxable 
years beginning after the date the final regulations are published in 
the Federal Register. However, Treasury and the IRS believe that the 
temporary regulations should be immediately available for qualifying 
partners. Therefore, a partnership may elect to apply the temporary 
regulations to partnership taxable years beginning after December 31, 
2004, provided such partnership also elects to apply the final 
regulations under Sec. Sec.  1.1446-1 through 1.1446-5, which otherwise 
would be effective for taxable years beginning after May 18, 2005, to 
partnership taxable years beginning after December 31, 2004.

Effective Dates

    These regulations are effective for partnership taxable years 
beginning after May 18, 2005. However, a partnership may elect to apply 
the provisions of the final regulations to partnership taxable years 
beginning after December 31, 2004. A partnership may also elect to 
apply the temporary regulations included in this document to 
partnership taxable years beginning after December 31, 2004, provided 
that the partnership also elects to apply the final regulations to 
partnership taxable years beginning after December 31, 2004.

Effect on Other Documents

    The following publications will be obsolete for partnership taxable 
years beginning after May 18, 2005, or for partnership taxable years 
beginning after December 31, 2004, if the partnership makes an election 
under Sec.  1.1446-7:

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 the final and temporary regulations are 
not a significant regulatory action as defined in Executive Order 
12866. It also has been determined that section 553(b) of the 
Administrative Procedures Act (5 U.S.C. chapter 5) does not apply to 
these regulations. With respect to the final regulations it is hereby 
certified that 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), 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 0.5 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 0.5 hours per respondent. Moreover, the 
information collection in Sec.  1.1446-4 is

[[Page 28717]]

voluntary. Therefore, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. For 
applicability of the RFA to the temporary regulation, please refer to 
the cross-referenced NPRM published elsewhere in this issue of the 
Federal Register. Pursuant to section 7805(f) of the Code, the Notice 
of Proposed Rulemaking preceding the final regulation was submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business. Further, pursuant to section 
7805(f) of the Code, the temporary regulation included in this document 
has been submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on its impact on small business.

Drafting Information

    The principal author of the final and temporary regulations is 
David J. Sotos, formerly of the 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.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Amendments to the Regulations

0
Accordingly, 26 CFR parts 1, 301, and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.1446-3 also issued under 26 U.S.C. 1446(f).
    Section 1.1446-4 also issued under 26 U.S.C. 1446(f).* * *


0
Par. 2. In Sec.  1.871-10, paragraph (d)(3) is amended by adding four 
sentences at the end of the 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. * * * A nonresident alien or foreign 
corporation that makes an election generally must provide the 
partnership a Form W-8ECI, ``Certificate of Foreign Person's Claim for 
Exemption from Withholding on Income Effectively Connected with the 
Conduct of a Trade or Business in the United States,'' and attach to 
such form a copy of the election (or a statement that indicates that 
the nonresident alien or foreign corporation will make the election). 
However, if the nonresident alien or foreign corporation has already 
submitted a valid form to the partnership that establishes such 
partner's foreign status, the partner shall furnish the partnership a 
copy of the election (or a statement that indicates that the 
nonresident alien or foreign corporation will make the election). To 
the extent the partnership has income to which the election pertains, 
the partnership shall treat such income as effectively connected income 
subject to withholding under section 1446. See also Sec.  1.1446-2.
    (e) Effective dates. This section shall apply for taxable years 
beginning after December 31, 1966, except the last four sentences of 
paragraph (d)(3) of this section shall apply to partnership taxable 
years beginning after May 18, 2005, or such earlier time as the 
regulations under Sec. Sec.  1.1446-1 through 1.1446-5 apply by reason 
of an election under Sec.  1.1446-7. * * *

0
Par. 3. Section 1.1443-1 is amended by revising paragraphs (a) and 
(c)(1) to read as follows:


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 and 
section 513 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 1.1446-6T, in the same manner as 
payments or allocations of effectively connected taxable income of the 
same amounts made to any foreign person that is not a tax-exempt 
organization. Therefore, a foreign organization receiving amounts 
includible under section 512 and section 513 in computing the 
organization's unrelated business taxable income may claim an exemption 
from withholding or a reduced rate of withholding with respect to that 
income in the same manner as a foreign person that is not a tax-exempt 
organization. See Sec.  1.1441-9(b)(3) for a presumption that amounts 
are includible under section 512 and section 513 in computing the 
organization's unrelated business taxable income in the absence of 
reliable certification. See also Sec.  1.1446-3(c)(3), applying this 
presumption in the context of section 1446.
* * * * *
    (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 May 18, 2005, or such earlier time as the regulations under 
Sec. Sec.  1.1446-1 through 1.1446-5 apply by reason of an election 
under Sec.  1.1446-7.
* * * * *

0
Par. 4. Sections 1.1446-0 through 1.1446.5, 1.1446-6T and 1.1446-7 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 1.1446-7.

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) Submission of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, and W-9.
(i) In general.
(ii) Withholding certificate applicable to each type of partner.
(A) U.S. person.
(B) Nonresident alien.
(C) Foreign partnership.
(D) Disregarded entities.
(E) Domestic and foreign grantor trusts.
(F) Nominees.
(G) Foreign governments, foreign tax-exempt organizations and other 
foreign persons.
(H) Foreign corporations, certain foreign trusts, and foreign 
estates.
(iii) Effect of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, W-9, and 
statement.
(A) Partnership reliance on withholding certificate.
(B) Reason to know.
(C) Subsequent knowledge and impact on penalties.
(iv) Requirements for certificates to be valid.
(A) When period of validity expires.
(B) Required information for Forms W-8BEN, W-8IMY, W-8ECI, and W-
8EXP.

[[Page 28718]]

(v) Partner must provide new withholding certificate when there is a 
change in circumstances.
(vi) Partnership must retain withholding certificates.
(3) Presumptions in the absence of valid Form W-8BEN, Form W-8IMY, 
Form W-8ECI, Form W-8EXP, Form W-9, or statement.
(4) Consequences when partnership knows or has reason to know that 
Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, or Form W-9 is 
incorrect or unreliable and does not withhold.
(5) Acceptable substitute form.

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) Deductions 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.
(i) In general.
(ii) Special types of income or gain.
(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) Application of section 6655(f).
(G) Application of section 6655(i).
(H) Current year tax safe harbor.
(I) 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 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) Special rules for apportioning the tax credit under section 
33.
(A) Foreign trusts and estates.
(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 and deemed payment 
of 1446 tax.
(3) Liability for interest, penalties, and additions to the tax.
(i) Partnership.
(ii) Foreign partner.
(4) Examples.
(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) Paying and reporting 1446 tax.
(d) Rules for designation of nominees to withhold tax under section 
1446.
(e) Determining foreign status of partners.
(f) Distributions subject to withholding.
(1) In general.
(2) In-kind distributions.
(3) Ordering rule relating to distributions.
(4) Coordination with section 1445(e)(1).

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) Publicly traded partnerships.
(1) Upper-tier publicly traded partnership.
(2) Lower-tier publicly traded partnership.
(e) Election by a domestic upper-tier partnership to apply look 
through rules.
(1) In general.
(2) Information required for valid election statement.
(3) Consent of lower-tier partnership.
(f) Examples.

Sec.  1.1446-6T Special rules to reduce a partnership's 1446 tax with 
respect to a foreign partner's allocable share of effectively connected 
taxable income (Temporary).

(a) In general.
(b) Foreign partner to whom this section applies.
(1) In general.
(2) Special rules.
(c) Certificate to reduce 1446 tax with respect to a foreign 
partner.
(1) In general.
(i) Deductions and losses from the partnership from prior taxable 
years.
(ii) Deductions and losses from sources other than the partnership 
from prior taxable years.
(iii) Limit on the consideration of a partner's net operating loss 
deduction.
(iv) Certificate of nonresident alien partner that partnership 
investment is partner's only activity giving rise to effectively 
connected items.
(2) Time and form of certification.
(i) Time for certification provided to partnership.
(A) First certificate submitted for a partnership's taxable year.
(B) Updated certificates and status updates.
(1) Foreign partner's prior year tax returns not yet filed.
(2) Other circumstances requiring a foreign partner to submit an 
updated certificate.
(3) Form and content of updated certificate.
(4) When partnership may consider an updated certificate.
(ii) Form of certification.
(3) Notification to partnership when a partner's certificate cannot 
be relied upon.
(4) Partner to receive copy of notice.
(5) Partner's certificate valid only for partnership taxable year 
for which submitted.
(d) Effect of certificate of deductions and losses on partners and 
partnership.
(1) Effect on partner.
(i) No effect on substantive tax liability of foreign partner.
(ii) No effect on partner's estimated tax obligations.
(2) Effect on partnership.
(i) Reasonable reliance to relieve partnership from addition to the 
tax under section 6655.
(ii) Filing requirement.
(iii) Continuing liability for withholding tax under section 1461 
and for applicable interest and penalties.
(iv) Partner's certified deductions and losses to offset foreign 
partner's annualized allocable share of partnership ECTI.
(e) Examples.
(f) Effective dates.

[[Page 28719]]

Sec.  1.1446-7 Effective dates.


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 (ECTI) as computed under Sec.  
1.1446-2 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 prescribed in this section, and Sec. Sec.  
1.1446-2 through 1.1446-6T.
    (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 
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 under section 704 to one or more of 
the foreign partners. If the partnership has ECTI allocable under 
section 704 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. For special rules that may apply in determining the amount of 
1446 tax due with respect to a partner, see Sec.  1.1446-6T.
    (c) Determining whether a partnership has a foreign partner--(1) In 
general. Except as otherwise provided in this section, Sec.  1.1446-3, 
and Sec.  1.1446-5, only a partnership that has at least one foreign 
partner during the partnership's taxable year can have a 1446 tax 
liability. Generally, the term foreign partner means any partner of the 
partnership that is not a U.S. person within the meaning of section 
7701(a)(30). Thus, a partner of the partnership is generally a foreign 
partner if the partner is a nonresident alien, foreign partnership (see 
Sec.  1.1446-5 for rules that allow a lower-tier partnership to look 
through an upper-tier foreign partnership to the partners of such 
partnership for purposes of computing its 1446 tax), foreign 
corporation (which includes a foreign government pursuant to section 
892(a)(3)), foreign estate or trust (see paragraph (c)(2) of this 
section for rules that instruct a partnership to consider the grantor 
or other owner of a trust under subpart E of subchapter J as the 
partner for purposes of computing the partnership's 1446 tax), as those 
terms are defined under section 7701 and the regulations thereunder, or 
a foreign organization described in section 501(c), or other foreign 
person. A person also is a foreign partner if the person is presumed to 
be a foreign person under paragraph (c)(3) of this section. 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) and 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 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 1446 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) Submission of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, 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 generally 
determine whether a partner is a foreign partner, and the partner's tax 
classification (e.g., corporate or non-corporate), by obtaining a 
withholding certificate from the partner that is 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,'' Form W-8ECI, ``Certificate of Foreign Person's Claim for 
Exemption from Withholding on Income Effectively Connected With the 
Conduct of a Trade or Business in the United States,'' Form W-8EXP, 
``Certificate of Foreign Government or other Foreign Organization for 
United States Tax Withholding,'' or a Form W-9, as applicable, or an 
acceptable substitute form permitted under paragraph (c)(5) of this 
section. Generally, a foreign partner that is a nonresident alien, 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.
    (ii) Withholding certificate applicable to each type of partner. A 
partner that submits a valid Form W-8 (e.g., Form W-8BEN) for purposes 
of section 1441 or 1442 will generally satisfy the documentation 
requirements of this section provided that the submission of such form 
is not inconsistent with the rules of this paragraph (c)(2) or 
paragraph (c)(3) of this section. The following rules shall apply for 
purposes of this section.
    (A) U.S. person. A partner that is a U.S. person (other than a 
grantor trust described in this paragraph (c)(2)), including a domestic 
partnership and domestic simple or complex trust (including an estate), 
shall provide a valid Form W-9.
    (B) Nonresident alien. A Form W-8 (e.g., Form W-8BEN) submitted by 
a nonresident alien for purposes of withholding under section 1441 will 
generally be accepted for purposes of section 1446. If no such form is 
submitted for purposes of section 1441, such nonresident alien shall 
submit Form W-8BEN for purposes of section 1446.
    (C) Foreign partnership. A partner that is a foreign partnership 
generally shall provide a valid Form W-8IMY for purposes of section 
1446. See Sec.  1.1446-5 (permitting a lower-tier partnership to look 
through an upper-tier foreign partnership in certain circumstances when 
computing 1446 tax).
    (D) Disregarded entities. An entity that is disregarded as an 
entity separate from its owner under Sec.  301.7701-3 of this chapter 
(whether domestic or foreign) shall not submit a Form W-8 (e.g., Form 
W-8BEN) or Form W-9. Instead, the owner of such entity for Federal tax 
purposes shall submit appropriate documentation to comply with this 
section. See Sec. Sec.  301.7701-1 through 301.7701-3 of this chapter 
for determining the U.S. Federal tax classification of a partner.
    (E) Domestic and foreign grantor trusts. To the extent that a 
grantor or other 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 provide documentation under this paragraph (c)(2) to 
identify the trust as a grantor trust and provide documentation on 
behalf of the grantor or other person treated as the owner of all or a 
portion of such trust as required by this paragraph (c)(2). If such 
trust is a foreign

[[Page 28720]]

trust, the trust shall submit Form W-8IMY to the partnership 
identifying itself as a foreign grantor trust and shall provide such 
documentation (e.g., Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, or W-9) and 
information pertaining to its grantor or other owner 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 domestic grantor 
trust and such statement shall identify 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, W-8ECI, 
W-8EXP, or W-9) pertaining to its grantor or other 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.
    (F) Nominees. Where a nominee holds an interest in a partnership on 
behalf of another person, the beneficial owner of the partnership 
interest, not the nominee, shall submit a Form W-8 (e.g., Form W-8BEN) 
or Form W-9 to the partnership or nominee that is the withholding 
agent.
    (G) Foreign governments, foreign tax-exempt organizations and other 
foreign persons. A Form W-8 (e.g., Form W-8EXP) submitted by a partner 
that is a foreign government, foreign tax-exempt organization, or other 
foreign person for purposes of withholding under Sec. Sec.  1441 
through 1443 will also operate to establish the foreign status of such 
partner under this section. However, except as set forth in Sec.  
1.1446-3(c)(3) (regarding certain tax-exempt organizations described in 
section 501(c)), the submission of Form W-8EXP will have no effect on 
whether there is a 1446 tax due with respect to such partner's 
allocable share of partnership ECTI. For example, a partnership must 
still pay 1446 tax with respect to a foreign government partner's 
allocable share of ECTI because such partner is treated as a foreign 
corporation under section 892(a)(3). If no Form W-8 is submitted for 
purposes of withholding under sections 1441 through 1443, then such 
government, tax-exempt organization, or person must generally submit 
Form W-8BEN.
    (H) Foreign corporations, certain foreign trusts, and foreign 
estates. Consistent with the rules of this paragraph (c)(2) and 
paragraph (c)(3) of this section, a foreign corporation, a foreign 
trust (other than a foreign grantor trust described in paragraph 
(c)(2)(ii)(E) of this section), or a foreign estate may generally 
submit any appropriate Form W-8 (e.g., Form W-8BEN) to the partnership 
to establish its foreign status for purposes of section 1446.
    (iii) Effect of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, W-9, and 
statement--(A) Partnership reliance on withholding certificate. In 
general, for purposes of this section, a partnership may rely on a 
valid Form W-8 (e.g., Form W-8BEN) or Form W-9, or statement described 
in this paragraph (c)(2) from a partner, beneficial owner, or grantor 
trust to determine whether that person, beneficial owner, or the owner 
of a grantor trust, is a non-foreign or foreign partner for purposes of 
computing 1446 tax, and if such person is a foreign partner, to 
determine whether or not such person is a corporation for U.S. tax 
purposes. The rules of paragraph (c)(3) of this section shall apply to 
a partnership that 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-8 (e.g., Form W-8BEN) or 
Form W-9 identifying such grantor or other person. Further, a 
partnership may not rely on a Form W-8 or Form W-9, or statement 
described in this paragraph (c)(2), and such form or statement is 
therefore not valid for any installment period or Form 8804 filing date 
during which 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, the partnership should pay 1446 tax in an amount greater than 
would be the case if it relied on the certificate or statement.
    (B) Reason to know. A partnership has reason to know that 
information on a withholding certificate or statement is incorrect or 
unreliable if its knowledge 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).
    (C) Subsequent knowledge and impact on penalties. If the 
partnership does not have actual knowledge or reason to know that a 
Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or 
statement received from a partner, beneficial owner, or grantor trust 
contains incorrect or unreliable information, but it subsequently 
determines that the certificate or statement contains 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 certificate or statement, then the partnership will not 
be subject to penalties for its failure to pay the 1446 tax in reliance 
on such certificate 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 a 
withholding certificate or statement is incorrect or unreliable.
    (iv) 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, Form W-8IMY, Form W-8ECI, or 
Form W-8EXP 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, Form W-8IMY, Form W-8ECI, or Form W-8EXP 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, W-8IMY, W-8ECI, and W-
8EXP. Forms W-8BEN, W-8IMY, W-8ECI, and W-8EXP 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

[[Page 28721]]

submitted by the forms or instructions for such form, as applicable.
    (v) 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.
    (vi) Partnership must retain withholding certificates. A 
partnership or nominee who has responsibility for paying 1446 tax under 
this section or Sec.  1.1446-4 must retain each withholding 
certificate, statement, and other information received from its direct 
and indirect partners for as long as it may be relevant to the 
determination of the withholding agent's 1446 tax liability under 
section 1461 and the regulations thereunder.
    (3) Presumptions in the absence of valid Form W-8BEN, Form W-8IMY, 
Form W-8ECI, Form W-8EXP, 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-8ECI, Form W-8EXP, Form W-9, 
or statement required by paragraph (c)(2) of this section from a 
partner, 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. Except as provided in Sec.  1.1446-3(a)(2) and Sec.  
1.1446-5(c)(2), a partnership that knows that a partner is an 
individual shall treat the partner as a nonresident alien. Except as 
provided in Sec.  1.1446-3(a)(2) and Sec.  1.1446-5(c)(2), a 
partnership that knows that a partner is an entity 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. See Sec.  1.1446-3(a)(2) which 
prohibits a partnership in certain circumstances from considering 
preferential tax rates in computing its 1446 tax when the presumption 
and rules of this paragraph (c)(3) apply. In all other cases, the 
partnership shall treat the partner as either a nonresident alien 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. Except as provided in Sec.  1.1446-5(c)(2), the 
presumption set forth in this paragraph (c)(3) that a partner is a 
foreign person 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 an acceptable certificate under this 
section. If a certificate 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, Form W-8ECI, Form W-8EXP, or Form W-9 is 
incorrect or unreliable and does not withhold. If a partnership has 
actual knowledge or has reason to know that a Form W-8BEN, Form W-8IMY, 
Form W-8ECI, Form W-8EXP, Form W-9, or statement required by paragraph 
(c)(2) of this section submitted by a partner, 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 1446 
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) and 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 
has such knowledge or reason to know that the certificate contained 
incorrect or unreliable information and for all subsequent installment 
periods. If a partner, beneficial owner, or grantor trust submits a new 
valid Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or 
statement, as applicable, the partnership may rely on that 
documentation when paying 1446 tax (or any installment of such tax) for 
any payment date that has not passed at the time such form is received.
    (5) Acceptable substitute form. A partnership or withholding agent 
responsible for paying 1446 tax (or any installment of such tax) may 
substitute its own form for the official version of Form W-8 (e.g., 
Form W-8BEN) that is recognized under this section to ascertain the 
identity of its partners, provided such form is consistent with Sec.  
1.1441-1(e)(4)(vi). All references under this section or Sec. Sec.  
1.1446-2 through 1.1446-6T to a Form W-8 (e.g., Form W-8BEN, Form W-
8IMY, Form W-8ECI, Form W-8EXP) shall include the acceptable substitute 
form recognized under this paragraph (c)(5).


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 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) or any installment of such 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. See 
Sec.  1.1446-6T (special rules permitting the partnership to consider 
partner-level deductions and losses to reduce the partnership's 1446 
tax). The calculation of partnership ECTI allocable to foreign partners 
as set forth in paragraph (b) of this section and the partnership's 
withholding tax obligation are partnership-level computations 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(a) 
or 882(c) and properly

[[Page 28722]]

allocable to the partner under section 704 and the regulations 
thereunder, in each case, after application of the rules of this 
section. See Sec.  1.1446-6T (special rules permitting the partnership 
to consider partner-level deductions and losses to reduce the 
partnership's 1446 tax). 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 and, when 
applicable, sections 1.1446-3(a)(2)(consideration of preferential rates 
when computing 1446 tax) and section 1.1446-6T (special rules 
permitting the partnership to consider partner-level deductions and 
losses to reduce the partnership's 1446 tax).
    (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 shall apply with respect to partnership income and 
gain.
    (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 include 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 Internal Revenue Code, without regard to 
whether those amounts are taxable to the partner. A partner that makes 
the election under section 871(d) or section 882(d) shall furnish to 
the partnership a statement that indicates that such election has been 
made. See Sec.  1.871-10(d)(3). If a partnership receives a valid Form 
W-8ECI from a partner, the partner is deemed, for purposes of section 
1446, to have effectively connected income subject to withholding under 
section 1446 to the extent of the items identified on the form.
    (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 
(see Sec.  1.1446-1(c)(2)(iii) regarding when a Form W-8BEN is valid 
for purposes of this section), containing the information necessary to 
support the claim for treaty benefits required in the forms and 
instructions. In addition, for purposes of this section, the 
withholding certificate must contain the beneficial owner's taxpayer 
identification number.
    (3) Deductions and losses. For purposes of computing a foreign 
partner's allocable share of partnership ECTI under this paragraph (b), 
the following rules shall apply with respect to deductions and losses.
    (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. 
Except as provided in Sec.  1.1446-6T, the net operating loss deduction 
of any foreign partner provided in section 172 shall not be taken into 
account. Further, except as provided in Sec.  1.1446-6T, 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 a 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 Sec.  
1.1446-6T and this paragraph (b)(3), 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. 
Except as provided in Sec.  1.1446-5(e), in computing partnership ECTI, 
the partnership shall not take into account any item of income, gain, 
loss, or deduction to the extent allocable to any partner that is not a 
foreign partner, as that term is defined in Sec.  1.1446-1(c).
    (ii) Partnership credits. See Sec.  1.1446-3(a) providing that the 
1446 tax is computed without regard to a partner's distributive share 
of the partnership's tax credits.
    (5) Examples. The following examples illustrate the application of 
this section. In considering the examples, disregard the potential 
application of Sec.  1.1446-3(b)(2)(v)(F) (relating to the de minimis 
exception to paying 1446 tax). The examples are as follows:

    Example 1. Limitation on capital losses. PRS partnership has two 
equal partners, A and B. A is a nonresident alien 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

[[Page 28723]]

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. Accordingly, A's share of partnership ECTI allocable under 
section 704 pursuant to Sec.  1.1446-2 is $100 ($150 of ordinary 
income less $50 of ordinary deductions, plus $50 of capital gain 
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 aliens. 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. Assume that these 
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 under Sec.  1.1446-2 is $400 
(consisting of $200 of ordinary income and $200 of long-term capital 
gain), and B's allocable share of partnership ECTI is $200 
(consisting of $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. FC's net operating loss 
carryover is not taken into account in determining FC's allocable 
share of partnership ECTI under Sec.  1.1446-2 and, absent the 
application of Sec.  1.1446-6T (permitting a foreign partner to 
certify deductions and losses reasonably expected to be available to 
reduce the partner's U.S. income tax liability on the effectively 
connected income or gain allocable from the partnership), is not 
considered in computing the 1446 tax installment payment due on 
behalf of FC. Accordingly, 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 equals 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--(i) In general. Except as provided in 
this paragraph (a)(2), in the case of a foreign partner that is a 
corporation for U.S. tax purposes, the applicable percentage is the 
highest rate of tax specified in section 11(b)(1) for such taxable 
year. Except as provided in this paragraph (a)(2) and Sec.  1.1446-5, 
in the case of a foreign partner that is not a corporation for U.S. tax 
purposes (e.g., a partnership, individual, trust or estate), the 
applicable percentage is the highest rate of tax specified in section 
1.
    (ii) Special types of income or gain. Except as otherwise provided, 
a partnership is permitted to consider as the applicable percentage 
under this paragraph (a)(2) the highest rate of tax applicable to a 
particular type of income or gain allocable to a partner (e.g., long-
term capital gain allocable to a non-corporate partner, unrecaptured 
section 1250 gain, collectibles gain under section 1(h)), to the extent 
of a partner's allocable share of such income or gain. Consideration of 
the highest rate of tax applicable to a particular type of income or 
gain under the previous sentence shall be made without regard to the 
amount of such partner's income. A partnership is not permitted to 
consider the highest rate of tax applicable to a particular type of 
income or gain under this paragraph (a)(2)(ii) if the application of 
the preferential rate depends upon the corporate or non-corporate 
status of the person reporting the income or gain and, either no 
documentation has been provided to the partnership under Sec.  1.1446-1 
to establish the corporate or non-corporate status of the partner 
required to pay tax on the income or gain, or the partnership is 
otherwise required to compute and pay 1446 tax on such portion of the 
income or gain using the highest applicable percentage under section 
1446(b). See e.g., Sec. Sec.  1.1446-1(c)(3) (presumption of foreign 
status in the absence of documentation) and 1.1446-5(c)(2) (requirement 
to pay 1446 tax at higher of rates in section 1446(b) where a lower-
tier partnership cannot reliably associate income with a partner of the 
upper-tier partnership).
    (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 is 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 paragraphs 
(b)(2)(v) and (b)(3)(ii) of this section, in computing its first 
installment of 1446 tax for a taxable year, a partnership must decide 
whether it will pay its 1446 tax for the entire taxable year by using 
the safe harbor set forth in paragraph (b)(3)(i) 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 a partnership's underpayment of an 
installment of 1446 tax, the partnership shall be subject to an 
addition to the tax equal to the amount determined under section 6655, 
as modified by this section, as if such partnership were a 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's 
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 of income, gain, loss and deduction are annualized to 
determine each foreign partner's allocable share of partnership ECTI 
under Sec.  1.1446-2. To the extent

[[Page 28724]]

applicable, Sec.  1.1446-6T may be considered for purposes of this 
section to reduce the amount of the partner's allocable share of 
partnership ECTI to an amount that is subject to tax under section 
1446. Each foreign partner's allocable share of partnership ECTI that 
is subject to tax under section 1446, or portion thereof, is then 
multiplied by the relevant applicable percentage for the type of income 
allocable to the foreign partner under paragraph (a)(2) of this 
section. The respective tax amounts are then added 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 subject to 
tax under section 1446 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. Therefore, the total amount of a 
partnership's 1446 tax installment payment is equal to the sum of the 
installment payments due for such period on behalf of all the 
partnership's foreign partners.
    (ii) Annualization methods. A partnership that decides 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 into 
account a partner's estimated tax payments.
    (iv) Partner whose interest terminates during the partnership's 
taxable year. If a partner's interest in the partnership terminates 
prior to the end of the partnership's taxable year, 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 1.1446-7 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 as set forth in 
this paragraph (b)(2)(v).
    (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. This paragraph (b)(2)(v)(B) shall apply to 
1446 tax paid by a partnership or nominee, as well as to amounts that a 
partner is deemed to have paid for estimated tax purposes by reason of 
the partnership's or nominee's 1446 tax payments under Sec.  1.1446-
3(d)(1)(i).
    (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, and any partnership required to pay such tax 
shall be treated as a corporation.
    (F) Application of section 6655(f). A partnership subject to 
section 1446 shall apply section 6655(f) after aggregating the 1446 tax 
due (or any installment of such tax) for all its foreign partners. See 
Sec.  1.1446-6T for an exception to this rule when a nonresident alien 
partner certifies to the partnership that the partnership investment is 
the nonresident alien partner's only activity giving rise to 
effectively connected items.
    (G) Application of section 6655(i). If a partnership has a taxable 
year of less than 12 months, the partnership is required to pay 1446 
tax (including installments of such tax) in accordance with this 
section Sec.  1.1446-3, if the partnership has ECTI allocable under 
section 704 to foreign partners. In such a case, the partnership shall 
adjust its installment payments of 1446 tax in a reasonable manner 
(e.g., the annualized amounts of ECTI estimated to be allocable to a 
foreign partner, and the section 6655(e)(2)(B)(ii) percentage to be 
applied to each installment) to account for the short-taxable year. 
However, if the partnership's taxable year is a period of less than 4 
months, the partnership shall not be required to make installment 
payments of 1446 tax, but will only be required to file Forms 8804 and 
8805 in accordance with this section Sec.  1.1446-3, and report and pay 
the appropriate 1446 tax for the short-taxable year.
    (H) Current year tax safe harbor. The safe harbor set forth in 
section 6655(d)(1)(B)(i) shall apply to a partnership subject to 
section 1446.
    (I) 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 (without regard to 
Sec.  1.1446-6T) 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)(ii), if a partnership 
decides to pay its 1446 tax for the first installment period based upon 
the safe harbor method set forth in paragraph (b)(3)(i), the 
partnership must use the safe harbor method for each installment 
payment made during the partnership's taxable year. Notwithstanding the 
previous sentence, 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

[[Page 28725]]

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 the tax under section 6655 (as 
applied through this section), 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 
IRS 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 subject to the withholding requirements of sections 1441 and 
1442 and the regulations thereunder.
    (2) Real property gains--(i) Domestic partnerships. Except as 
otherwise provided in this paragraph (c)(2), 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)). A 
partnership that has complied with the requirements of section 1446 
will be deemed to satisfy the withholding requirements of section 1445 
and the regulations thereunder. However, a domestic partnership that 
would otherwise be exempt from section 1445 withholding by operation of 
a nonrecognition provision must continue to comply with the 
requirements of Sec.  1.1445-5(b)(2). In the event that amounts are 
withheld under section 1445(e) at the time of the disposition of a U.S. 
real property interest, such amounts may be credited against the 
partnership's 1446 tax. A partnership that fails to comply fully with 
the requirements of section 1446 pursuant to this paragraph (c)(2) 
shall be liable for any unpaid 1446 tax and subject to any applicable 
addition to the tax, interest, and penalties under section 1446. See 
Sec.  1.1446-4(f)(4) for rules coordinating the withholding liability 
of publicly traded partnerships under sections 1445 and 1446.
    (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 amount 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 501(c) shall be required to pay 1446 tax on such ECTI only to 
the extent such ECTI is includible under section 512 and section 513 in 
computing the organization's unrelated business taxable income. The 
certificate procedure available under Sec.  1.1441-9(b)(1) by which a 
partner may set forth the amounts it believes will and will not be 
includible in its computation of unrelated business taxable income 
under section 512 and section 513 shall also apply to a partner in a 
partnership subject to section 1446. Such certificate shall be made by 
a partner in the same manner as under Sec.  1.1441-9(b)(2). A 
partnership that determines that the partner's certificate as to 
certain partnership items is unreliable or lacking must presume, 
consistent with Sec.  1.1441-9(b)(3) (regarding amounts includible 
under section 512 in computing the organization's unrelated business 
taxable income), that such partnership items would be includible in 
computing the partner's UBTI.
    (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 
ECTI allocable to 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 to that form. Form 8813 is generally used to transmit 
an installment payment of 1446 tax to the IRS with respect to 
partnership ECTI estimated to be allocated to foreign partners. 
However, see Sec.  1.1446-6T (relating to circumstances where a 
partnership must file Form 8813 when no payment is required under 
section 1446). Except as provided in this section, a partnership must 
notify each foreign partner of the 1446 tax paid on the partner's 
behalf when the partnership makes an installment payment of 1446 tax. 
The notice required to be given to a foreign partner under the previous 
sentence must be provided within 10 days of the installment payment due 
date, or, if paid later, the date such installment payment is made. A 
foreign partner generally may credit an installment of 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. 
See Sec.  1.1446-5(b) (relating to tiered partnership structures). 
However, a foreign partner may not obtain an early refund of such 
amounts under the estimated tax rules. See Sec.  1.1446-3(b)(2)(v)(B). 
See paragraph (d)(2) of this section for the amount of 1446 tax a 
partner may credit against its U.S. income tax liability. 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 
(or prior year's safe harbor amount, if applicable), and the amount of 
tax paid on behalf of the partner for both the current and any prior 
installment periods during the partnership's taxable year. 
Notwithstanding any other provision of this paragraph (d), a 
withholding agent is not required to notify a partner of an installment 
of 1446 tax paid on the partner's behalf, unless requested by the 
partner, if--
    (A) The partnership's agent responsible for providing notice 
pursuant to this paragraph is the same person that acts as an agent of 
the foreign partner for purposes of filing the partner's U.S. Federal 
income tax return for the partner's taxable year that includes the 
installment payment date; or
    (B) The partnership has at least 500 foreign partners and the total 
1446 tax that the partnership determines will be required to be paid 
for the partnership taxable year on behalf of such partner (based on 
paragraph (b)(2)(ii) or (3) of

[[Page 28726]]

this section) with respect to the partner's allocable share of ECTI is 
less than $1,000.
    (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. 
Installment 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 paragraph (d)(1)(iii) of 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 subject to Sec.  1.1446-4) 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(b)), 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,'' for each of 
its foreign partners on whose behalf it paid 1446 tax, and furnish Form 
8804 and the Forms 8805 to the Internal Revenue Service and the 
respective Form 8805 to each of its partners. Notwithstanding the 
previous sentence, a partnership that considers a foreign partner's 
certificate under Sec.  1.1446-6T when computing its 1446 tax on Form 
8804 is required to furnish such partner and the Internal Revenue 
Service a Form 8805, even if the form submitted to the partner shows no 
payment of 1446 tax on behalf of the partner. 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.
    (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 Internal Revenue Service 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 (as shown on Form 8805 to the 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 that includes the 
installment periods 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 pursuant to paragraph 
(d)(1)(iv) of this section, 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 the 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 generally 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. See paragraph 
(d)(1)(i) of this section regarding a partner's ability to credit an 
installment of 1446 tax paid on the partner's behalf against the 
partner's estimated tax payments due for the taxable year. See also 
Sec.  1.1446-5(b) (relating to tiered partnership structures).
    (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) or (vii) of this 
section to be provided by such trust or estate and a copy of 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 28727]]

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) Special rules for apportioning the tax credit under section 
33--(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. The 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 of such trust or estate that includes the 
partnership ECTI allocated to the trust or estate in gross income under 
section 652 or section 662 (whether distributed or deemed to be 
distributed and with the same character as effectively connected income 
as in the hands of the trust or estate). In the case of a foreign trust 
or estate with multiple beneficiaries, each beneficiary may claim a 
portion of the 1446 tax that may be claimed by all beneficiaries under 
the previous sentence as a credit in the same proportion as the amount 
of ECTI included in such beneficiary's gross income bears to the total 
amount of ECTI included by all beneficiaries. 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 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 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 additions to the tax, interest, 
and penalties 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 knows or has reason to 
know that this paragraph (d)(2)(iii)(B) applies. A publicly traded 
partnership within the meaning of Sec.  1.1446-4 (or a nominee required 
to pay 1446 tax under Sec.  1.1446-4) will not be considered to know or 
have reason to know a domestic trust is being used to avoid the 1446 
tax under this paragraph (d)(2)(iii)(B), provided the interest held in 
such entity by the domestic trust is publicly traded.
    (iv) Refunds to withholding agent. A withholding agent (i.e., the 
partnership) may obtain a refund of the 1446 tax paid (or deemed paid 
under Sec.  1.1446-5(b)) to the extent of the excess of the amount paid 
to the Internal Revenue Service by the partnership, over the 
partnership's section 1446 tax liability as determined by the sum of 
the total tax creditable to each partner indicated on all Forms 8805 
for the taxable year. If a partnership issues Form 8805 to a partner, 
then the partnership may not claim a refund for any amount of tax shown 
on that form as paid on behalf of the partner. If a partnership 
incorrectly withholds upon a United States person under section 1446 of 
the Internal Revenue Code and issues a Form 8805 to that person, the 
partnership may not file for a refund of the amount incorrectly 
withheld. Instead, the United States person may file for a refund of 
that amount on its annual return. For rules concerning refunds to 
withholding agents who pay 1446 tax on distributions of effectively 
connected income or gain under Sec.  1.1446-4 (i.e., publicly traded 
partnerships or nominees), see Sec.  1.1464-1.
    (v) 1446 tax treated as cash distribution to partners. Except as 
otherwise provided in this paragraph (d)(2)(v), a partnership's payment 
of 1446 tax on behalf of a foreign partner is treated under section 
1446(d) and this section as a deemed distribution of money to the 
partner on the earliest of the day on which the partnership paid the 
tax, the last day of the partnership's taxable year for which the 
amount was paid, or the last day on which the partner owned an interest 
in the partnership during the taxable year for which the tax was paid. 
However, a deemed distribution of money under section 1446(d) resulting 
from a partnership's installment payment of 1446 tax on behalf of a 
partner is treated as an advance or drawing of money under Sec.  1.731-
1(a)(1)(ii) to the extent of the partner's distributive share of income 
for the partnership taxable year. The rule treating a deemed 
distribution as an advance or drawing of money under this paragraph 
(d)(2)(v) applies only for purposes of determining the tax results of 
the deemed distribution to the partner under sections 705, 731, and 
733, and does not affect the date that the partnership is considered to 
have paid any installment of 1446 tax for purposes of section 6655 (as 
applied through this section) or the date a foreign partner is deemed 
to have paid estimated tax by reason of such installment payment. See 
paragraph (d)(1)(i) of this section (permitting a partner to credit 
1446 tax paid on the partner's behalf against the partner's estimated 
tax obligation). An amount treated as an advance or drawing of money is 
taken into account at the end of the partnership taxable year or the 
last day during the partnership's taxable year on which the partner 
owned an interest in the partnership. Any 1446 tax paid after the close 
of the partnership's taxable year, including amounts paid with the 
filing of Form 8804, that are on account of partnership ECTI allocated 
to partners for the prior taxable year shall be treated under section 
1446(d) and this section as a distribution from the partnership on the 
earlier of the last day of the partnership's prior taxable year for 
which the tax is paid, or the last day in such prior taxable year on 
which such foreign partner held an interest in the partnership.
    (vi) Examples. The following examples illustrate the application of 
this section. In considering the examples, disregard the potential 
application of paragraph (b)(2)(v)(F) of this section (relating to the 
de minimis exception to paying 1446 tax). The examples are as follows:

    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. PRS and FT each 
maintain a calendar taxable year. PRS estimated for each installment 
period during the partnership's taxable year that FT would be 
allocated $100 of ECTI for the taxable year, and that all such ECTI 
would be ordinary in character. Assume that the allocation of the 
$100 would be respected under section 704(b) and the regulations 
thereunder. PRS pays installments of 1446 tax based upon its 
estimates and timely pays a total of $35 of 1446 tax over the course 
of the partnership's taxable year ($100 ECTI x .35). Assume that 
PRS' estimates of ECTI allocable to FT during the taxable year equal 
the actual amount of ECTI allocable to FT for the taxable year. 
Assume also that FT's only income for the taxable year is the $100 
of income from PRS, and that, pursuant to the terms of the trust's 
governing instrument and local law, the $100

[[Page 28728]]

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 as 
determined under paragraph (d)(2)(iii) of this section 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 PRS paid.
    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 FT includes in its 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 $14 credit under section 
33 for the 1446 tax PRS paid ($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 $21 credit under section 33 
for the 1446 tax PRS paid ($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 FT includes in its 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). Pursuant 
to paragraph (d)(2)(iii) of this section, 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 $35 credit under section 33 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 1446 tax is made liable for 
that tax by section 1461. Therefore, a partnership that is required to 
pay 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, and to the extent, the 
partnership can demonstrate pursuant to paragraph (e)(2) of this 
section, to the satisfaction of the Commissioner or his delegate, that 
a foreign partner has paid the full amount of tax required to be paid 
by such partner to the Internal Revenue Service. See paragraph (e)(3) 
of this section and section 1463 regarding a partnership's liability 
for penalties and interest even though a foreign partner has satisfied 
the underlying tax liability. See also 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 the tax under section 6655 when 
there is an underpayment of 1446 tax.
    (2) Proof that tax liability has been satisfied and deemed payment 
of 1446 tax. Proof of payment of tax may be established for purposes of 
paragraph (e)(1) of this section consistent with Sec.  1.1445-1(e)(3). 
Under that standard, a partnership must provide sufficient information 
to the IRS to determine that the partner's tax liability was satisfied 
or established to be zero in accordance with the rules of this section. 
Under this section, a partnership's liability for 1446 tax shall be 
deemed to have been satisfied (deemed payment), to the extent of the 
1446 tax due with respect to the ECTI allocable to a foreign partner, 
on the later of the date that such partner is considered to have paid 
all tax that is required to be shown on such partner's U.S. income tax 
return under section 6513(a) and (b)(2) (prescribing the date tax is 
considered paid for purposes of sections 6511(b)(2), (c), and 6512), or 
the last date for payment of the 1446 tax without extensions (the 
unextended due date for Form 8804). The deemed payment rule of this 
paragraph (e)(2) shall apply for purposes sections of 1446, 1461, and 
1463, and any additions to the tax, interest, or penalties potentially 
applicable to such partnership under section 1446, including sections 
6601, 6651, and 6655. Any deemed payment of 1446 tax under this 
paragraph (e)(2) shall not be treated as a deemed distribution under 
section 1446(d) and this section.
    (3) Liability for interest, penalties, and additions to the tax--
(i) Partnership. Notwithstanding paragraph (e)(2) of this section, a 
partnership that fails to pay 1446 tax is not relieved from liability 
under section 6655 (as applied through this section) or for interest 
under section 6601, when applicable. 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 the 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. The section 6601 
interest charge shall accrue beginning on the last date prescribed for 
payment of the 1446 tax due under section 1461 (which is the due date, 
without extensions, for filing Form 8804). The section 6601 interest 
charge 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 (or is deemed satisfied under this paragraph (e)). Further, a 
partnership's liability under section 6655 (as applied through this 
section) for any underpaid installment payment shall accrue beginning 
on the relevant installment payment date, and shall stop accruing on 
the earlier of the date (and to the extent) that the 1446 tax liability 
is actually satisfied or the date prescribed in paragraph (b)(2)(v)(C) 
of this section. See paragraph (e)(4) of this section for examples 
illustrating that a partner's payment of estimated tax has no effect on 
the partnership's calculation of its addition to the tax under section 
6655 and this section. See Sec.  1.1461-3 for a list of the additions 
to tax, interest, and penalties that may apply to a partnership that 
fails to comply with section 1446. See Sec.  1.1446-6T for exceptions 
to the application of the addition to the tax under section 6655 (as 
applied through this section) when a partnership reasonably relies on a 
foreign partner's certificate to reduce 1446 tax.
    (ii) Foreign partner. A foreign partner is permitted to reduce any 
addition to the tax under section 6654 or section 6655 by the amount of 
any section 6655 addition to the tax paid by the partnership with 
respect to the partnership's failure to pay adequate installment 
payments of the 1446 tax on ECTI allocable to the foreign partner.
    (4) Examples. The following examples illustrate the application of 
this section. In considering the examples, disregard the potential 
application of paragraph (b)(2)(v)(F) of this section (relating to the 
de minimis exception to paying 1446 tax). Further, in each of the 
examples where a partnership is deemed to have paid 1446 tax with 
respect to ECTI allocable to a partner, it is assumed that the 
partnership has presented to the IRS the appropriate information under 
paragraph (e)(2) of this section for the IRS to conclude that the 
deemed payment is appropriate. The examples are as follows:

    Example 1. Foreign partnership fails to pay 1446 tax and sole 
foreign partner fails to pay all tax required to be shown on 
partner's U.S. income tax return.
    (i) PRS is a foreign partnership engaged in a trade or business 
in the United States and has two equal partners, A, a U.S. person, 
and B, a nonresident alien. PRS is described in Sec.  1.6081-5(a) 
(PRS keeps its books and records outside the United States and 
Puerto

[[Page 28729]]

Rico) and, therefore, is required to file Form 8804 by the 15th day 
of the 6th month following the close of its taxable year. Both 
partners and PRS are calendar year taxpayers. PRS has received a 
valid Form W-9 and W-8BEN from A and B, respectively, but has not 
received any other documents or certificates. B is engaged in 
multiple trades or businesses (including the PRS partnership) that 
give rise to effectively connected income. PRS will use an 
acceptable annualization method under this section for computing its 
1446 tax.
    (ii) In PRS's first year of operations (Year 1), PRS estimates 
for each installment period described in Sec.  1.1446-3 that B will 
be allocated $100 of ordinary ECTI for the taxable year. Therefore, 
for each installment period PRS is required to pay one fourth of the 
tax on the annualized ECTI allocable to B, or $8.75 (.25 x ($100 x 
.35)). PRS fails to make any installment payments. PRS's operations 
actually result in $100 of ECTI allocated to B. Therefore, PRS was 
required to have paid 1446 tax of $35 on or before the due date, 
without extensions, for filing its Form 8804 which is June 15, Year 
2 (the last date prescribed for payment of the 1446 tax). PRS does 
not file Forms 8804 or 8805.
    (iii) B pays estimated taxes and makes the following payments on 
the following dates: June 15, Year 1--$20, September 15, Year 1--
$15, and January 15, Year 2--$10. B's total estimated tax payments 
equal $45. B files its U.S. Federal income tax return timely on June 
15, Year 2, and reports all effectively connected income required to 
be shown on its return. Assume that B's total correct tax liability 
as shown on the return is $50. B does not make a payment with its 
return and so B still owes $5 to the Internal Revenue Service 
(excluding any interest, penalties, and additions to the tax that 
may apply). Assume that B is not subject to an addition to the tax 
under section 6654.
    (iv) Under the rules of paragraph (e)(2) of this section, for 
purposes of sections 1446, 1461, and 1463, PRS is not considered to 
have paid any 1446 tax because B has not paid all of B's U.S. income 
tax liability.
    (v) Further, under the principles of section 6655 and the rules 
of Sec.  1.1446-3(e), a partner's estimated tax payments will not 
affect the calculation of a partnership's addition to the tax. 
Accordingly, PRS will be liable under the principles of section 6655 
and Sec.  1.1446-3 for failing to withhold for each installment 
payment. The addition to the tax will accrue beginning with the due 
date of each installment payment on the $8.75 underpayment for each 
respective installment period and will continue to accrue until June 
15, Year 2 (the date prescribed in paragraph (b)(2)(v)(C) of this 
section).
    (vi) Further, beginning on June 15, Year 2 (the last date 
prescribed for payment of 1446 tax without extensions), PRS will be 
liable for interest under section 6601 with respect to the unpaid 
1446 tax, $35. This interest will stop accruing on the earlier of 
the date that the 1446 tax is paid by PRS or is deemed paid under 
paragraph (e)(2) of this section by reason of B's payment of its 
full tax liability.
    (vii) Further, beginning on June 15, Year 2 (the due date for 
filing Form 8804), PRS will be liable for the addition to the tax 
under section 6651(a)(1) for failing to file Form 8804. This 
addition to the tax accrues on the amount required to be shown as 
the 1446 tax liability on Form 8804, $35. This addition to the tax 
will accrue at the rate of 5 percent per month until the date that 
PRS files Form 8804 for Year 1, or the maximum accrual of the 
penalty (25 percent of the tax required to be shown on the return) 
under that section has been reached.
    (viii) PRS may be liable for other penalties and additions to 
the tax for its failure to withhold or to furnish statements to its 
foreign partner B. See Sec.  1.1461-3 for a list of the penalties 
that may apply.
    Example 2. Foreign partnership fails to pay 1446 tax but sole 
foreign partner pays all tax required to be shown on the partner's 
U.S. income tax return. The facts are the same as Example 1, except 
that B pays $5 with the filing of B's return and has therefore paid 
all tax required to be shown on B's return within the meaning of 
paragraph (e)(2) of this section.
    (i) For purposes of sections 1446, 1461, and 1463, PRS is deemed 
to have paid its 1446 tax liability under paragraph (e)(2) of this 
section as of the later of the date that B is considered to have 
paid its tax under section 6513(a) and (b)(2) (June 15, Year 2) and 
the last date for PRS to pay its 1446 tax without extensions (also 
June 15, Year 2). Therefore, PRS is deemed to have paid all of its 
1446 tax liability as of June 15, Year 2. PRS has no continuing 
liability for 1446 tax under section 1461, however, additions to the 
tax, interest, and penalties may apply.
    (ii) For purposes of section 6655 and Sec.  1.1446-3, under 
paragraph (e)(2) PRS is deemed to have paid its 1446 tax on June 15, 
Year 2. Even if B had fully paid its tax liability as of March 15, 
Year 2, the rule in paragraph (e)(2) of this section would not deem 
PRS to have paid its 1446 tax until June 15, Year 2. As a result, 
B's estimated tax payments will have no effect on PRS's calculation 
of its addition to the tax. The addition to the tax under 6655 and 
Sec.  1.1446-3 shall begin to accrue on each installment date with 
respect to the underpaid installment ($8.75), and will stop accruing 
on June 15, Year 2, the date prescribed in paragraph (b)(2)(v)(C) of 
this section.
    (iii) Because PRS is deemed to have paid its full 1446 tax 
liability as of June 15, Year 2 (the last date prescribed for 
payment of 1446 tax without extensions), PRS is not subject to an 
interest charge under section 6601, or a failure to file penalty 
under section 6651 (see section 6651(b)(1)).
    (iv) PRS may be liable for other penalties and additions to the 
tax for its failure to withhold or to furnish statements to its 
foreign partner B. See Sec.  1.1461-3 for a list of the penalties 
that may apply.
    (v) If PRS had several foreign partners, PRS would conduct the 
same analysis as set forth above with respect to each partner. That 
is, under paragraph (e) of this section, PRS may be deemed to have 
paid 1446 tax with respect to the ECTI allocable to some but not all 
of its foreign partners.
    Example 3. Domestic partnership fails to pay 1446 tax but sole 
foreign partner fully pays all tax required to be shown on partner's 
U.S. income tax return. The facts are the same as Example 2, except 
that PRS is a domestic partnership whose last date prescribed for 
paying 1446 tax without extensions (i.e., generally the unextended 
due date for Form 8804) is April 15, Year 2.
    (i) For purposes of sections 1446, 1461, and 1463, PRS is deemed 
to have paid its 1446 tax liability on the later of the date that B 
is considered to have paid tax under section 6513(a) and (b)(2) 
(June 15, Year 2) and the last date for paying 1446 tax without 
extensions (i.e., the unextended due date for Form 8804, April 15, 
Year 2). Accordingly, PRS is not considered to have fully paid its 
1446 tax liability until June 15, Year 2. PRS has no continuing 
liability for 1446 tax under section 1461, however, additions to the 
tax, interest, and penalties may apply.
    (ii) For purposes of section 6655 and Sec.  1.1446-3, PRS is 
subject to an underpayment addition to the tax that accrues on the 
same amount as in Example 1 and Example 2 because PRS is not deemed 
to have paid 1446 tax under paragraph (e)(2) of this section until 
June 15, Year 2. The addition to the tax will stop accruing on the 
date prescribed in paragraph (b)(2)(v)(C) of this section (i.e., 
April 15, Year 2, the due date, without extensions, for filing Form 
8804).
    (iii) For purposes of section 6601, as of the last date 
prescribed for paying 1446 tax without extensions (April 15, Year 
2), PRS has not paid or been deemed to have paid any 1446 tax. 
Accordingly, the interest charge under section 6601 shall begin to 
accrue on April 15, Year 2, and shall accrue until the 1446 
liability is paid or deemed to have been paid. In this case, the 
interest charge will accrue until June 15, Year 2, the date that PRS 
is deemed to have paid its 1446 tax under paragraph (e)(2) of this 
section.
    (iv) For purposes of section 6651(a)(1), as of April 15, Year 2, 
PRS's amount required to be shown as tax on its Form 8804 is $35. 
This amount cannot be reduced under section 6651(b)(1) because PRS 
is not deemed to have paid 1446 tax under paragraph (e)(2) of this 
section until June 15, Year 2, a date falling after the last date 
for PRS to pay its 1446 tax, April 15, Year 2. Accordingly, the 
failure to file penalty will begin to accrue on April 15, Year 2 
(filing due date for Form 8804), and shall stop accruing on the 
earlier of the date that PRS files Form 8804 or the maximum accrual 
of the penalty (25 percent of the amount required to be shown as tax 
on the return) is reached.
    (v) PRS may be liable for other penalties and additions to the 
tax for its failure to withhold or to furnish statements to its 
foreign partner B. See Sec.  1.1461-3 for a list of the penalties 
that may apply.

    (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

[[Page 28730]]

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 
paragraph (d) of this section, 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. See Sec.  1.1446-
3(e)(3)(ii) for rules permitting a partner to reduce its addition to 
tax under section 6654 or section 6655.


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) of this section, and generally are not to pay over and 
report the 1446 tax under the rules in Sec.  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. For penalties 
and additions to the tax for failure to comply with this section, see 
Sec. Sec.  1.1461-1 and 1.1461-3.
    (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), 
except that the partnership or nominee required to pay 1446 tax may not 
consider a preferential rate in computing the 1446 tax due with respect 
to a partner.
    (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. 78a). See paragraph (d) of this section regarding when a 
nominee is considered to have received a qualified notice.
    (c) Paying and reporting 1446 tax. 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, as 
supplemented by the rules of this section. However, the reimbursement 
and set-off procedures set forth in Sec.  1.1461-2 shall not apply. A 
withholding agent under this section 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). Further, a withholding agent under this 
section may obtain a refund for 1446 tax paid in accordance with 
section 1464 and the regulations thereunder. See Sec.  1.1446-
3(d)(1)(iv) and (vii) (relating to a foreign trust or estate that holds 
an interest in a publicly traded partnership) and Sec.  1.1446-5(d) 
(relating to a publicly traded partnership that is part of a tiered 
partnership structure) for additional guidance.
    (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) received by the nominee. A nominee is treated as 
receiving a qualified notice at the time such notice is published in 
accordance with 17 CFR 240.10b-17(b)(1) or (3). Where a nominee is 
designated as a withholding agent with respect to a foreign partner of 
the partnership, 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 responsible for withholding 
under the rules of this section shall be subject to liability under 
sections 1461 and 6655, as well as all applicable penalties and 
interest, as if such nominee was a partnership responsible for 
withholding under this section. [FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][RULES][RULE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT][/
PREAMB][SUPLINF][HED]*[/HED][REGTEXT][P]*[/P]?>
    (e) Determining foreign status of partners. 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. A 
partnership or nominee obligated to withhold under this section shall 
be entitled to rely on any of the forms acceptable under Sec.  1.1446-1 
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.
    (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. In the case of a partnership (upper-tier 
partnership) that receives a partnership distribution from another 
partnership in which it is a partner (lower-tier partnership) (i.e., a 
tiered structure described in Sec.  1.1446-5), any 1446 tax that was 
paid by the lower-tier partnership may be credited by the upper-tier 
partnership and shall be treated as a distribution under section 1446. 
For example, a foreign publicly traded partnership, UTP, owns an 
interest in domestic publicly traded partnership, LTP. LTP makes a 
distribution subject to section 1446 of $100 to UTP during its taxable 
year beginning January 1, 2005, and withholds 35 percent (the highest 
rate in section 1)($35) 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. See Sec.  1.1462-1(b) 
and Sec.  1.1446-5(b)(1). 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

[[Page 28731]]

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 effectively connected with a U.S. trade or business, 
but not subject to withholding under section 1446 (e.g., amounts exempt 
by treaty);
    (iii) Amounts subject to withholding under section 1446; and
    (iv) Amounts not listed in paragraphs (f)(3)(i) through (iii) 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) of the 
regulations; 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).


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 a partnership 
(upper-tier partnership). Except as provided in paragraph (e) of this 
section, if an upper-tier domestic partnership directly owns an 
interest in a lower-tier partnership, the lower-tier partnership is not 
required to pay the section 1446 withholding tax (1446 tax) with 
respect to the upper-tier partnership's allocable share of net income, 
regardless of whether the upper-tier domestic partnership's partners 
are foreign. Paragraph (b) of this section prescribes the reporting 
requirements for upper-tier and lower-tier partnerships subject to 
section 1446. Paragraph (c) of this section prescribes rules requiring 
a lower-tier partnership to look through an upper-tier foreign 
partnership to a partner of such upper-tier partnership to the extent 
it has sufficient documentation to determine the status of such partner 
and determine such partner's indirect share of the lower-tier 
partnership's effectively connected taxable income (ECTI). Paragraph 
(d) of this section prescribes rules applicable to a publicly traded 
partnership in a tiered partnership structure. Paragraph (e) of this 
section prescribes rules permitting a domestic upper-tier partnership 
to elect to apply the look through rules of paragraph (c) of this 
section. Paragraph (f) of this section sets forth examples illustrating 
the rules of this section.
    (b) Reporting requirements--(1) In general. Notwithstanding 
paragraph (c) of this section, 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 paid 1446 tax 
(including installment payments of such tax) with respect to ECTI 
allocable to the upper-tier partnership, the lower-tier partnership 
shall comply with Sec. Sec.  1.1446-1 through 1.1446-3 and provide the 
upper-tier partnership notice of such payments and a copy of the 
statements and forms filed with respect to the upper-tier partnership's 
interest in the lower-tier partnership (e.g., Form 8805, ``Foreign 
Partner's Information Statement of Section 1446 Withholding Tax''). The 
upper-tier partnership may treat the 1446 tax (or any installment of 
such tax) paid by the lower-tier partnership on its behalf as a credit 
against its liability to pay 1446 tax (or any installment of such 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) and Sec.  1.1446-3(d). To the extent required in 
Sec.  1.1446-3(d)(1)(iii), the upper-tier partnership will file Form 
8804, ``Annual Return for Partnership Withholding Tax (Section 1446),'' 
and Form 8805, ``Foreign Partner's Information Statement of Section 
1446 Withholding Tax,'' for each of its foreign partners with respect 
to its 1446 tax obligation. To the extent the upper-tier partnership 
does not claim a refund of the 1446 tax it paid (or is considered to 
have paid), the upper-tier partnership will pass the credit for the 
1446 tax paid to its partners on the Forms 8805 it issues. See Sec.  
1.1446-3(d). The rules of this paragraph (b) shall apply to an upper-
tier and lower-tier partnership to the extent that an election has been 
made and consented to under paragraph (e) of this section.
    (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. See also paragraph (d) of this section.
    (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 foreign partnership owns an interest in 
the lower-tier partnership, the upper-tier partnership's allocable 
share of ECTI from the lower-tier partnership shall be treated as 
allocable to a partner of the upper-tier partnership, to the extent of 
such partner's indirect share of such ECTI (as if such partner were a 
direct partner in the lower-tier partnership), if--
    (1) The upper-tier foreign partnership furnishes the lower-tier 
partnership 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)) effectively connected partnership 
items allocable to the upper-tier partnership (and indirectly to such 
partner) with a Form W-8 (e.g., Form W-8BEN), Form W-9, ``Request for 
Taxpayer Identification Number and Certification,'' or other form 
acceptable under Sec.  1.1446-1, establishing the status of such 
partner provided by the upper-tier partnership. 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 with a partner 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 a portion of the upper-tier partnership's allocable 
share of effectively connected partnership items with a partner of such 
upper-tier partnership, then the lower-tier partnership shall pay 1446 
tax on such portion at the higher of the applicable percentages in 
section 1446(b). See Sec.  1.1446-3(a)(2) for the treatment of any 
income or gain

[[Page 28732]]

potentially subject to a preferential rate. If a lower-tier partnership 
has not received a valid Form W-8IMY from the upper-tier partnership, 
the lower-tier partnership shall withhold on the upper-tier 
partnership's entire allocable share of ECTI at the higher of the 
applicable percentages in section 1446(b). The look through regime set 
forth in this paragraph (c) is for purposes of computing the lower-tier 
partnership's 1446 tax obligation only and does not alter the persons 
considered to be partners in the lower-tier partnership for partnership 
reporting purposes (e.g., issuing Form 8805, Schedule K-1).
    (d) Publicly traded partnerships--(1) Upper-tier publicly traded 
partnership. The rules set forth in paragraph (c) shall not apply to 
look through an upper-tier partnership whose interests are publicly 
traded (as defined in Sec.  1.1446-4(b)(1)).
    (2) Lower-tier publicly traded partnership. The look through rules 
of paragraph (c) of this section shall apply, if the requirements of 
that paragraph are met, to a lower-tier partnership that is a publicly 
traded partnership within the meaning of Sec.  1.1446-4(b)(1) only if 
the upper-tier partnership is not described in paragraph (d)(1) of this 
section. For example, a lower-tier publicly traded partnership (or 
nominee) shall look through an upper-tier foreign partnership (or 
domestic partnership to the extent an election is made and consented to 
under paragraph (e) of this section) when computing its 1446 tax 
liability, provided the upper-tier partnership is not a publicly traded 
partnership and the appropriate documentation needed to satisfy the 
standards set forth in Sec.  1.1441-1(b)(2)(vii) and paragraph (c) of 
this section have been furnished.
    (e) Election by a domestic upper-tier partnership to apply look 
through rules--(1) In general. Subject to the rules of this paragraph 
(e), a domestic partnership that is a partner in a lower-tier 
partnership may elect to apply the rules of this section 1.1446-5 and 
have the lower-tier partnership look through such upper-tier 
partnership to the partners of such domestic partnership for purposes 
of computing the lower-tier partnership's 1446 tax liability. A 
domestic partnership shall make this election by attaching to the Form 
W-9 submitted to the lower-tier partnership, a written statement and 
information (described in paragraph (e)(2) of this section) that 
identifies the upper-tier partnership as a domestic partnership and 
that states that such partnership is making the election under this 
paragraph (e). This paragraph (e)(1) shall not apply to a publicly 
traded partnership described in Sec.  1.1446-4(b)(1). See paragraph 
(d)(1) of this section.
    (2) Information required for valid election statement. In addition 
to the requirements of paragraphs (e)(1) and (3) of this section, the 
election statement submitted under this paragraph (e)(2) is not valid 
and cannot be accepted by the lower-tier partnership pursuant to 
paragraph (e)(3) of this section unless the upper-tier partnership 
attaches valid documentation pursuant to Sec.  1.1446-1 (e.g., Form W-
8BEN) with respect to one or more of its foreign partners. The 
information and documentation submitted with the election must comply 
with the rules of this section to permit the lower-tier partnership to 
reliably associate (within the meaning of Sec.  1.1441-1(b)(2)(vii)) at 
least a portion of the upper-tier partnership's allocable share of ECTI 
with one or more foreign partners of the upper-tier partnership. The 
election statement must identify the upper-tier partnership by name, 
address, and TIN, and specify the percentage interest the domestic 
partnership holds in the lower-tier partnership. The statement may also 
include such information the upper-tier partnership deems necessary to 
enable the lower-tier partnership to apply the provisions of this 
section. If at any time the upper-tier partnership determines that the 
information or documentation previously provided to the lower-tier 
partnership is no longer correct, the upper-tier partnership shall 
update such information and documentation. Except as provided in 
paragraph (e)(3) of this section, an election that is effective under 
this paragraph (e) shall apply for subsequent taxable years until such 
upper-tier partnership revokes the election in writing. A revocation 
under this section shall be effective for any installment due date 
arising more than 15 days subsequent to the date that the lower-tier 
partnership receives such revocation.
    (3) Consent of lower-tier partnership. An election made under this 
paragraph (e) is not effective until the lower-tier partnership 
consents in writing to the upper-tier partnership that it agrees to 
apply the provisions of this section. A lower-tier partnership may not 
consent to an election submitted under this paragraph (e) for any 
installment date or Form 8804 filing date arising within 15 days of the 
lower-tier partnership's receipt of such election. The lower-tier 
partnership's written consent must specify the extent to which it will 
look through the upper-tier partnership in computing its 1446 tax (or 
any installment of such tax). To the extent that the lower-tier 
partnership does not consent to an election to apply the look through 
provisions of paragraph (c) of this section, the lower-tier partnership 
shall consider such portion of the upper-tier partnership's allocable 
share of ECTI as allocable to a domestic person for purposes of 
computing its 1446 tax obligation. A lower-tier partnership that has 
consented to an election under this paragraph (e) may revoke or modify 
its consent, in writing, at any time.
    (f) Examples. The following examples illustrate the provisions of 
this section. In considering the examples, disregard the potential 
application of Sec.  1.l446-3(b)(2)(v)(F) (relating to the de minimis 
exception to paying 1446 tax). The examples are as follows:

    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. 
All of LTP'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. LTP has $100 of annualized ECTI for the relevant 
installment period. All of this income is ordinary income and there 
is no potential application of a preferential rate applicable 
percentage under Sec.  1.1446-3(a)(2). Further, Sec.  1.1446-6T does 
not apply. 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. The 
information that PRS submits to LTP is sufficient to permit LTP to 
reliably associate (within the meaning of Sec.  1.1441-1(b)(2)(vii)) 
PRS's allocable share of effectively connected items with NRA and FC 
pursuant to this section. 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 applicable percentage for non-corporate 
partners (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 40 percent allocable share ($40), or $28), LTP will 
pay 1446 tax on NRA's allocable share of LTP's ECTI (as determined 
by looking through PRS) using

[[Page 28733]]

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 40 percent allocable share ($40), 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 
(the highest rate in section 11).
    (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 Forms 8805 that it files with the Internal 
Revenue Service pursuant to paragraph (b) of this section and will 
credit the amount withheld by LTP on its Form 8804. This credit will 
satisfy PRS's 1446 tax liability as reported on the Form 8804 it 
files because PRS's only income is from LTP, and LTP paid 1446 tax 
with respect to all of PRS's allocable share in LTP by looking 
through to PRS's partners NRA and FC. Further, PRS will pass along 
the credit for the 1446 tax withheld by LTP to its partners, NRA and 
FC on the Form 8805 issued to each partner. The credit passed to 
each partner on Form 8805 will be treated as a distribution to the 
respective partners under section 1446(d).
    Example 2. Insufficient documentation--tiered partnership 
structure. (i) LTP is a domestic partnership that has two equal 
partners A and PRS. A is a nonresident alien and PRS is a foreign 
partnership that has two equal foreign partners, C and D. Neither A 
nor PRS provides LTP with a valid Form W-8 or Form W-9. Neither C 
nor D provides PRS with a valid Form W-8 or Form W-9. Pursuant to 
Sec.  1.1446-1(c)(3), LTP must presume that PRS is a foreign person 
subject to withholding under section 1446 at the higher of the 
highest rate under section 1 or section 11(b)(1). LTP has also not 
received any documentation with respect to A. LTP must presume that 
A is a foreign person, and, if LTP knows that A is an individual, 
compute and pay 1446 tax, subject to Sec.  1.1446-3(a)(2), based on 
that knowledge.
    (ii) Assume a change of facts where C provides a form W-8 (e.g., 
Form W-8BEN) to PRS, and PRS in turn, furnishes that form to LTP along 
with its Form W-8IMY, and information regarding how effectively 
connected items are allocated to C and D. Based upon the additional 
facts, LTP can reliably associate one-half of PRS's allocable share of 
ECTI with documentation related with C. Therefore, under paragraph 
(c)(2) of this section, LTP will look through PRS to C when computing 
its 1446 tax to the extent of C's indirect share and will not look 
through with respect to the remainder of PRS's allocable share (D's 
indirect share).


Sec.  1.1446-6T  Special rules to reduce a partnership's 1446 tax with 
respect to a foreign partner's allocable share of effectively connected 
taxable income (Temporary).

    (a) In general. The rules of this section describe when a 
partnership required to pay withholding tax under section 1446 (1446 
tax), or any installment of such tax, may consider certain partner-
level deductions and losses in computing its 1446 tax obligation under 
Sec.  1.1446-3, or otherwise may not be required to pay a de-minimis 
amount of 1446 tax with respect to a nonresident alien partner. A 
partnership determines the applicability of this section on a partner-
by-partner basis for each installment period and when completing its 
Form 8804, ``Annual Return for Partnership Withholding Tax (Section 
1446),'' and paying 1446 tax for the partnership taxable year. When 
applicable, the rules of this section permit a foreign partner to whom 
this section applies (within the meaning of paragraph (b) of this 
section) to furnish a certificate to the partnership that sets forth 
the deductions and losses that are connected with, or properly 
allocated and apportioned to, as the case may be, gross income that is 
effectively connected with the partner's U.S. trade or business and 
that such foreign partner reasonably expects to be available for the 
partner's taxable year to reduce the partner's U.S. income tax 
liability on the partner's allocable share of effectively connected 
income or gain from the partnership. The rules of this section also 
permit a partner to represent that the partner's investment in the 
partnership is (and will be) the partner's only investment or activity 
that will give rise to effectively connected items for the partner's 
taxable year. To apply the rules of this section, a partner must submit 
a new certificate for each partnership taxable year. Paragraph (c) of 
this section sets forth the deductions and losses that a partner may 
certify as reasonably expected to be available to such partner for the 
partner's taxable year, and sets forth rules regarding the partner's 
representation that the partnership investment is the partner's only 
activity giving rise to effectively connected items. Paragraph (c) of 
this section also sets forth requirements for a foreign partner's 
certificate to be valid. Paragraph (d) of this section provides rules 
regarding when a partnership may rely on and consider a foreign 
partner's certificate in computing its 1446 tax, and the effect of 
relying on such a certificate. Paragraph (d) of this section also 
provides rules regarding how a partnership must handle any certificate 
or updated certificate received pursuant to this section. Paragraph (e) 
of this section sets forth examples that illustrate the rules of this 
section.
    (b) Foreign partner to whom this section applies--(1) In general. 
Subject to paragraph (b)(2) of this section, a foreign partner to whom 
this section applies is a foreign partner that has provided valid 
documentation to the partnership to whom a certificate is submitted 
under this section in accordance with Sec.  1.1446-1, has timely filed 
or will timely file a Federal income tax return in the United States in 
each of the partner's preceding four taxable years and the partner's 
taxable year(s) during which the certificate under this section is 
considered, and has timely paid (or will timely pay) all tax shown on 
such returns. This section shall not apply to a partner in a publicly 
traded partnership subject to Sec.  1.1446-4.
    (2) Special rules. Notwithstanding paragraph (b)(1) of this 
section:
    (i) In the case of a domestic or foreign partnership (upper-tier 
partnership) that is a partner in another partnership (lower-tier 
partnership), this section may apply to reduce or eliminate the 1446 
tax (or any installment of such tax) of the lower-tier partnership with 
respect to a foreign partner of the upper-tier partnership only to the 
extent the provisions of Sec.  1.1446-5 apply to look-through the 
upper-tier partnership to the foreign partner of such upper-tier 
partnership and the certificate described in paragraph (c) of this 
section is provided by such foreign partner to the upper-tier 
partnership and, in turn, provided to the lower-tier partnership with 
other appropriate documentation. See Sec.  1.1446-5(c) and (e). Absent 
the application of Sec.  1.1446-5(c), the upper-tier partnership may 
not submit a certificate of deductions and losses to the lower-tier 
partnership.
    (ii) This section shall not apply to a partner that is a foreign 
estate.
    (iii) This section shall not apply to a partner that is a domestic 
or foreign trust, except to the extent that such trust is owned by a 
grantor or other person under subpart E of subchapter J of the Internal 
Revenue Code, the documentation requirements of Sec.  1.1446-1 have 
been met by the grantor or other owner of such trust, and the 
certificate described in paragraph (c) of this section is provided by 
the grantor or other owner of such trust to the partnership.
    (c) Certificate to reduce 1446 tax with respect to a foreign 
partner--(1) In general. Subject to the rules of this section, a 
foreign partner may certify under paragraph (c)(1)(i) or (ii) of this 
section to a partnership for a partnership taxable year of such

[[Page 28734]]

partnership that it has deductions and losses that the partner 
reasonably expects to be available to reduce the partner's U.S. income 
tax liability on the partner's allocable share of effectively connected 
income or gain from the partnership. Among other requirements, 
exceptions, and limitations set forth in paragraphs (c)(1)(i), (ii), 
and (iii) of this section, the foreign partner must generally represent 
that such deductions and losses have been (or will be) reflected on a 
timely filed U.S. income tax return of the partner for a taxable year 
that ends prior to the installment due date or Form 8804 filing date 
(without regard to extensions) for the partnership taxable year for 
which the certificate is considered (i.e., no anticipated deduction or 
loss with respect to the partner's current year operations may be 
considered). A partner may also certify pursuant to paragraph 
(c)(1)(iv) of this section that the partner's only investment or 
activity giving rise to effectively connected items for the partner's 
taxable year is (and will be) the partner's investment in the 
partnership. A foreign partner's certificate to a partnership under 
this section must be in accordance with the form and requirements set 
forth in paragraph (c)(2)(ii) of this section.
    (i) Deductions and losses from the partnership from prior taxable 
years. Under this section, a partner may certify that it has deductions 
and losses (certified deductions and losses), other than charitable 
deductions, from the partnership that the partner reasonably expects to 
be available to reduce the partner's U.S. income tax liability on the 
partner's allocable share of effectively connected income or gain from 
the partnership for the partner's taxable year. The certified 
deductions and losses must be reflected on a Schedule K-1 issued (or to 
be issued) to the partner by the partnership for a prior partnership 
taxable year. A partner that has a loss that is set forth on a Schedule 
K-1 the partnership issued for a prior year, but is not reflected on 
any of the partner's prior year returns because the loss is suspended 
under section 704(d) and, therefore, not deductible, may certify such 
loss to the partnership. Further, the foreign partner must certify that 
the deductions and losses are connected with (or, in the case of a 
corporate partner, allocated and apportioned to) gross income which is 
effectively connected (or treated as effectively connected) with the 
conduct of the partner's trade or business in the United States. In 
addition, the certificate must contain the information and 
representations set forth in paragraph (c)(2)(ii) of this section.
    (ii) Deductions and losses from sources other than the partnership 
from prior taxable years. Under this section, a foreign partner may 
certify that it has deductions and losses, other than charitable 
deductions, from sources other than the partnership that the partner 
reasonably expects to be available to reduce the partner's U.S. income 
tax liability on the partner's allocable share of effectively connected 
income or gain from the partnership for the taxable year. The foreign 
partner must certify that the deductions and losses are connected with 
(or, in the case of a corporate partner, allocated and apportioned to) 
gross income which is effectively connected (or treated as effectively 
connected) with the conduct of the partner's trade or business in the 
United States. To the extent the deductions and losses certified under 
this paragraph (c)(1)(ii) arise from the partner's investment in 
another partnership, such deductions and losses must be reflected on a 
Schedule K-1 issued (or to be issued) to the partner by such other 
partnership for a prior taxable year of such other partnership that 
ends prior to the installment due date or Form 8804 filing date 
(without regard to extensions) of the partnership for the partnership 
taxable year for which the certificate is considered. Further, the 
partner may not certify to the partnership a loss suspended under 
section 704(d) from such other partnership. In addition, the 
certificate must contain the information and representations set forth 
in paragraph (c)(2)(ii) of this section.
    (iii) Limit on the consideration of a partner's net operating loss 
deduction. A partnership may not consider a partner's net operating 
loss deduction certified under this section in an amount greater than 
90 percent of the partner's allocable share of ECTI.
    (iv) Certificate of nonresident alien partner that partnership 
investment is partner's only activity giving rise to effectively 
connected items. Under this section, a nonresident alien partner whose 
only activity giving rise to effectively connected income, gain, 
deduction, or loss for the partner's taxable year is (and will be) the 
partner's investment in the partnership, may certify this fact to the 
partnership. Except as otherwise provided in this paragraph (c)(1)(iv), 
a certificate submitted under this paragraph is generally subject to 
all of the applicable requirements and rules of this section (e.g., the 
partner's preceding four years U.S. income tax returns are (or will be) 
timely filed, a new certificate is submitted for each partnership year, 
the time requirements for submitting the certificate are met, the 
certificate is signed under penalties of perjury). A partnership that 
receives a certificate from a nonresident alien partner under this 
paragraph (c)(1)(iv) is not required to pay 1446 tax (or any 
installment of such tax) with respect to such partner if the 
partnership estimates that the annualized (or, in the case of a 
partnership completing its Form 8804, the actual) 1446 tax due with 
respect to such partner is less than $1,000. For purposes of computing 
the annualized or actual 1446 tax due with respect to such partner 
under the previous sentence, the partnership may not consider any of 
the partner's deductions and losses certified under paragraph (c)(1)(i) 
or (ii) of this section. In addition to the requirements of paragraph 
(c)(2) of this section, a nonresident alien partner must notify the 
partnership in writing and revoke its certificate submitted under this 
paragraph (c)(1)(iv) within 10 days of the date that the partner 
invests, or otherwise engages in, an activity that may give rise to 
effectively connected income, gain, deduction, or loss for the 
partner's taxable year. A partnership may reasonably rely on a 
partner's statement under the rules of paragraph (d) of this section 
and generally will be relieved of an addition to the tax under section 
6655 as applied through this section, however, the partnership shall 
remain liable for the 1446 tax (or any installment of such tax), and 
any applicable additions to the tax (other than the addition to the tax 
under section 6655 as applied through this section), interest, and 
penalties under such paragraph, if the partner's certificate is later 
determined to be defective. The IRS may determine under the rules of 
this section, in its sole discretion, that the partner's certificate is 
defective within the meaning of paragraph (c)(3) of this section and 
notify the partnership in accordance with the rules of this section.
    (2) Time and form of certification--(i) Time for certification 
provided to partnership--(A) First certificate submitted for a 
partnership's taxable year. Provided the other requirements of this 
section are met, the first certificate a foreign partner furnishes with 
respect to a partnership's taxable year shall not be relied upon for 
any installment due date, or Form 8804 filing due date (without regard 
to extensions), arising within 30 days of the date that the partnership 
receives such certificate. For example, a calendar year domestic 
partnership must generally receive a

[[Page 28735]]

certificate under this section from a foreign partner on or before 
March 16th for the partnership to consider it for its first installment 
due date of 1446 tax on April 15th. If the foreign partner's first 
certificate for the partnership's current taxable year is received on 
April 10th, the partnership may not consider such certificate until the 
partnership's second installment due date of June 15th. See Sec.  
1.1446-3 for 1446 tax installment due dates. See also paragraph (e) of 
this section for examples illustrating the rules of this paragraph 
(c)(2).
    (B) Updated certificates and status updates--(1) Foreign partner's 
prior year tax returns not yet filed. If a foreign partner's U.S. 
Federal income tax return for a preceding taxable year has not been 
filed at the time that the partner submits its first certificate under 
this paragraph (c) to the partnership for a partnership taxable year, 
the partner shall specify this fact, set forth the filing due date for 
such return to the partnership in accordance with paragraph (c)(2)(ii) 
of this section, and submit an updated certificate in accordance with 
this paragraph (c) no later than 10 days after the date that the 
partner timely files its U.S. Federal income tax return for any such 
taxable year. If a prior year return has not been filed under the 
previous sentence, the partner shall provide the partnership a status 
update with respect to any unfiled prior year return, which must be 
received by the partnership at least 10 days prior to the partnership's 
final installment due date. The status update must be submitted under 
penalties of perjury and shall set forth the filing due date for any 
unfiled return identified in the first certificate and indicate whether 
the partner's first certificate submitted for the taxable year may 
continue to be considered. A status update shall apply only with 
respect to the timely filing of a partner's prior year tax returns. If 
the partnership does not receive an updated certificate (that includes 
the information required by this paragraph (c) for a status update) or 
a status update from the partner at least 10 days prior to the 
partnership's final installment due date, the partnership shall 
disregard the partner's certificate for the fourth installment period 
and when completing its Form 8804 for the taxable year and no 
additional certificate may be submitted or substituted for such 
disregarded certificate. Notwithstanding the previous sentence, if the 
partner can meet the requirements of this section for the next year, 
the partner may submit a certificate under this section.
    (2) Other circumstances requiring a foreign partner to submit an 
updated certificate. Notwithstanding paragraph (c)(2)(i)(B)(1) of this 
section, if at any time the partner estimates that it reasonably 
expects to have available deductions and losses in an amount less than 
the corresponding amounts set forth on the most recent certificate 
furnished to the partnership for the partnership taxable year, then, 
within 10 days of such determination, the foreign partner shall submit 
an updated certificate under this paragraph (c) to the partnership. 
Similarly, if at any time the partner determines that its certificate 
is incorrect, other than by reason of the preceding sentence (e.g., the 
character of a certified loss is capital rather than ordinary), then 
such partner shall update its certificate within 10 days of such 
determination.
    (3) Form and content of updated certificate. The updated 
certificate required by this paragraph (c)(2)(i) must be submitted in 
the same form as the original certificate (described in paragraph 
(c)(2)(ii) of this section), and must include a caption at the top of 
the certificate, in lieu of the caption required by paragraph 
(c)(2)(ii), that states ``UPDATED CERTIFICATE OF PARTNER-LEVEL ITEMS 
UNDER TEMP. REG. Sec.  1.1446-6T TO REDUCE SECTION 1446 WITHHOLDING.'' 
Further, the partner must attach a copy of the certificate that is 
being updated (superseded certificate) that was previously submitted 
for the same partnership taxable year.
    (4) When a partnership may consider an updated certificate. A 
partnership may only consider an updated certificate that meets all the 
requirements of this paragraph (c) that it receives at least 10 days 
prior to an installment due date in the same partnership taxable year 
for which the superseded certificate was provided, or at least 10 days 
prior to the due date of its Form 8804 (without regard to extensions) 
to be filed for the year the superseded certificate was provided. An 
updated certificate that may be considered under the previous sentence 
supersedes all prior certificates submitted by the foreign partner for 
the same partnership taxable year, beginning with the installment 
period or Form 8804 filing date for which the partnership may consider 
the updated certificate. See Sec.  1.1446-6T(e) Example 2.
    (ii) Form of certification. No particular form is required for the 
partner's certificate of deductions and losses to the partnership, but 
the partner's certificate must have a caption at the top of the page 
that reads: ``CERTIFICATE OF PARTNER-LEVEL ITEMS UNDER TEMP. REG. Sec.  
1.1446-6T TO REDUCE SECTION 1446 WITHHOLDING.'' Further, the 
certificate must include:
    (A) The partner's name, address, Taxpayer Identification Number 
(TIN), and the date of the certification;
    (B) The partnership's name, address, and TIN;
    (C) The partnership taxable year for which the certificate is 
submitted;
    (D) A representation that the partner is described in paragraph (b) 
of this section, and that the deductions and losses set forth in the 
certificate are described in paragraph (c)(1) of this section;
    (E) The amount of the deductions and losses described in paragraph 
(c)(1) and, if applicable, the character of such deductions and losses 
(e.g., capital or ordinary), as well as any particular deductions and 
losses that are subject to limitation or otherwise warrant special 
consideration (e.g., suspended passive activity losses under section 
469, suspended losses under section 704(d)), that the partner 
reasonably expects to be available to reduce the partner's U.S. income 
tax liability on the partner's allocable share of effectively connected 
income or gain from the partnership for the partner's taxable year in 
which such income or gain is includible in gross income;
    (F) A representation that the deductions and losses described in 
paragraph (c)(1) and set forth in the certificate have been reflected 
on a timely filed U.S. income tax return, consistent with sections 874 
and 882 of the Internal Revenue Code and the regulations thereunder 
(and such other provisions that impose requirements for the use of such 
deductions and losses);
    (G) A representation that the deductions and losses described in 
paragraph (c)(1) and set forth in the certificate have not been set 
forth in a certificate provided to another partnership for the same 
taxable year for the purpose of reducing withholding under this 
section;
    (H) A representation that the partner has timely filed, or will 
timely file its U.S. Federal income tax return for each of the 
preceding four taxable years and the partner's taxable year during 
which the certificate is considered, and has timely paid (or will 
timely pay) all tax shown on such returns as required under paragraph 
(b) of this section. The partner shall specify any taxable year for 
which a U.S. income tax return has not been filed as of the time of 
submission of the certificate, set forth the filing due date for such 
return, and represent that the partner will comply with the provisions 
of this paragraph (c) for providing an updated certificate or

[[Page 28736]]

status update with respect to the filing of any such return;
    (I) A representation that all of the deductions and losses 
described in paragraph (c)(1) (other than losses suspended under 
section 704(d)) and set forth in the certificate are (or will be) 
reflected on an income tax return of the partner that is filed (or will 
be filed) with respect to a taxable year of the partner that ends prior 
to the installment due date or Form 8804 filing due date (without 
regard to extensions) for the partnership taxable year for which such 
certificate will be considered;
    (J) A representation that such deductions and losses described in 
paragraph (c)(1) and set forth in such certificate have not been 
disallowed by the IRS as part of a proposed adjustment described in 
Sec.  601.103(b) of this chapter (relating to examination and 
determination of tax liability) or Sec.  601.105(b) of this chapter 
(relating to examination of returns);
    (K) A representation, when applicable (see paragraph (c)(1)(iv) of 
this section), that the partner's only activity that gives rise to 
effectively connected income, gain, deduction, or loss is (and will be) 
during the partner's taxable year the partner's investment in the 
partnership;
    (L) The following statement: ``Consent is hereby given to 
disclosures of return and return information by the Internal Revenue 
Service pertaining to the validity of this certificate to the 
partnership or other withholding agent to which this certificate is 
submitted for the purpose of administering section 1446.'' If a 
representative of the partner signs and dates the certificate under 
paragraph (c)(2)(ii)(M) of this section, a power of attorney 
specifically authorizing the agent to make the representation contained 
in this paragraph (c)(2)(ii)(L) must be attached to the certificate; 
and
    (M) The signature of the partner, or its authorized representative, 
under penalties of perjury, and the date that the certificate was 
signed.
    (3) Notification to partnership when a partner's certificate cannot 
be relied upon. Subject to paragraphs (c)(2), (c)(5), and (d)(2) of 
this section, a partnership may generally rely on a partner's 
certificate of available deductions and losses provided that the 
partnership does not have actual knowledge or reason to know that the 
certificate is defective within the meaning of this paragraph (c)(3). 
However, a partnership may not rely on a partner's certificate if the 
IRS determines, in its sole discretion, whether upon audit or 
otherwise, that a certificate submitted by a partner is defective, or 
that it lacks sufficient information to determine if the certificate is 
defective after written request to the partner for verification of the 
statements on the certificate. For example, a foreign partner's 
certificate is defective and, therefore, invalid if the IRS determines 
that the foreign partner has not timely filed a U.S. income tax return 
for a taxable year that the partner represented was or would be timely 
filed. See paragraph (e) Example 3 of this section. If the IRS 
determines under this paragraph (c) that a certificate is defective (or 
lacks information sufficient to make this determination) and notifies 
the partnership in writing, the partnership may not rely on any 
certificate submitted by the partner for the partnership taxable year 
to which the defective certificate relates (or any subsequent 
partnership taxable year), until the IRS notifies the partnership again 
in writing and revokes or modifies the original notice. A partner's 
certificate of available deductions and losses is defective if--
    (i) The partner is not described in paragraph (b) of this section;
    (ii) The deductions and losses set forth in such certificate are 
not described in paragraph (c)(1) of this section;
    (iii) The timing requirements for submitting certificates 
(including updated certificates and status updates) under paragraph 
(c)(2) of this section, or the requirements for submitting such updated 
certificates or status updates under such paragraph, are not observed;
    (iv) The certificate does not include all of the information 
required by paragraph (c)(2)(ii) (e.g., the partner's TIN is not set 
forth on such certificate);
    (v) Any representation set forth in such certificate is incorrect 
(e.g., a partner's prior year return certified to have been timely 
filed was not timely filed, or, where applicable, that the partner is 
invested in or otherwise engaged in an activity (other than its 
investment in the partnership) that may give rise to effectively 
connected items); or
    (vi) The actual deductions and losses available to the partner are 
less than the deductions and losses last certified to the partnership 
for the partnership taxable year and considered by the partnership.
    (4) Partner to receive copy of notice. If the IRS notifies a 
partnership or withholding agent under this section that a certificate 
of a foreign partner is defective, the IRS shall also send a copy of 
such notice to the partner's address as shown on the certificate. The 
partnership shall promptly furnish the foreign partner whose 
certificate is the subject of the notice the copy of the notice 
received from the IRS.
    (5) Partner's certificate valid only for partnership taxable year 
for which submitted. A partnership may only consider a certificate 
submitted under this paragraph (c) for the partnership taxable year for 
which the certificate is submitted, as set forth on the certificate. 
Therefore, for each year a partner wants the provisions of this section 
to apply, the partner must submit a new first certificate (as described 
in this paragraph (c)) for that year.
    (d) Effect of certificate of deductions and losses on partners and 
partnership--(1) Effect on partner--(i) No effect on substantive tax 
liability of foreign partner. A foreign partner's submission of a 
certificate under this section to reduce or eliminate the partnership's 
1446 tax (or any installment of such tax) with respect to ECTI 
allocable to such partner has no effect on the partner's substantive 
tax liability on the partner's allocable share of effectively connected 
income or gain from the partnership. Further, the submission of a 
certificate under this section does not constitute an acceptance by the 
IRS of the amount or character of the deductions or losses certified.
    (ii) No effect on partner's estimated tax obligations. A foreign 
partner that certifies deductions and losses to a partnership under 
this section is not relieved of any estimated tax obligation otherwise 
applicable to such partner with respect to income or gain allocated 
from the partnership.
    (2) Effect on partnership--(i) Reasonable reliance to relieve 
partnership from addition to the tax under section 6655. Subject to 
Sec.  1.1446-2 and the rules of this section (e.g., paragraph 
(c)(1)(iii) of this section), a partnership receiving a certificate 
(including an updated certificate or status update) of deductions and 
losses from a partner under this section may reasonably rely on such 
certificate (to the extent of the certified deductions and losses or 
other representations set forth in the certificate) for such time 
during which it has no actual knowledge or reason to know that the 
certificate is defective (within the meaning of paragraph (c)(3) of 
this section). To the extent a partnership has reasonably relied on a 
certificate under the preceding sentence, the partnership shall not be 
liable for any addition to the tax under section 6655 (as applied 
through Sec.  1.1446-3) for any period during which the partnership 
reasonably relied on such certificate, even if either it is later 
determined that the partner's certificate is defective or

[[Page 28737]]

the partner submits an updated certificate under paragraph (c)(2) of 
this section that increases the 1446 tax due with respect to such 
partner. A partnership will not be considered to have actual knowledge 
or reason to know that a certificate is defective if the partnership 
receives an updated certificate that, pursuant to paragraph 
(c)(2)(i)(B)(4) of this section, the partnership cannot reasonably rely 
upon for an installment due date or Form 8804 filing date because it 
was received less than 10 days before such date. See paragraph (e) 
Example 2 of this section.
    (ii) Filing requirement. A partnership that relies in whole or in 
part on a partner's certificate pursuant to this section must file Form 
8813, ``Partnership Withholding Tax Payment Voucher (Section 1446)'' or 
Forms 8804, ``Annual Return for Partnership Withholding Tax (Section 
1446)'' and 8805, ``Foreign Partner's Information Statement of Section 
1446 Withholding Tax,'' whichever is applicable, for the period for 
which the certificate is considered, even if no 1446 tax (or an 
installment of such tax) is due with respect to such foreign partner. 
The partnership must also attach a copy of such certificate, and the 
partnership's computation of 1446 tax due with respect to such partner, 
to both the Form 8813 and Form 8805, filed with the IRS for any period 
for which such certificate is considered in computing the partnership's 
1446 tax (or any installment of such tax). See Sec.  1.1446-
3(d)(1)(iii) requiring the partnership to provide Form 8805 to such 
foreign partner even if no 1446 tax is paid on behalf of the partner.
    (iii) Continuing liability for withholding tax under section 1461 
and for applicable interest and penalties. Except as provided in 
paragraph (d)(2)(i) of this section and this paragraph (d)(2)(iii), a 
partnership is not relieved from liability for the 1446 tax under 
section 1461 or for any applicable addition to the tax, interest, or 
penalties if the partnership or the IRS, in its sole discretion, 
determines that a partner's certificate is defective (within the 
meaning of paragraph (c)(3) of this section), or the partner submits an 
updated certificate under paragraph (c)(2) of this section that 
increases the 1446 tax due with respect to such partner. If a 
certificate is determined to be defective for a reason other than the 
amount or character of the deductions and losses set forth on such 
certificate (e.g., partner failed to timely file a U.S. income tax 
return), then the partnership shall be liable for the full 1446 tax 
under section 1461 (or any installment of such tax) due with respect to 
such partner, without regard to the certificate. However, see Sec.  
1.1446-3(e) which deems a partnership to have paid 1446 tax with 
respect to ECTI allocable to a partner in certain circumstances. 
Further, if the partnership or the IRS, in its sole discretion, 
determines that a certificate is defective because the actual 
deductions and losses available to the partner are less than the amount 
certified to the partnership (other than when it is determined that the 
partner certified the same deduction or loss to more than one 
partnership), or that the character of the certified deductions and 
losses is erroneous, then the partnership shall be liable for 1446 tax 
under section 1461 (or any installment of such tax) with respect to 
such partner only to the extent it considers the certified deductions 
and losses in an amount greater than the amount determined to be 
actually available to the partner and permitted to be used under Sec.  
1.1446-1 through Sec.  1.1446-6T, or to the extent that a mistake in 
the character of the deductions and losses results in an increase in 
the 1446 tax due with respect to such partner. See paragraph (e) 
Example 4 of this section. Although a partnership is generally liable 
for the 1446 tax, any addition to the tax, interest, and penalties 
under this paragraph (d)(2), the partnership may be relieved of some 
penalties in certain circumstances. See Sec. Sec.  301.6651-(1)(c) and 
301.6724-1 of this chapter. See also paragraph (e) Example 3 of this 
section.
    (iv) Partner's certified deductions and losses to offset foreign 
partner's annualized allocable share of partnership ECTI. For purposes 
of section 1446, when considering a foreign partner's certificate 
submitted under this section in computing the 1446 tax due (or any 
installment of such tax) with respect to the foreign partner, a 
partnership shall first annualize the partner's allocable share of the 
partnership's effectively connected items of income, gain, deduction, 
and loss before considering the partner's certified deductions and 
losses.
    (e) Examples. The following examples illustrate the application of 
this section. In considering the examples, disregard the potential 
application of Sec.  1.1446-3(b)(2)(v)(F) (relating to the de minimis 
exception to paying 1446 tax) and paragraph (c)(1)(iv) of this section 
(relating to a foreign partner whose sole investment generating 
effectively connected income or gain is the partnership), and assume, 
where necessary, that the election to apply the temporary regulations 
is made. The examples are as follows:

    Example 1. General application of the rules of Sec.  1.1446-6T. 
NRA, a nonresident alien, and B, a U.S. person form a partnership, 
PRS, to conduct a trade or business in the United States. NRA and B 
are equal partners under the partnership agreement and the 
partnership, NRA, and B all maintain a calendar taxable year. NRA 
and B provide PRS with a valid Form W-8BEN and Form W-9, 
respectively. Prior to the formation of PRS, NRA had neither 
invested in, nor been considered to be engaged in a U.S. trade or 
business. In each of years 1, 2, and 3, PRS incurs a $1,000 net loss 
from operations which is allocated equally to NRA and B. Assume the 
net loss is not a passive activity loss within the meaning of 
section 469, is comprised entirely of ordinary items and, with 
respect to NRA, is an effectively connected net loss. Further, 
assume that NRA has timely filed U.S. Federal income tax returns for 
each of the first three years reflecting the losses allocated from 
PRS, as reflected on the Schedule K-1 issued to NRA for each of 
those years.
    (i) With respect to Year 4, NRA may not submit a certificate 
under paragraph (c) of this section to PRS because NRA has not and 
will not have timely filed a U.S. Federal income tax return for the 
preceding four years. That is, during Year 4, NRA can only certify 
that it has or will timely file its U.S. Federal income tax returns 
for the preceding three years (Years 1 through 3) and the current 
year, Year 4. Therefore, with respect to Year 4, PRS may not use the 
procedures in this section to reduce its withholding tax.
    (ii) Assume that in Year 4, PRS has a net income of $1,000 from 
its U.S. business operations and that all of such income is 
comprised of ordinary items. NRA's allocable share of this income is 
$500 and such income is effectively connected income. PRS satisfies 
its 1446 tax obligations for Year 4.
    (iii) During Year 5, PRS uses an acceptable annualization method 
under Sec.  1.1446-3 and estimates for its first installment period 
that it will earn $4,000 of taxable income for the taxable year. 
Assume that all of this income is ordinary in character and is 
allocable to NRA and B equally. NRA's allocable share of $2,000 is 
NRA's share of partnership ECTI. NRA has not yet filed its income 
tax return for Year 4, although NRA has received the Schedule K-1 
issued by PRS pertaining to Year 4. On or before March 16th (at 
least 30 days prior to the first installment date) of Year 5, PRS 
receives a certificate described in this section from NRA which 
certifies that NRA reasonably expects to have available ordinary 
losses of $1,000 ($500 loss in each of Years 1, 2, and 3 less $500 
of income in Year 4). Further, NRA makes all of the statements and 
representations required for the certificate to be valid.
    (iv) With respect to Year 5, and based upon paragraph (b)(1) of 
this section, NRA can include Year 4 (NRA's preceding taxable year) 
as one of the preceding four years that it has timely filed or will 
timely file its U.S. Federal income tax return (and timely paid or 
will timely pay all tax shown on such returns). Therefore, provided 
PRS has no actual knowledge or reason to know the certificate is 
defective, PRS may reasonably rely on NRA's certificate. 
Accordingly, PRS

[[Page 28738]]

may consider NRA's certificate to reduce the amount that would 
otherwise be required to be paid on NRA's behalf under section 1446. 
Specifically, the $1,000 of net losses that have been reflected on 
Schedule K-1s issued to NRA that are available to reduce NRA's U.S. 
income tax on NRA's allocable share of effectively connected income 
or gain allocable from PRS may be used to reduce the $2,000 of ECTI 
estimated to be allocable to NRA. As a result, PRS must pay 1446 tax 
on only $1,000 of NRA's allocable share of partnership ECTI for the 
first installment period in Year 5. PRS must pay 1446 tax of $87.50 
for its first installment period with respect to the ECTI allocable 
to NRA ($1,000 (net ECTI after considering certified losses) x .35 
(withholding tax rate) x .25 (Sec.  6655(e)(2)(B) percentage for 
first installment)). Pursuant to paragraph (d)(2) of this section, 
PRS must also attach NRA's certificate and PRS's computation of its 
1446 tax obligation with respect to NRA to its Form 8813, 
``Partnership Withholding Tax Payment Voucher (Section 1446),'' 
filed for the first installment period. Under paragraph 
(c)(2)(i)(B), NRA is required to update its certified available 
losses on or before the 10th day after NRA files its U.S. Federal 
income tax return for Year 4, even if the updated certificate 
results in no change to the deductions and losses certified.
    (v) The result in this example is the same even if NRA had not 
yet received a Schedule K-1 from PRS for Year 4. In such case, NRA 
is still permitted to certify the losses that it reasonably expects 
to be available for Year 5, and certify that it will timely file its 
U.S. Federal income tax return for Year 4 and Year 5 (and timely pay 
all U.S. income tax due).

    Example 2. Updated certificate submitted for losses. On January 
1, 2005, NRA, a foreign individual, and B, a U.S. individual, form a 
domestic partnership, PRS, to conduct a business in the United 
States, with NRA and B as equal partners in PRS. NRA and B provide a 
valid Form W-8BEN and Form W-9, respectively, to PRS. NRA, B, and 
PRS all maintain a calendar taxable year. For the preceding seven 
calendar taxable years (1998-2004), NRA has been engaged in a U.S. 
trade or business through its investment in another partnership, 
XYZ, and timely filed its Form 1040NR U.S. Federal income tax return 
reporting its share of XYZ's activity for each of years 1998-2003 
(and timely paid all tax shown on such returns). NRA also timely 
files its income tax return for the 2004 taxable year (and timely 
pays all tax shown on such return) on June 8, 2005 (due date June 
15, 2005). During the taxable years 1998-2004, NRA's only activity 
generating effectively connected items was its investment in XYZ. 
Assume that the losses that XYZ allocated to NRA are not considered 
passive activity losses to NRA within the meaning of section 469. 
The XYZ partnership liquidated and ceased doing business on December 
31, 2004. Assume that PRS uses an acceptable annualization method 
under Sec.  1.1446-3 for purposes of section 1446.
    (i) On or before March 16, 2005, NRA provides and PRS receives a 
valid certificate under this section in which NRA certifies that it 
reasonably expects to have available effectively connected net 
operating losses in the amount of $5,000. Among other statements 
made in accordance with paragraph (c) of this section, NRA 
represents that it has not filed its 2004 U.S. income tax return, 
but will timely file such return (and timely pay all tax shown on 
such return). PRS reasonably relies on such certificate within the 
meaning of paragraph (d) of this section. For its first installment 
period in 2005, PRS estimates that it will earn taxable income of 
$10,000 for the year which will be allocated equally to NRA and B 
(NRA's allocable share of $5,000 is considered NRA's share of 
partnership ECTI). Assume that all of this income is ordinary in 
character.
    (ii) Under these facts, PRS may consider NRA's certified 
available losses when computing its 1446 tax obligation for the 
first installment period. PRS is limited under paragraph (c)(1)(iii) 
of this section and may consider only $4,500 of NRA's certified net 
operating loss. After consideration of the certified loss, PRS owes 
1446 tax in the amount of $43.75 for the first installment period 
($5,000 estimated allocable ECTI less $4,500 (certified loss as 
limited under paragraph (c)(1)(iii)) x .35 (1446 tax applicable 
percentage) x .25 (section 6655(e)(2)(B) percentage for first 
installment period). Pursuant to paragraph (d)(2) of this section, 
PRS must file Form 8813 with respect to NRA, and attach to the form 
a copy of NRA's certificate and PRS's computation of its 1446 tax 
obligation.
    (iii) Assume that PRS's estimates of its net income allocable to 
NRA for the second and third installment periods are the same as for 
the first installment period (i.e., NRA's allocable share of 
annualized ECTI is $5,000), and that on June 10, 2005, PRS receives 
an updated certificate under this section from NRA that certifies 
that NRA reasonably expects to have only $4,000 of losses available 
to reduce NRA's income tax liability on NRA's allocable share of the 
effectively connected income or gain from PRS. NRA provided this 
certificate within 10 days of filing its U.S. Federal income tax 
return for the 2004 taxable year, as required by paragraph (c) of 
this section. However, PRS received the updated certificate less 
than 10 days before its second installment due date (June 15, 2005) 
and, under paragraph (c)(2)(i)(B) of this section, is not permitted 
to reasonably rely on the updated certificate for the second 
installment period. Notwithstanding that the updated certificate 
indicates to PRS that NRA's certified losses are less than the 
$5,000 set forth on NRA's first certificate, under paragraph (d)(2) 
of this section, PRS will not be considered to have actual knowledge 
or reason to know that the first certificate is defective for the 
second installment period. Provided the updated certificate is 
otherwise valid, it may be relied upon for the third installment 
period (due date September 15, 2005).
    (iv) Under paragraph (d) of this section, PRS may reasonably 
rely on all or a portion of NRA's first certificate for the second 
installment period. That is, PRS may consider all $4,500 of NRA's 
certified losses, as limited by paragraph (c)(1)(iii) of this 
section, or some lesser amount (e.g., only $4,000) for the second 
installment period. Further, if PRS considers NRA's first 
certificate for the second installment period, PRS must file Form 
8813 and attach the certificate it reasonably relied upon for the 
second installment period. Assume that PRS considers $4,500 of the 
net operating losses for the second installment period, as limited 
by paragraph (c)(1)(iii) of this section, and therefore makes a 1446 
tax payment of $43.75 on behalf of NRA.
    (v) Under paragraph (d) of this section, PRS is not relieved 
from its liability for 1446 tax under section 1461 when it accepts a 
certificate of losses from a foreign partner and it is later 
determined that the certificate is defective, or the partner updates 
its certificate and represents losses in an amount less than 
previously certified. Under the principles of section 6655 (as 
applied through Sec.  1.1446-3), PRS is required to have paid in 75 
percent of the annualized 1446 tax on or before the third 
installment payment date (section 6655(e)(2)(B) percentage for third 
installment period). Under paragraph (c)(2)(i)(B) of this section, 
because NRA's updated certificate is valid for the third installment 
period, if PRS considers any certificate for that period it must 
consider the updated certificate. Assuming PRS considers NRA's 
updated certificate for the third installment period, PRS must have 
paid a total of $262.50 with respect to the ECTI estimated to be 
allocable to NRA as of the third installment due date ($1,000 (ECTI 
subject to 1446 tax after considering the $4,000 of certified losses 
on the updated certificate) x .35 (withholding tax rate) x .75 
(section 6655(e)(2)(B) percentage for the third installment 
period)). After considering PRS's payments of 1446 tax for the first 
and second installment periods, PRS is required to pay $175 for the 
third installment period ($262.50 less previous payments totaling 
$87.50).
    (vi) Under paragraph (d) of this section, PRS is not liable for 
the addition to the tax under section 6655 (as applied through Sec.  
1.1446-3) for the first or second installment period because PRS 
reasonably relied on NRA's certificate of losses during those 
periods.
    Example 3. IRS determines in subsequent taxable year that 
partner's certificate is defective because partner failed to timely 
file an income tax return. NRA, a foreign individual, and B, are the 
only partners in PRS, a domestic partnership that conducts a trade 
or business in the United States. Each partner provides appropriate 
documentation under Sec.  1.1446-1 (e.g., Form W-8BEN, Form W-9) to 
establish the partner's status for purposes of section 1446. Both 
partners and the partnership maintain a calendar taxable year. NRA 
timely submits a certificate under this section to PRS to be 
considered for PRS's first installment period in the 2005 taxable 
year. The certificate sets forth that NRA reasonably expects to have 
$5,000 of an effectively connected net operating loss available to 
offset effectively connected income or gain allocable from PRS for 
the 2005 taxable year. No part of this loss is a passive activity 
loss within the meaning of section 469. NRA is eligible to submit 
this certificate under paragraph (b) of this section

[[Page 28739]]

and the certificate complies with all necessary requirements set 
forth in this section. PRS estimates for each installment period 
that NRA's allocable share of ECTI will be $5,000. Further, PRS's 
actual operating results for the year result in $5,000 of ECTI 
allocable to NRA.
    (i) PRS reasonably relies on (within the meaning of paragraph 
(d)(2) of this section) NRA's certificate when computing each 
installment payment during the 2005 taxable year and its 1446 tax on 
Form 8804, and appropriately considers the limitation set forth in 
paragraph (c)(1)(iii) of this section. As a result, PRS paid a total 
of $175 of 1446 tax on behalf of NRA for the taxable year ($5,000 
allocable share of ECTI--$4,500 losses permitted to be considered 
under paragraph (c)(1)(iii) of this section x .35 applicable 
percentage). As required under paragraph (d) of this section, PRS 
attached the certificate it relied upon and its calculation of 1446 
tax for each period to the Form 8813 or Form 8805 it filed for such 
period with the IRS.
    (ii) Assume that NRA timely submits a certificate under this 
section to be considered for PRS's first installment due date of the 
2006 taxable year (due date April 17, 2006). The certificate 
represents that NRA reasonably expects to have $5,000 of an 
effectively connected net operating loss available to offset 
effectively connected income or gain allocated from PRS for the 2006 
taxable year. No part of this loss is a passive activity loss within 
the meaning of section 469. Further, the certificate contains all of 
the necessary representations required under this section. For the 
first installment period of 2006, PRS estimates that NRA's allocable 
share of partnership ECTI is $5,000. Assume all of the estimated 
ECTI is ordinary in character and, pursuant to paragraph (d)(2) of 
this section, PRS reasonably relies on NRA's certificate for the 
first installment period and appropriately determines that it is 
required to make an installment payment of 1446 tax on behalf of NRA 
in the amount of $43.75 ($5,000 estimated allocable ECTI less $4,500 
(certified loss as limited under paragraph (c)(1)(iii) of this 
section) x .35 (1446 tax applicable percentage) x .25 (section 
6655(e)(2)(B) percentage for first installment period). PRS makes 
the $43.75 installment payment of 1446 tax with the Form 8813 it 
files for the first installment period, and complies with paragraph 
(d)(2) of this section and attaches NRA's certificate and PRS's 
computation of 1446 tax to its Form 8813.
    (iii) Assume that the IRS notifies the partnership on June 1, 
2006, pursuant to paragraph (c)(3) of this section, that NRA's 
certificate for PRS's 2005 taxable year is defective because NRA 
failed to timely file its U.S. Federal income tax return for one of 
the taxable years that NRA represented was (or would be) timely 
filed (e.g., 2001, 2002, 2003, or 2004). The IRS notice states that 
PRS is not to rely on any certificate that NRA has submitted for the 
2006 taxable year.
    (iv) Under paragraph (d)(2)(iii) of this section, PRS is not 
relieved from its liability for 1446 tax under section 1461 when it 
accepts a certificate of losses from a foreign partner and it is 
later determined that the certificate is defective. Because NRA's 
certificate was determined to be defective for a reason other than 
the amount or character of the certified deductions and losses, PRS 
is fully liable for the 1446 tax due with respect to NRA's allocable 
share of partnership ECTI for the 2005 taxable year without regard 
to the certificate. The total 1446 tax due for 2005 is $1,750 
($5,000 ECTI x .35) and PRS has paid $175 of this liability. 
Therefore, PRS owes $1,575 of 1446 tax. However, PRS may be deemed 
to have paid the outstanding 1446 tax due if NRA has paid all of its 
tax. See Sec.  1.1446-3(e).
    (v) Because PRS neither had actual knowledge nor reason to know 
that the certificate submitted by NRA was defective, PRS reasonably 
relied on NRA's certificate for the 2005 taxable year under 
paragraph (d)(2) of this section. Therefore, PRS is not liable for 
an underpayment addition to the tax under the principles of section 
6655 (as applied through Sec.  1.1446-3) for any installment period 
during the 2005 taxable year.
    (vi) However, PRS is generally liable for interest under section 
6601 and for the failure to pay penalty under section 6651(a)(2) on 
the $1,575 of 1446 tax due for the 2005 taxable year from April 17, 
2006 (last date prescribed for payment of 1446 tax), to the date 
that the partnership pays the 1446 tax or is deemed to have paid 
such tax under Sec.  1.1446-3(e).
    (vii) With respect to the 2006 taxable year, PRS reasonably 
relied on NRA's certificate when computing its first installment 
payment for the 2006 taxable year (due on April 17, 2006). 
Therefore, PRS will not be liable for the underpayment addition to 
the tax under section 6655 (as applied through Sec.  1.1446-3) for 
the first installment period in 2006. However, because PRS was 
notified on June 1, 2006, to disregard any certificate received from 
NRA for the 2006 taxable year, PRS may not rely on NRA's certificate 
(or any new certificate provided by NRA) when PRS computes its 
second installment payment of 1446 tax due on June 15, 2006. PRS is 
not permitted to consider any certificate submitted by NRA under 
this section until the IRS notifies the partnership again in writing 
and revokes or modifies the original notice.
    Example 4. IRS determines in subsequent taxable year that 
partner's certificate is defective because partner's actual losses 
are less than amount certified and considered by the partnership. 
Assume the same facts as in Example 3, except that the IRS does not 
determine that NRA's certificate for 2005 was defective because NRA 
failed to timely file a U.S. income tax return for a prior year. 
Rather, the IRS determines that NRA's certificate was defective for 
the 2005 taxable year because NRA's actual available net operating 
loss for the taxable year was $1,000, not the $5,000 amount that was 
certified. In Example 3, pursuant to paragraph (c)(1)(iii) of this 
section, PRS considered $4,500 of the certified loss in each 
installment period and when completing Form 8804.
    (i) Under paragraph (d)(2)(iii) of this section, PRS is not 
relieved from its liability for 1446 tax under section 1461 when it 
accepts a certificate of losses from a foreign partner and it is 
later determined that the certificate is defective. However, when 
the IRS determines that a partner's certificate is defective because 
of the amount or character of the certified deductions and losses 
set forth on such certificate, the partnership is only liable for 
the 1446 tax, interest, and penalties to the extent it considered 
the certified deductions and losses on such certificate when 
computing its 1446 tax (or any installment of such tax) in an amount 
greater than the partner's actual available losses. Here, PRS 
considered the certified deductions and losses in the amount of 
$4,500. It was later determined that NRA only had $1,000 of actual 
losses. Accordingly, PRS is liable for the 1446 tax due with respect 
to the portion of the overstated losses that it considered when 
computing its 1446 tax. The remaining 1446 tax due for 2005 is 
$1,225 ($3,500 of excess losses considered x .35). However, PRS may 
be deemed to have paid the $1,225 of 1446 tax under Sec.  1.1446-
3(e) if NRA has paid all of NRA's U.S. income tax.
    (ii) If PRS had considered only $1,000 of NRA's certified net 
operating loss when computing and paying its 1446 tax during the 
2005 taxable year then, under paragraph (d)(2)(iii) of this section, 
PRS would not be liable for 1446 tax because it did not consider the 
certified deductions and losses in an amount greater than the amount 
determined to be actually available to the partner.
    Example 5. Partner with different taxable year than partnership. 
PRS partnership has two equal partners, FC, a foreign corporation, 
and DC, a domestic corporation. PRS conducts a trade or business in 
the United States and generates effectively connected income. FC 
maintains a June 30 fiscal taxable year end, while DC and PRS 
maintain a calendar taxable year end. FC and DC provide a valid Form 
W-8BEN and Form W-9, respectively, to PRS. PRS uses an acceptable 
annualization method under Sec.  1.1446-3 in computing its 1446 tax. 
FC and DC are the only persons that have ever been partners in PRS. 
For its 2000 through 2004 taxable years, PRS issued Schedule K-1s to 
each of its partners. In the aggregate, the Schedule K-1s passed 
through $100 of net ordinary loss to each partner. For its 2005 
taxable year, PRS issued Schedule K-1s to its partners passing 
through $150 of ordinary loss to each partner. All of the losses 
passed through on the Schedule K-1s are effectively connected to 
PRS's and FC's trade or business in the United States.
    (i) Assume that all the requirements of this section have been 
met to permit FC to certify losses to the partnership for the 
partnership's 2006 taxable year. Further, assume that FC's only 
source of effectively connected income, gain, deduction, or loss is 
the activity of PRS.
    (ii) For PRS's first installment period in 2006, FC may only 
certify deductions and losses under this section in the amount of 
$100 (the losses as reflected on the Schedule K-1s issued for PRS's 
2000-2004 taxable years). Under section 706, the taxable income of a 
partner shall include the income, gain, loss, deduction, or credit 
of the partnership for the partnership taxable year ending within or 
with the taxable year of the partner.

[[Page 28740]]

PRS's 2005 calendar taxable year ends during FC's fiscal taxable 
year ending June 30, 2006. Therefore, under paragraph (c)(1) of this 
section, as of March 18, 2006 (the last date FC may submit its first 
certificate under paragraph (c) to have it considered for PRS's 
first installment due date of April 17, 2006), the losses passed 
through from PRS for the 2000-2004 partnership taxable years will be 
the only losses that FC can represent will be reflected on an FC 
U.S. income tax return filed for a taxable year ending prior to such 
installment due date.
    (iii) The result in (ii) is the same for the second installment 
period, the due date of which is June 15, 2006.
    (iv) FC may submit an updated certificate under this section 
after June 30, 2006, that includes the 2005 Schedule K-1 loss in the 
amount of $150. PRS may consider such an updated certificate for its 
third installment period (due date September 15, 2006), provided the 
updated certificate is received in accordance with paragraph (c) of 
this section, by September 5, 2006.
    Example 6. Failure to provide status update with respect to 
prior year unfiled returns. PRS partnership has two equal partners, 
FC, a foreign corporation, and DC, a domestic corporation. Both 
partners and PRS maintain calendar taxable years. PRS is engaged in 
a trade or business in the United States. FC and DC provide Form W-
8BEN and Form W-9, respectively, to establish each partner's status 
for purposes of section 1446. Assume all partnership items allocated 
from the partnership arise from the partnership's trade or business 
in the United States and, therefore, FC's allocable share of these 
items is considered effectively connected.
    (i) Assume FC is eligible to submit a certificate under this 
section and submits a certificate at least 30 days prior to PRS's 
first installment due date. FC represents that it has or will timely 
filed an income tax return in the United States in each of the 
preceding four taxable years (and has timely paid or will timely pay 
all tax shown on such returns). FC specifies that it has not filed 
its U.S. income tax return for the immediately preceding taxable 
year. FC also represents that it will timely file its U.S. income 
tax return for the partner taxable year during which the certificate 
is considered (and will timely pay all tax shown on such return). 
All other requirements under paragraph (c) of this section are met 
for FC's certificate to be valid.
    (ii) Provided that PRS does not possess actual knowledge or 
reason to know that FC's certificate is defective, and an updated 
certificate is not provided to PRS, under paragraph (d) of this 
section, PRS may reasonably rely on FC's certificate for its first, 
second, and third installment payments.
    (iii) If FC does not submit either an updated certificate or a 
status update as required by paragraph (c) of this section with 
respect to the filing of the previous year's income tax return by 
December 5th of PRS's current taxable year, PRS must disregard FC's 
certificate when computing its fourth installment payment of 1446 
tax and when completing its Form 8804 for the taxable year. Further, 
even if the status update with respect to the preceding year's 
return is provided, PRS may only rely on the certificate provided 
the status update does not contradict the certificate and such 
update indicates that the preceding year's return may still be, and 
will be, timely filed.

    (f) Effective dates. The rules of this section are applicable for 
partnership taxable years beginning after May 18, 2005. However, a 
partnership may elect to apply all of the provisions of the temporary 
regulations to partnership taxable years beginning after December 31, 
2004, provided the partnership also elects under Sec.  1.1446-7 to 
apply Sec. Sec.  1.1446-1 through 1.1446-5 to partnership taxable years 
beginning after December 31, 2004. A partnership shall make the 
election under this section by complying with the provisions of this 
section and attaching a statement to the Form 8804 annual return filed 
for the taxable year in which the regulation provisions first apply, 
that indicates that the partnership is making the election under this 
section and Sec.  1.1446-7.


Sec.  1.1446-7  Effective dates.

    Sections 1.1446-1 through 1.1446-5 shall apply to partnership 
taxable years beginning after May 18, 2005. However, a partnership may 
elect to apply all of the provisions of Sec. Sec.  1.1446-1 through 
1.1446-5 to partnership taxable years beginning after December 31, 
2004. A partnership shall make the election under this section by 
complying with the provisions of Sec. Sec.  1.1446-1 through Sec.  
1.1446-5 and attaching a statement to the Form 8804 or Form 1042 annual 
return, filed for the taxable year in which the regulation provisions 
first apply, that indicates that the partnership is making the election 
under this section.

0
Par. 5. Section 1.1461-1 is amended as follows:
0
1. Paragraph (a)(1) is amended by adding three sentences at the end of 
the paragraph.
0
2. The second sentence of paragraph (c)(1)(i) is removed and two 
sentences are added in its place.
0
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.
0
4. The first sentence of paragraph (c)(2)(i) is removed and two 
sentences are added in its place.
0
5. The first sentence of paragraph (c)(3) is removed and two sentences 
are added in its place.
0
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. 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. The previous two sentences shall apply to partnership 
taxable years beginning after May 18, 2005, or such earlier time as the 
regulations under Sec. Sec.  1.1446-1 through 1.1446-5 apply by reason 
of an election under Sec.  1.1446-7.
* * * * *
    (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) (applicable to publicly traded 
partnerships required to pay tax under section 1446 on distributions) 
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 May 18, 2005, or such earlier time as the 
regulations under Sec. Sec.  1.1446-1 through 1.1446-5 apply by reason 
of an election under Sec.  1.1446-7. * * *
    (ii) * * *
    (A) * * *
    (8) A partner receiving a distribution from a publicly traded 
partnership subject to withholding under section 1446 and Sec.  1.1446-
4 on distributions of effectively connected income. This paragraph 
(c)(1)(ii)(A)(8) shall apply to partnership taxable years beginning 
after May 18, 2005, or such earlier time as the regulations under 
Sec. Sec.  1.1446-1 through 1.1446-5 apply by reason of an election 
under Sec.  1.1446-7.
* * * * *
    (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) (addressing publicly traded partnerships required to pay 
withholding tax under section 1446 on distributions of

[[Page 28741]]

effectively connected income). The reference in the previous sentence 
to withholding under Sec.  1.1446-4 shall apply to partnership taxable 
years beginning after May 18, 2005, or such earlier time as the 
regulations under Sec. Sec.  1.1446-1 through 1.1446-5 apply by reason 
of an election under Sec.  1.1446-7. * * *
* * * * *
    (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) (as applied to publicly traded partnerships required to 
pay tax under section 1446 on distributions of effectively connected 
income) 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 May 18, 2005, or 
such earlier time as the regulations under Sec. Sec.  1.1446-1 through 
1.1446-5 apply by reason of an election under Sec.  1.1446-7. * * *
    (i) Effective date. Unless otherwise provided in this section, this 
section shall apply to returns required for payments made after 
December 31, 2000.

0
Par. 6. Section 1.1461-2 is amended by:
0
1. Removing the first sentence of paragraph (a)(1) and adding two 
sentences in its place.
0
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 May 18, 2005, or such 
earlier time as the regulations under Sec. Sec.  1.1446-1 through 
1.1446-5 apply by reason of an election under Sec.  1.1446-7. * * *
* * * * *
    (b) Withholding of additional tax when underwithholding occurs. A 
withholding agent may withhold from future payments (or distributions 
of effectively connected income under section 1446) made to a 
beneficial owner the tax that should have been withheld from previous 
payments (or distributions subject to section 1446) 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 Form 1042 is required to be 
filed (not including extensions) for the calendar 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 1.1446-7 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 May 18, 2005, 
or such earlier time as the regulations under Sec. Sec.  1.1446-1 
through 1.1446-5 apply by reason of an election under Sec.  1.1446-7.
* * * * *
    (d) Effective date. Unless otherwise provided in this section, this 
section applies to payments made after December 31, 2000.

0
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 1.1446-7. For interest, penalties, and additions to the tax for 
failure to timely pay the tax required to be paid under section 1446, 
see sections 6601, 6651, 6655 (in the case of publicly traded 
partnerships, see section 6656), 6672, and 7202 and the regulations 
under those sections. For additional penalties and additions to the tax 
for failure to comply 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 May 18, 2005, or such earlier 
time as the regulations under Sec. Sec.  1.1446-1 through 1.1446-5 
apply by reason of an election under Sec.  1.1446-7.

0
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 are 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 by a foreign trust or estate. Further, if a 
partnership withholds an amount under chapter 3 of the Internal Revenue 
Code with respect to the allocable share of a partner that is a 
partnership (upper-tier partnership) or with respect to the allocable 
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 May 18, 2005, or such earlier 
time as the regulations under Sec. Sec.  1.1446-1 through 1.1446-5 
apply by reason of an election under Sec.  1.1446-7.
    (c) Effective date. Unless otherwise provided in this section, this 
section applies to payments made after December 31, 2000.

0
Par. 9. Section 1.1463-1 is amended by:
0
1. Adding two sentences at the end of paragraph (a).
0
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(e) and (f) for application of the rule 
of this paragraph (a), and for additional rules, where the withholding 
tax was required to be paid under section 1446. The previous

[[Page 28742]]

sentence shall apply to partnership taxable years beginning after May 
18, 2005, or such earlier time as the regulations under Sec. Sec.  
1.1446-1 through 1.1446-5 apply by reason of an election under Sec.  
1.1446-7.
    (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

0
Par. 10. The authority for 26 CFR part 301 continues to read, in part, 
as follows:

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


0
Par. 11. Section 301.6109-1 is amended as follows:
0
1. In paragraph (b)(2)(vi), remove the word ``and''.
0
2. In paragraph (b)(2)(vii), remove the period at the end of the 
paragraph and add ``; and'' in its place.
0
3. Paragraph (b)(2)(viii) is added.
0
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 or whose 
taxpayer identification number is required to be furnished on any 
return, statement, or other document as required by the income tax 
regulations under section 1446. This paragraph (b)(2)(viii) shall apply 
to partnership taxable years beginning after May 18, 2005, or such 
earlier time as the regulations under Sec. Sec.  1.1446-1 through 
1.1446-5 of this chapter apply by reason of an election under Sec.  
1.1446-7 of this chapter.
    (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 May 18, 2005, or such earlier time as the regulations 
under Sec. Sec.  1.1446-1 through 1.1446-5 of this chapter apply by 
reason of an election under Sec.  1.1446-7 of this chapter.
* * * * *

0
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 May 
18, 2005, or such earlier time as the regulations under Sec. Sec.  
1.1446-1 through 1.1446-5 of this chapter apply by reason of an 
election under Sec.  1.1446-7 of this chapter.

PART 602--OMB CONTROL NUMBERS UNDER PAPERWORK REDUCTION ACT

0
Par. 13. The authority citation for part 602 continues to read as 
follows:


    Authority: 26 U.S.C. 7805.

0
Par. 14. In Sec.  602.101, paragraph (b) is amended by adding entries 
in numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                               Current
     CFR part or section where identified and described      OMB control
                                                                 No.
------------------------------------------------------------------------
1.1446-1...................................................    1545-1852
1.1446-3...................................................    1545-1852
1.1446-4...................................................    1545-1852
1.1446-5...................................................    1545-1852
1.1446-6T..................................................    1545-1934
 
                                * * * * *
------------------------------------------------------------------------


Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: May 3, 2005.
Eric Solomon,
Acting Assistant Secretary of the Treasury.
[FR Doc. 05-9424 Filed 5-13-05; 8:45 am]
BILLING CODE 4830-01-P