[Federal Register Volume 73, Number 83 (Tuesday, April 29, 2008)]
[Rules and Regulations]
[Pages 23069-23086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-9356]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 301, and 602

[TD 9394]
RIN 1545-BD80


Special Rules To Reduce Section 1446 Withholding

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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[[Page 23070]]

SUMMARY: This document contains final regulations regarding when a 
partnership may consider certain deductions and losses of a foreign 
partner to reduce or eliminate the partnership's obligation to pay 
withholding tax under section 1446 on effectively connected taxable 
income allocable under section 704 to such partner. 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 Sec. Sec.  1.1446-3 and 1.1446-5 
and to regulations under sections 1464, 6071, 6091, 6151, 6302, 6402, 
6414, and 6722.

DATES: Effective Date: These regulations are effective on April 29, 
2008.
    Applicability Dates: The regulations are generally applicable for 
partnership taxable years beginning after December 31, 2007. See Sec.  
1.1446-6(f). For a transition rule see Sec.  1.1446-6(g).

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

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has 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 number 1545-1934. The collection of information 
in these final regulations is in Sec.  1.1446-6(c) and (d). This 
information is required to determine the extent to which a partnership 
will consider certifications of losses and deductions in calculating 
the amount of withholding tax it must pay with respect to a foreign 
partner on the partner's allocable share of effectively connected 
taxable income earned by such partnership.
    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.
    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 the Treasury Department published 
in the Federal Register a notice of proposed rulemaking [REG-108524-00; 
2003-42 IRB 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 provide guidance 
for partnerships required to pay withholding tax under section 1446 of 
the Code (1446 tax). On May 18, 2005, the IRS and the Treasury 
Department issued final and temporary regulations under section 1446. 
The 2005 final regulations set forth the provisions of the 2003 
proposed regulations in final form and the temporary regulations 
established a new procedure by which a partnership could consider 
certain partner-level deductions and losses when computing its 1446 
tax. The temporary regulations generally apply to partnership taxable 
years beginning after the date of their issuance, but an election was 
provided that permitted a partnership to apply the regulations to 
partnership taxable years beginning after December 31, 2004, provided 
the partnership elected to apply the 2005 final regulations to 
partnership taxable years beginning after December 31, 2004. On May 18, 
2005, the IRS and the Treasury Department also published in the Federal 
Register a notice of proposed rulemaking [REG-108524-00; 2005-1CB 1158; 
70 FR 28701], under sections 1464, 6071, 6091, 6151, 6302, 6402, 6414, 
and 6722 of the Code to implement the section 1446 regime, as well as 
cross-referencing the temporary regulations under Sec.  1.1446-6T (see 
26 CFR Part 1, revised as of April 1, 2007). Written comments were 
received in response to the notice of proposed rulemaking, and a public 
hearing was held on November 16, 2005. After consideration of all the 
comments, the proposed regulations are adopted, as revised by this 
Treasury decision and the temporary regulations are removed.

Explanation of Provisions

    Section 1446 requires a partnership to pay section 1446 tax on a 
foreign partner's allocable share of effectively connected taxable 
income (ECTI) from the partnership. The temporary regulations allow 
certain foreign partners to certify certain 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. The 
temporary regulations also permit a nonresident alien partner to 
certify to the partnership that the partnership investment is (and will 
be) its only activity for its taxable year that gives rise to 
effectively connected income, gain, deduction, or loss. In that 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 ``Annual Return for Partnership Withholding Tax (Section 
1446),'' the actual) 1446 tax due with respect to such nonresident 
alien partner is less than $1,000.

I. Modifications to the Temporary Regulations

A. Format of Certificate Submitted to a Partnership
    The temporary regulations state that no particular form is required 
for the partner's certificate of deduction and losses to the 
partnership. However, the temporary regulations list 13 items the 
certificate must contain and the caption that must appear at the top of 
the certificate. To ensure uniformity of the certificates and to reduce 
the likelihood of an inadvertently omitted item causing the certificate 
to be defective, the IRS developed a form (Form 8804-C, ``Certificate 
of Partner-Level Items to Reduce Section 1446 Withholding'') to be used 
by the partner providing a certificate to the partnership. The IRS and 
the Treasury Department believe that the Form 8804-C will facilitate a 
partner's ability to provide original and updated certificates.
B. Partners Entitled To Certify Deductions and Losses
    1. Filing period requirement: number of years
    To be eligible to provide a certificate to a partnership the 
temporary regulations require a partner to have timely filed (or to 
represent that it will timely file) a U.S. income tax return for each 
of its preceding four taxable years and for the taxable year during 
which the certificate is provided and will be considered by the 
partnership. The partner is also required to have timely paid (or to 
represent that it will timely pay) all tax shown on such returns. The 
final regulations clarify that only returns that report income or gain 
effectively connected with a U.S. trade or business or deductions or 
losses properly allocated and apportioned to such activities will 
satisfy the tax return filing requirement (for the current or relevant 
prior years). Accordingly, the partner may not fulfill this requirement 
with a U.S. income tax return that reports no items of income or gain 
effectively connected with a U.S. trade or business or deductions or 
losses properly allocated and apportioned to such activities.

[[Page 23071]]

    Several commentators suggested reducing the temporary regulations' 
prior years U.S. tax return filing requirement. One commentator 
suggested reducing the requirement to the lesser of the two prior years 
or the number of years the partner has been a partner in the relevant 
partnership. Another commentator suggested reducing the requirement 
from four to two years.
    The IRS and the Treasury Department believe it appropriate to 
require the foreign partner to have filed a certain number of returns 
and paid any tax relating to those returns regardless of the number of 
years the partner has been a member of the relevant partnership. The 
IRS and the Treasury Department do not believe that a reduction to two 
years is appropriate. Because the return for the year immediately 
preceding the year a partner submits a certificate to a partnership may 
not have been filed by the date when the certificate is submitted, 
reducing the prior years filing requirement to two years could result 
in only one return being filed by the date on which the certificate is 
submitted. In response to these comments, however, the IRS and the 
Treasury Department have determined that it is appropriate to reduce 
the prior years filing requirement to three years.
    The IRS and the Treasury Department have also decided to modify the 
filing requirement of a tax return for a preceding taxable year in 
which the partner did not submit a certificate to any partnership, if 
the return has a due date (without extensions) before the beginning of 
the partnership taxable year for which the certificate is provided. The 
final regulations provide that such returns must be filed and all 
amounts due with such return (including interest, penalties, and 
additions to tax, if any) must be paid on or before the earlier of: (1) 
The date that is one year from the due date (without extensions) of 
such return; or (2) The date on which the certificate for the current 
taxable year is submitted to the partnership. Once a partner submits a 
certificate to a partnership, however, it must timely file all its 
subsequent years' returns (and timely pay all amounts due with the 
returns) to submit a certificate to a partnership in a later year. The 
IRS and the Treasury Department anticipate that this modified rule will 
permit more foreign partners to provide certificates to partnerships 
under the final regulations.
    2. Trusts and estates
    One commentator requested that the IRS and the Treasury Department 
explain why foreign estates and domestic or foreign trusts, other than 
grantor trusts, are not permitted to certify deductions and losses to 
partnerships. Another commentator asked that the decedent's compliance 
record be considered in determining whether the estate can certify 
deductions and losses to a partnership. The final regulations do not 
modify the treatment of estates and trusts. The IRS and the Treasury 
Department continue to believe, as stated in the preamble to the 
temporary regulations, that because trusts and estates are not always 
pure conduits for tax purposes it is difficult for a partnership to 
determine the taxpayer (that is, the trust, estate or beneficiary) that 
will pay tax on the ECTI allocated to the trust or estate. Further, a 
decedent's filing history may have limited relevance in predicting the 
estate's likely compliance.
    3. Tiered partnerships
    In a tiered partnership structure, a lower-tier partnership must 
withhold 1446 tax on ECTI allocable to an upper-tier foreign 
partnership that is a partner in the lower-tier partnership. However, 
if the upper-tier foreign partnership provides sufficient information 
regarding its partners to the lower-tier partnership, the lower-tier 
partnership may withhold 1446 tax based on the partners in the upper-
tier partnership. These rules may also apply to upper-tier domestic 
partnerships that have foreign partners. See Sec.  1.1446-5. Similarly, 
an upper-tier partnership that receives certificates of deductions and 
losses from its foreign partners may provide the certificates to the 
lower-tier partnerships.
    The final regulations add several rules to ensure that deductions 
and losses certified to an upper-tier partnership are not taken into 
account by both the upper-tier partnership and a lower-tier partnership 
or by more than one lower-tier partnership. A new rule is also added 
requiring that sufficient information regarding a partner in the upper-
tier partnership submitting the certificate be provided to the lower-
tier partnership and then to the IRS so that the IRS can reliably 
associate the ECTI and the certificate with the partner in the upper-
tier partnership.
C. Submissions of Certificates
    1. Time lags for submission of certificates
    The temporary regulations provide that the partnership may rely on 
the first certificate submitted by the foreign partner for a 
partnership taxable year only if the partnership receives the 
certificate at least 30 days before the installment due date or the 
annual Form 8804 filing due date (without regard to extensions) for the 
partnership taxable year for which the partner would like the 
certificate to be considered in computing the 1446 tax due with respect 
to the partner. Updated certificates may only be considered if received 
at least ten days before the installment due date or the Form 8804 
filing date (without regard to extensions). Several commentators 
questioned the appropriateness of these timing requirements if the 
partnership is willing to rely on a certification submitted at the last 
moment and remits the 1446 tax installment or files the final return on 
a timely basis. The IRS and the Treasury Department agree with the 
commentators and have removed these requirements in the final 
regulations.
    2. Resubmission of certificates
    The temporary regulations require the partnership to attach a copy 
of any certificate, and the computation of 1446 tax due with respect to 
a partner, to both the Form 8813, ``Partnership Withholding Tax Payment 
Voucher (Section 1446),'' and Form 8805, ``Foreign Partner's 
Information Statement of Section 1446 Withholding Tax,'' 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). 
One commentator suggested that a certificate submitted with Form 8813 
should not be required to be submitted with subsequent filings of Form 
8813 or with Form 8805. The IRS and the Treasury Department agree with 
the comment regarding Form 8813. The final regulations provide that a 
partner's certificate need only be submitted for the first installment 
period for which it is considered. For subsequent installment periods 
for which the certificate is considered, the partnership may instead 
attach a list of the name, taxpayer identification number, and the 
amount of certified deductions of each foreign partner whose 
certificate was previously considered during the taxable year and whose 
certificate was again considered in the subject installment period. The 
partnership would also indicate if it was relying on the state and 
local taxes withheld and remitted on behalf of the partner. If the 
partnership is relying on the de minimis rule for the partner, the 
partnership would indicate that, in lieu of indicating the amount of 
certified deductions. However, if a partnership receives an updated 
certificate from a partner, that certificate must be attached with the 
Form 8813 for the first installment period it is considered. In all 
events, a partnership must attach to the Form 8813 and Form 8805, a 
computation of 1446 tax due with respect to such

[[Page 23072]]

partner for all periods for which a certificate received from the 
partner is considered by the partnership. In addition, in all events 
the partnership must attach to the Form 8805 a copy of the partner's 
original or updated certificate, as appropriate.
    3. Denying partnerships the ability to submit certificates
    Consistent with the temporary regulations, the final regulations 
provide that upon receipt of written notification from the IRS that a 
foreign partner's certificate is defective, the partnership may no 
longer rely on the defective certificate or any other certificate 
submitted by the partner until the IRS notifies the partnership in 
writing and revokes or modifies the original notice. The final 
regulations provide that the IRS may also notify the partnership in 
writing if either a substantial portion of the certificates submitted 
by the partnership are defective or a substantial amount of the 
deductions and losses relied on by the partnership in computing its 
1446 tax due are reported on one or more defective certificates. Upon 
receiving that notification the partnership may not rely on any 
certificate submitted by any partner for the partnership taxable year 
in which such notification is received or any subsequent partnership 
taxable year, until the IRS notifies the partnership again in writing 
and revokes or modifies the original notice.
D. Deductions and Losses Certified to the Partnership
    1. Current year deductions
    The temporary regulations provide that 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 (or to be 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. Therefore, no anticipated 
deduction or loss with respect to current operations may be considered. 
One commentator suggested that partners should be permitted to certify 
current year deductions to the partnership. The IRS and the Treasury 
Department are concerned about the uncertainty associated with 
fluctuations in estimates of current-year activities and therefore have 
not adopted this suggestion.
    2. Charitable deductions
    One commentator requested that partners be permitted to certify 
charitable contribution deductions. The IRS and the Treasury Department 
have not adopted this recommendation because of the difficulty a 
partnership would have in determining the amount of a charitable 
contribution deduction allowed to the foreign partner. Section 170 
provides separate rules for corporations and individuals, the type of 
charity to which the contribution is made, and the type of property 
contributed to the charity. In addition, separate rules apply to 
determine the deduction amount in the case of charitable contribution 
carryover.
    3. Suspended losses
    One commentator raised a concern that a foreign partner could 
certify a passive activity loss to a partnership that conducts a 
different activity in which the partner materially participates. If the 
partnership took that loss into account it would inappropriately reduce 
its 1446 tax due with respect to that partner. Because on its income 
tax return the partner could not offset the loss against its allocable 
share of partnership ECTI, the partner might inappropriately each year 
recertify that loss to the partnership. To address that concern the 
final regulations clarify that a partner must identify any certified 
deductions and losses that are subject to special limitations at the 
partner level and provide information to the partnership that will 
allow the partnership to take into account the special limitations.
    4. Net operating losses
    The temporary regulations provide that a partnership may not 
consider a partner's net operating loss (NOL) deduction in an amount 
greater than 90 percent of the partner's allocable share of ECTI. Two 
commentators discerned that this requirement reflects a concern about 
the alternative minimum tax (AMT) limitation on NOL deductions and 
suggested the regulations should be tied to the continuing 
applicability of the 90 percent AMT limitation on the use of NOL 
carryovers. The IRS and the Treasury Department have adopted this 
suggestion. One commentator further suggested that if the 90 percent 
limitation is retained, or as long as it applies, the regulations 
should be clarified to explain that the limitation should be applied on 
a cumulative basis for each installment period. This suggestion has 
also been adopted. With this clarification, if the partnership's 
annualized income changes during the year, the NOL deduction that the 
partnership may take into account can increase or decrease accordingly.
E. Partnership Items Allocable to Partners That Give Rise to Partner 
Level Deductions, Losses or Credits But Are Not Partnership Allocations 
of Deductions and Losses Under Section 704
    1. State income taxes
    One commentator suggested allowing the partnership to reduce a 
foreign partner's ECTI by the amount of any state and local taxes paid 
by the partnership on behalf of the partner with respect to the 
partner's allocable share of partnership income. The final regulations 
adopt this recommendation but provide that the partnership may only 
consider 90 percent of the state and local taxes withheld and remitted 
on behalf of the partner but only with respect to the partner's 
allocable share of ECTI. The partnership may consider these amounts 
regardless of whether the partner submits a certification of deductions 
and losses or of its de minimis status to the partnership for the 
relevant partnership taxable year.
    2. Section 199 deductions
    One commentator suggested allowing a partnership to consider a 
partner's available deduction under section 199 in determining its 
section 1446 tax with respect to that partner. The section 199 
deduction is a percentage of the lesser of the qualified production 
activities income (QPAI) of the taxpayer for the taxable year or the 
taxpayer's taxable income or, in the case of an individual, adjusted 
gross income determined without regard to section 199 for the taxable 
year. In addition, the deduction is limited to 50 percent of the Form 
W-2, ``Wage and Tax Statement'', wages for the taxpayer for the taxable 
year. Depending on a taxpayer's gross receipts and assets, there are up 
to three permissible methods for calculating QPAI.
    In the case of a pass-through entity (such as a partnership), 
section 199(d)(1)(A) provides that the section 199 deduction is 
calculated at the partner level. A partner may be a member of more than 
one partnership and may engage in its own qualifying activities under 
section 199. The QPAI and Form W-2 wages, and any other QPAI and Form 
W-2 wages reported by a partnership to the partner, must be added to 
the partner's own calculation of QPAI and Form W-2 wages. Therefore, 
because of the difficulty in a partnership determining the section 199 
deduction of a partner, the IRS and the Treasury Department determined 
it would be inappropriate to allow a partnership to consider the 
section 199 deduction of a partner in determining

[[Page 23073]]

the amount of section 1446 tax to be withheld with respect to that 
partner.
    3. Section 470 deductions
    One commentator suggested that the regulations allow the 
partnership to consider partner-level deductions previously suspended 
under section 470 (limitation on deductions allocable to property used 
by governments or other tax-exempt entities) and relating to the 
partnership, when the deductions become available. Section 470 
currently allows the partnership to consider these suspended partner-
level deductions in determining the partner's ECTI. Therefore, there is 
no need to modify the regulations in response to this suggestion.
    4. Tax credits
    One commentator suggested that a foreign partner should be able to 
certify credits to the partnership and that the partnership be able to 
consider current-year credits in determining the amount of its 1446 
tax. Section 1446 requires that a partnership pay a withholding tax on 
its ECTI allocable to foreign partners. It provides no authority for 
partnerships to consider credits in determining the amount of 1446 tax 
the partnership is required to withhold and pay. Therefore, this 
suggestion has not been adopted.
F. Effect on Reasonable Reliance on Certificate of Deductions and 
Losses
    The temporary regulations provide that a partnership is not 
relieved from liability for 1446 tax under section 1461 or for any 
applicable addition to the tax, interest, or penalties if a partner's 
certificate is defective or the partner submits an updated certificate 
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 (for example, the partner failed to timely file a U.S. 
income tax return), then the partnership is liable for the entire 1446 
tax amount under section 1461 (or any installment of such tax).
    Further, under the temporary regulations, if it is determined 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), the 
partnership is liable for 1446 tax under section 1461 (or any 
installment of such tax) only to the extent the amount of certified 
deductions and losses taken into account by the partnership is greater 
than the amount determined to be actually available to the partner and 
permitted to be used under regulations.
    Similarly, if it is determined that a certificate is defective 
because the character of the certified deductions and losses is 
erroneous, the partnership is liable for 1446 tax under section 1461 
(or any installment of such tax) only to the extent the actual 
character of the deductions and losses results in an increase in the 
1446 tax due with respect to such partner.
    However, the temporary regulations provide that the partnership is 
not liable for the addition to tax under section 6655 (as applied 
though Sec.  1.1446-3) for the period during which the partnership 
reasonably relied on the certificate. Further, the temporary 
regulations provide that although a partnership is generally liable for 
the 1446 tax, any addition to the tax, interest, and penalties, the 
partnership may be relieved of some penalties in certain circumstances.
    One commentator stated that reasonable reliance on a certificate 
should protect a partnership against liability not only under section 
6655, but also for liability for the tax under section 1461, interest 
on the tax under section 6601, and various other penalty provisions. 
The IRS and the Treasury Department have not adopted this 
recommendation. Use of the certification procedures under Sec.  1.1446-
6 is voluntary. The foreign partner is not required to submit a 
certificate of deductions and losses to the partnership. Moreover, even 
if the partnership receives a certificate it may consider all, none or 
only a portion of the certified deductions and losses when calculating 
its payment of 1446 tax. Further, as the temporary regulations stated, 
the partnership may be relieved of some penalties in certain 
circumstances.
G. Relief for a Partnership's Failure To Comply Timely With the 
Requirements of This Section
    Among other requirements, to apply the rules of Sec.  1.1446-6 the 
partnership must receive a valid certificate from the foreign partner 
and attach the certificate, along with the computation of 1446 tax due 
with respect to that partner, to certain Forms 8813 and Form 8805 filed 
with respect to that partner. The IRS and the Treasury Department 
believe that a reasonable cause standard should be applied to determine 
whether a partnership that failed to attach the certificate and 1446 
tax computation to the relevant filing is eligible for an extension of 
time to comply with this requirement.
    Under the reasonable cause standard, if a partnership that may 
otherwise rely on a partner's certificate fails to comply timely with 
the requirements of Sec.  1.1446-6, the partnership is considered to 
have satisfied the timeliness requirement if it demonstrates, to the 
satisfaction of the Area Director, Field Examination, Small Business/
Self-Employed or the Director, Field Operations, Large and Mid-Size 
Business (Director) having jurisdiction of the partnership's return for 
the taxable year, that such failure was due to reasonable cause and not 
willful neglect. Once the partnership becomes aware of the failure, the 
partnership must demonstrate reasonable cause and must satisfy the 
filing requirement by attaching the certificate and the partnership's 
computation of 1446 tax due with respect to that partner to an amended 
Form 8813 or Forms 8804 and 8805 (that amends the tax return to which 
the certificate and computation should have been attached). A written 
statement must be included that explains the reasons for the failure to 
comply.
    In determining whether the partnership has reasonable cause, the 
Director shall determine whether the partnership acted reasonably and 
in good faith based on all the facts and circumstances. The Director 
shall notify the partnership in writing within 120 days of the filing 
if it is determined that the failure to comply was not due to 
reasonable cause or if additional time will be needed to make such 
determination. If the Director fails to notify the partnership within 
120 days of the filing, the partnership shall be considered to have 
demonstrated to the Director that such failure was due to reasonable 
cause and not willful neglect.
H. Effective/Applicability Dates and Transition Rule
    The final regulations are effective for partnership taxable years 
beginning after December 31, 2007. However, any certificate submitted 
on or before July 28, 2008 that met the requirements of the temporary 
regulations shall not be considered defective solely because it does 
not meet the requirements of the final regulations. However, any 
certificate (including any updated certificates and status reports) 
submitted, or required to be submitted, after July 28, 2008, must 
comply with the requirements of these final regulations.

[[Page 23074]]

II. Modifications to the 2005 Final Regulations

    The final regulations make several clarifying and conforming 
changes to the 2005 final regulations including with respect to the 
calculation of installment payments of 1446 tax when a partnership 
considers a certificate received under Sec.  1.1446-6 and the 
information that a lower-tier partnership must receive from an upper-
tier partnership when the lower-tier partnerships pays 1446 tax on 
behalf of the partners in the upper-tier partnership. Also the prior 
year safe harbor provision in Sec.  1.1446-3 was conformed with section 
6655 to provide that the partnership must compute its current year 1446 
tax installments based on the total 1446 tax (without regard to Sec.  
1.1446-6) as computed for the prior taxable year. These revisions are 
effective for partnership taxable years beginning after December 31, 
2007.

Special Analyses

    It has been determined that this Treasury decision is 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. It is hereby certified that the collections of information 
contained in these regulations will not have a significant economic 
impact on a substantial number of small entities. This certification is 
based upon the fact that only a few small entities are expected to be 
impacted by these collections and the burden associated with such 
collections is estimated to be 0.5 hours. Moreover, the information 
collection in Sec.  1.1446-6 and its use is voluntary. Therefore, a 
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the 
Code, the notice of proposed rulemaking preceding the final regulations 
was submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Drafting Information

    The principal author of these regulations is Ronald M. Gootzeit of 
the Office of the Associate Chief Counsel (International). However, 
other personnel from the IRS and the Treasury Department 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.

Adoption of 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 * * *


0
Par. 2. Section 1.1446-0 is amended is as follows:
0
1. Adding entries for Sec.  1.1446-6.
0
2. Removing entries for Sec.  1.1446-6T.
0
3. Revising the entry for Sec.  1.1446-7.
    The addition and revision read as follows:


Sec.  1.1446-0  Table of contents.

* * * * *


Sec.  1.1446-6  Special rules to reduce a partnership's 1446 tax with 
respect to a foreign partner's allocable share of effectively connected 
taxable income.

    (a) In general.
    (1) Purpose and scope.
    (2) Reasonable reliance on a certificate.
    (b) Foreign partners to whom this section applies.
    (1) In general.
    (2) Definitions.
    (i) U.S. income tax return.
    (ii) Timely-filed.
    (iii) Qualifying U.S. income tax return.
    (3) Special rules.
    (c) Reduction of 1446 tax with respect to a foreign partner.
    (1) General rules.
    (i) Certified deductions and losses.
    (A) Deductions and losses from the partnership.
    (B) Deductions and loss from other sources.
    (C) Limit on the consideration of a partner's net operating loss 
deduction.
    (D) Limitation on losses subject to certain partner level 
limitations.
    (E) Certification of deductions and losses to other 
partnerships.
    (F) Partner level use of deductions and losses certified to a 
partnership.
    (ii) De minimis certificate for nonresident alien individual 
partners.
    (A) In general.
    (B) Requirements for exception.
    (iii) Consideration of certain current year state and local 
taxes.
    (2) Form and time of certification.
    (i) Form of certification.
    (ii) Time of certification provided to partnership.
    (A) First certificate submitted for a partnership's taxable 
year.
    (B) Updated certificates and status updates.
    (1) Preceding year tax returns not yet filed.
    (2) Other circumstances requiring an updated certificate.
    (3) Form and content of updated certificate.
    (4) Partnership consideration of an updated certificate.
    (3) Notification to partnership when a partner's certificate 
cannot be relied upon.
    (4) Partner to receive copy of notice.
    (5) Notification to partnership when no foreign partner's 
certificate can be relied upon.
    (6) Partnership notification to partner regarding use of 
deductions and losses.
    (7) Partner's certificate valid only for partnership taxable 
year for which submitted.
    (d) Effect of certificate of deductions and losses on partner 
and partnership.
    (1) Effect on partner.
    (i) No effect on liability for income tax of foreign partner.
    (ii) No effect on partner's estimated tax obligations.
    (iii) No effect on partner's obligation to file U.S. income tax 
return.
    (2) Effect on partnership.
    (i) Reasonable reliance to relieve partnership from addition to 
tax under section 6665.
    (ii) Continuing liability for withholding tax under section 1461 
and for applicable interest and penalties.
    (A) In general.
    (B) Certificate defective because of amount or character of 
deductions and losses.
    (3) Partnership level rules and requirements.
    (i) Filing requirement.
    (ii) Reasonable cause for failure to timely file a valid 
certificate and computation.
    (A) Determining reasonable cause.
    (B) Notification.
    (e) Examples.
    (f) Effective/Applicability date.
    (g) Transition rule.
    Sec.  1.1446-7 Effective/Applicability date.


0
Par. 3. For each entry in the table in the ``Section'' column remove 
the phrase in the ``Remove'' column and add the phrase in the ``Add'' 
column in its place.

------------------------------------------------------------------------
           Section                 Remove                 Add
------------------------------------------------------------------------
1.1443-1(a) (First sentence)  1.1446-6T......  1.1446-6
1.1446-1(a).................  1.1446-6T......  1.1446-6
1.1446-1(b).................  Sec.   1.1446-   Sec.   1.1446-6
                               6T.

[[Page 23075]]

 
1.1446-1(c)(5) (Second        1.1446-6T......  1.1446-6
 sentence).
1.1446-2(a) (Third sentence)  Sec.   1.1446-   Sec.   1.1446-6
                               6T.
1.1446-2(b)(1) (Second        Sec.   1.1446-   Sec.   1.1446-6
 sentence).                    6T.
1.1446-2(b)(1) (Last          1.1446-6T......  1.1446-6
 sentence).
1.1446-2(b)(3)(iii) (First    Sec.   1.1446-   Sec.   1.1446-6
 sentence).                    6T.
1.1446-2(b)(3)(iii) (Second   Sec.   1.1446-   Sec.   1.1446-6
 sentence).                    6T.
1.1446-2(b)(3)(vii).........  Sec.   1.1446-   Sec.   1.1446-6
                               6T.
1.1446-2(b)(5) Example 3      Sec.   1.1446-   Sec.   1.1446-6
 (Sixth sentence).             6T.
1.1446-3(b)(2)(v)(F) (Second  Sec.   1.1446-   Sec.   1.1446-6(c)(1)(ii)
 sentence).                    6T.
1.1446-3(d)(1)(i) (Third      Sec.   1.1446-   Sec.   1.1446-6(d)(3)
 sentence).                    6T.
1.1446-3(d)(1)(iii) (Third    Sec.   1.1446-   Sec.   1.1446-6
 sentence).                    6T.
1.1446-3(e)(3)(i) (Last       Sec.   1.1446-   Sec.   1.1446-6(d)(2)(i)
 sentence).                    6T.
1.1446-5(f) Example 1(i)      Sec.   1.1446-   Sec.   1.1446-6
 (Ninth sentence).             6T.
------------------------------------------------------------------------


0
Par. 4. Section 1.1446-3 is amended by:
0
1. Removing the acronym ``ECTI'' from the first sentence in paragraph 
(b)(1) and adding the language ``effectively connected taxable income 
(ECTI)'' in its place.
0
2. Revising paragraphs (b)(2)(i) and (b)(3)(i)(A).
    The revisions read as follows:


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

* * * * *
    (b) * * *
    (2) * * * (i) Application of the principles of section 6655--(A) In 
general. 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 the payments 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. The principles of section 6655, except as otherwise provided in 
Sec.  1.6655-2, are applied to annualize the partnership's items of 
effectively connected income, gain, loss, and deduction to determine 
each foreign partner's allocable share of partnership ECTI. Each 
foreign partner's allocable share of partnership ECTI 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 1446 tax amounts are then added for each 
foreign partner to yield an annualized 1446 tax with respect to such 
partner. The installment of 1446 tax due with respect to a foreign 
partner 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 amount of 1446 tax installment payments previously paid with 
respect to that partner during the partnership's taxable year. The 
partnership's total 1446 tax installment payment equals the sum of the 
installment payments due for such period on behalf of all the 
partnership's foreign partners.
    (B) Calculation rules when certificates are submitted under Sec.  
1.1446-6--(1) To the extent applicable, in computing the 1446 tax due 
with respect to a foreign partner, a partnership may consider a 
certificate received from such partner under Sec.  1.1446-6(c)(1)(i) or 
(ii) and the amount of state and local taxes permitted to be considered 
under Sec.  1.1446-6(c)(1)(iii). For this purpose, a partnership shall 
first annualize the partner's allocable share of the partnership's 
items of effectively connected income, gain, deduction, and loss 
before--
    (i) Considering under Sec.  1.1446-6(c)(1)(i) the partner's 
certified deductions and losses;
    (ii) Determining under Sec.  1.1446-6(c)(1)(ii) whether the 1446 
tax otherwise due with respect to that partner is less than $1,000 
(determined with regard to any certified deductions or losses); or
    (iii) Considering under Sec.  1.1446-6 (c)(1)(iii) the amount of 
state and local taxes withheld and remitted on behalf of the partner.
    (2) The amount of the limitation provided in Sec.  1.1446-
6(c)(1)(i)(C) shall be based on the partner's allocable share of these 
annualized amounts. For any installment period in which the partnership 
considers a partner's certificate, the partnership must also consider 
the following events to the extent they occur prior to the due date for 
paying the 1446 tax for such installment period--
    (i) The receipt of an updated certificate or status update from the 
partner under Sec.  1.1446-6(c)(2)(ii)(B) certifying an amount of 
deductions or losses that is less than the amount reflected on the 
superseded certificate (see Sec.  1.1446-6(e)(2) Example 4);
    (ii) The failure to receive an updated certificate or status update 
from the partner that should have been provided under Sec.  1.1446-
6(c)(2)(ii)(B); and
    (iii) The receipt of a notification from the IRS under Sec.  
1.1446-6(c)(3) or (c)(5) (see Sec.  1.1446-6(e)(2) Example 5).
* * * * *
    (3) * * * (i) * * *
    (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 (without regard to Sec.  1.1446-6) for the prior taxable 
year;
* * * * *

0
Par. 5. Section 1.1446-5(c)(2) is amended by adding two new sentences 
after the first sentence to read as follows:


Sec.  1.1446-5  Tiered partnership structures.

* * * * *
    (c) * * *
    (2) * * * The lower-tier partnership required to pay 1446 tax must 
be able to provide the information necessary for the IRS to determine 
the chain of ownership, allocation of effectively connected items at 
each partnership level, as well as to the ultimate beneficial owner of 
the effectively connected items, and whether the amount of 1446 tax 
paid was appropriate. This information should permit each partnership 
in the tiered structure and the IRS to reliably associate any 
effectively connected items allocable to such upper-tier partnership, 
as well as to the ultimate beneficial owner of the effectively 
connected items. * * *


Sec.  1.1446-6T  [Removed]

0
Par. 6. Section 1.1446-6T is removed.

0
Par. 7. Section 1.1446-6 is added to read as follows:


Sec.  1.1446-6  Special rules to reduce a partnership's 1446 tax with 
respect to a foreign partner's allocable share of effectively connected 
taxable income.

    (a) In general--(1) Purpose and scope. This section provides rules 
regarding when a partnership required to pay

[[Page 23076]]

withholding tax under section 1446 (1446 tax), or an installment of 
1446 tax, may consider certain partner-level deductions and losses in 
computing its 1446 tax obligation under Sec.  1.1446-3, or otherwise 
not pay a de minimis amount of 1446 tax due with respect to a 
nonresident alien individual partner. A partnership determines the 
applicability of the rules 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. Except with respect 
to certain state and local taxes paid by the partnership on behalf of 
the partner, to apply the rules of this section with respect to a 
foreign partner, the partnership must receive a certificate from such 
partner for each partnership taxable year. Paragraph (b) of this 
section identifies the foreign partners to which this section applies. 
Paragraph (c) of this section identifies the deductions and losses that 
a foreign partner may certify to the partnership as well as the state 
and local taxes paid by the partnership on behalf of the foreign 
partner that can be taken into account without a certification, and 
establishes an exception that permits a partnership to not pay a de 
minimis amount of 1446 tax with respect to a nonresident alien partner. 
Paragraph (c) of this section also sets forth the requirements for a 
valid certificate. Paragraphs (a)(2) and (d) of this section establish 
when a partnership may rely on and consider a foreign partner's 
certificate in computing its 1446 tax, and the effects of relying on 
such a certificate. Paragraph (d) of this section also describes the 
effects of a partnership relying on a certificate (including an updated 
certificate) and the reporting requirements of a partnership with 
respect to a certificate. Paragraph (e) of this section sets forth 
examples that illustrate the rules of this section. Paragraph (f) of 
this section provides the Effective/Applicability date. Paragraph (g) 
of this section provides a transition rule.
    (2) Reasonable reliance on a certificate. Subject to Sec.  1.1446-2 
and the rules of this section, a partnership receiving a certificate 
(including an updated certificate or status update under paragraph 
(c)(2)(ii)(B) of this section) of deductions and losses from a partner 
provided in accordance with the provisions of 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) until such time that it has actual knowledge or reason to 
know that the certificate is defective or that the time for receiving 
an updated certificate or status update from the partner under 
paragraph (c)(2)(ii)(B) of this section has expired. For this purpose, 
a partnership shall be considered to have actual knowledge or reason to 
know that a certificate is defective upon receipt of written 
notification from the IRS under paragraph (c)(3) or (c)(5) of this 
section.
    (b) Foreign partner to whom this section applies--(1) In general. 
Except as otherwise provided in paragraph (b)(3) of this section, a 
foreign partner to whom this section applies is a foreign partner that 
meets the requirements of this paragraph (b)(1).
    (i) The partner has provided valid documentation to the partnership 
to which a certificate is submitted under this section in accordance 
with Sec.  1.1446-1.
    (ii) If the partner's current taxable year is the first taxable 
year in which the partner submits a certificate to any partnership, the 
partner has filed (or will file) a qualifying U.S. income tax return 
for each of its three taxable years ending before the end of the 
partnership's taxable year for which the partner is submitting a 
certificate (regardless of whether it was a partner in that partnership 
during each of these years). A qualifying U.S. income tax return for a 
taxable year that is prior to the first taxable year the partner 
submits a certificate to any partnership is a U.S. income tax return 
filed within the time specified in paragraph (b)(2)(iii) of this 
section.
    (iii) If the current taxable year of the partner is not the first 
taxable year in which the partner submits a certificate to any 
partnership, the partner met the requirements in paragraph (b)(1)(ii) 
of this section for the first taxable year in which it submitted a 
certificate to any partnership and has filed (or will file) a 
qualifying U.S. income tax return for its first taxable year in which 
it submitted a certificate to any partnership and each subsequent 
taxable year ending before the beginning of the current taxable year 
(regardless of whether it was a partner in any partnership during each 
of those years). A qualifying U.S. income tax return for a taxable year 
that is prior to the taxable year the partner submits a certificate to 
any partnership is a U.S. income tax return filed within the time 
specified in paragraph (b)(2)(iii) of this section.
    (iv) The partner files a qualifying U.S. income tax return (within 
the meaning of paragraph (b)(2)(iii) of this section) for its taxable 
year in which a certificate is provided to any partnership.
    (2) Definitions--(i) U.S. income tax return. A U.S. income tax 
return means a Form 1040NR, ``U.S. Nonresident Alien Income Tax 
Return,'' in the case of a nonresident alien individual and a Form 
1120F, ``U.S. Income Tax Return of a Foreign Corporation,'' in the case 
of a foreign corporation.
    (ii) Timely-filed. Only for purposes of this section, a U.S. income 
tax return shall be considered timely-filed if the return is filed on 
or before the due date set forth in section 6072(c), plus any extension 
of time to file such return granted under section 6081.
    (iii) Qualifying U.S. income tax return. A U.S. income tax return 
shall constitute a qualifying U.S. income tax return if the return 
reports income or gain that is effectively connected with a U.S. trade 
or business or deductions or losses properly allocated and apportioned 
to such activities and if the return is described in paragraph 
(b)(2)(iii)(A), (B), or (C) of this section. A protective return 
described in Sec.  1.874-1(b)(6) or Sec.  1.882-4(a)(3)(vi) is not a 
qualifying U.S. income tax return for purposes of this section.
    (A) A U.S. income tax return for a partner's preceding taxable year 
in which it did not submit a certificate to any partnership (but not 
including a taxable year following the first taxable year in which the 
partner submitted a certificate to any partnership), with a due date as 
set forth in section 6072(c), not including any extensions of time to 
file, which falls before the beginning of the current partnership 
taxable year for which the certificate is provided is described in this 
paragraph (b)(2)(iii)(A) if the return is filed and all amounts due 
with respect to such return (including interest, penalties, and 
additions to tax, if any) are paid on or before the earlier of--
    (1) The date that is one year after the due date set forth in 
section 6072(c) for such return, not including any extensions of time 
to file; or
    (2) The date on which the certificate for the current partnership 
taxable year is submitted to the partnership.
    (B) A U.S. income tax return for a partner's preceding taxable year 
in which it did not submit a certificate to any partnership (but not 
including a taxable year following the first taxable year in which the 
partner submitted a certificate to any partnership), with a due date as 
set forth in section 6072(c), not including any extensions of time to 
file, which falls within the current partnership taxable year for which 
the certificate is provided is described in this paragraph 
(b)(2)(iii)(B) if the return is timely-filed and all amounts due with 
respect to such return are timely paid.

[[Page 23077]]

    (C) A U.S. income tax return for a taxable year in which the 
partner submits a certificate to any partnership and for a taxable year 
following the first taxable year in which the partner submits a 
certificate to any partnership is described in this paragraph 
(b)(2)(iii)(C) if the return is timely-filed and all amounts due with 
such return are timely paid with respect to such return.
    (3) Special rules--(i) In the case of a partnership (upper-tier 
partnership) that is a partner in another partnership (lower-tier 
partnership)--
    (A) The rules of 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));
    (B) An upper-tier partnership that submits a certificate of 
deductions and losses or a de minimis certificate to a lower-tier 
partnership may not submit that certificate to another lower-tier 
partnership;
    (C) An upper-tier partnership that relies on a certificate 
submitted to it by a foreign partner under this section for computing 
its 1446 tax due on effectively connected taxable income (ECTI) 
allocable to that partner (other than ECTI allocable to it from a 
lower-tier partnership) may not submit that certificate to any lower-
tier partnership; and
    (D) In addition to any other information required by this section, 
a lower-tier partnership must submit with a Form 8813, ``Partnership 
Withholding Tax Payment Voucher (Section 1446),'' and Form 8805, 
``Foreign Partner's Information Statement of Section 1446 Withholding 
Tax,'' for which it relies on a certificate from an upper-tier 
partnership to reduce the 1446 tax due with respect to a foreign 
partner of the upper-tier partnership, sufficient information so that 
the IRS may reliably associate the ECTI and the certificate of 
deductions and losses with the partner in the upper-tier partnership 
submitting the certificate, including the name, taxpayer identification 
number (TIN) and allocation of effectively connected items at each 
partnership tier, as well as to the ultimate upper-tier partner 
submitting the certificate.
    (ii) This section shall not apply to a partner that is a foreign 
estate or its beneficiaries.
    (iii) This section shall not apply to a partner that is a trust or 
to its beneficiaries, 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.
    (iv) This section shall not apply to a partner in a publicly-traded 
partnership subject to Sec.  1.1446-4.
    (c) Reduction of 1446 tax with respect to a foreign partner--(1) 
General rules. Under paragraph (c)(1)(i) of this section a foreign 
partner to whom this section applies may certify to a partnership for a 
partnership taxable year that it has certain deductions (other than 
charitable deductions) and losses properly allocated and apportioned to 
gross income that is effectively connected (or treated as effectively 
connected) with the conduct of the partner's trade or business in the 
United States, and that the partner reasonably expects those deductions 
and losses to be available and claimed on the partner's U.S. income tax 
return to be filed for that taxable year. Under paragraph (c)(1)(ii) of 
this section, a nonresident alien individual partner to whom this 
section applies may also certify to a partnership for a partnership 
taxable year that its only investment or activity giving rise to 
effectively connected items for the partnership's taxable year that 
ends with or within the partner's taxable year is (and will be) the 
partner's investment in the partnership. A certificate submitted by a 
foreign partner 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. Under paragraph (c)(1)(iii) of this 
section, a partnership may take into account certain state and local 
taxes withheld by the partnership on behalf of the partner.
    (i) Certified deductions and losses--(A) Deductions and losses from 
the partnership. Under this paragraph (c)(1)(i)(A), a partner may 
certify to a partnership for a partnership taxable year deductions 
(other than charitable deductions) and losses properly 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, that are reported on a Form 1065 
(Schedule K-1), ``Partner's Share of Income, Credits, Deductions, 
etc.,'' issued (or to be issued) to the partner by the partnership for 
a prior partnership taxable year, that are (or will be) reported on a 
qualifying U.S. income tax return for a partner's taxable year that 
ends before the installment due date or the close of the partnership 
taxable year for which the partner is certifying such deductions and 
losses, and that the partner reasonably expects to be available and 
claimed on a qualifying U.S. income tax return for the partner's 
taxable year ending with or after the close of the partnership taxable 
year. A partner that has a loss reported on a Form 1065 (Schedule K-1) 
issued (or to be issued) to the partner by the partnership for a prior 
partnership taxable year, but that is not (and will not be) reported on 
a qualifying U.S. income tax return for a prior taxable year of the 
partner because the loss is suspended under section 704(d) may also 
certify such suspended loss to the partnership under this paragraph 
(c)(1)(i)(A).
    (B) Deductions and losses from other sources. Under this paragraph 
(c)(1)(i)(B), a foreign partner may certify to a partnership for a 
partnership taxable year deductions (other than charitable deductions) 
and losses properly allocated and apportioned to gross income that is 
effectively connected (or treated as effectively connected) with the 
conduct of the partner's trade or business in the United States and 
that are from sources other than the partnership to whom the 
certificate is submitted if the deductions and losses are (or will be) 
reported on a qualifying U.S. income tax return of the partner for a 
taxable year that ends before the installment due date or the close of 
the partnership taxable year for which the partner is certifying the 
deductions and losses and the partner reasonably expects the deductions 
and losses to be available and claimed on the qualifying U.S. income 
tax return filed for its taxable year ending with or after the close of 
the partnership taxable year. Any deductions and losses certified under 
this paragraph (c)(1)(i)(B) that are allocated to the partner from 
another partnership must be reported on a Form 1065 (Schedule K-1) 
issued (or to be issued) to the partner by such other partnership. 
However, the partner may not certify any deduction or loss allocated to 
it from another partnership that is suspended under section 704(d).
    (C) Limit on the consideration of a partner's net operating loss 
deduction. A partnership may not consider a net operating loss 
deduction (as determined

[[Page 23078]]

under section 172) certified by the partner under this paragraph 
(c)(1)(i) in an amount greater than the percentage limitation, if any, 
provided in section 56(a)(4) and (d) multiplied by the partner's 
allocable share of ECTI from the partnership reduced by all other 
certified deductions and losses whether or not taken into account by 
the partnership, as well as deductions considered under paragraph 
(c)(1)(iii) of this section.
    (D) Limitation on losses subject to certain partner level 
limitations. Pursuant to paragraph (c)(2)(i) of this section, a partner 
must identify any certified losses or deductions that are subject to 
special limitations at the partner level (for example, sections 465 and 
469) and provide information to the partnership that will allow the 
partnership to take the special limitations into account. For example, 
where a partner certifies a loss to the partnership that is a passive 
activity loss under section 469, the partner shall identify the 
activities the partnership conducts that the partner expects will be 
passive activities. The partnership shall then ensure that these 
limitations are taken into account when determining the 1446 tax due 
with respect to the partner.
    (E) Certification of deductions and losses to other partnerships. 
Deductions and losses certified to a partnership for a taxable year of 
the partnership may not be certified for the taxable year of another 
partnership that begins or ends with or within the taxable year of the 
partnership to which the deductions and losses were certified.
    (F) Partner level use of deductions and losses certified to a 
partnership. Any deductions and losses certified to a partnership for a 
taxable year of the partner and considered by the partnership in 
computing its section 1446 tax due may not be considered by that 
partner for the same taxable year in computing the amount of its 
required installments under section 6654(d) or 6655(d) on income 
unrelated to the partnership to which the partner has submitted the 
certificate.
    (ii) De minimis certificate for nonresident alien individual 
partners--(A) In general. Under this paragraph (c)(1)(ii), a 
nonresident alien individual partner to whom this section applies and 
that satisfies the requirements of paragraph (c)(1)(ii)(B) of this 
section may certify to a partnership that its only activity giving rise 
to effectively connected income, gain, deduction, or loss for the 
partnership's taxable year that ends with or within the partner's 
taxable year is (and will be) the partner's investment in the 
partnership. A partnership that receives a certificate from a 
nonresident alien partner under this paragraph (c)(1)(ii) and that may 
reasonably rely on such certificate 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 otherwise 
due with respect to such partner is less than $1,000, without taking 
into account any deductions or losses certified by the partner to the 
partnership under paragraph (c)(1)(i) of this section or any amounts 
under paragraph (c)(1)(iii) of this section.
    (B) Requirements for exception. The requirements of this paragraph 
(c)(1)(ii)(B) are met if the nonresident individual alien partner's 
only activity giving rise to effectively connected income, gain, 
deduction, or loss for the partnership taxable year that ends with or 
within the partner's taxable year is (and will be) the partner's 
investment in the partnership. For this purpose, if the partner has (or 
has reason to expect to have) income or gain described in section 
864(c)(6), such income or gain shall be considered derived from a 
separate investment activity. A certificate submitted by a nonresident 
alien individual partner under this paragraph (c)(1)(ii) is valid even 
if such certificate does not certify deductions and losses to 
partnership under this section. A nonresident alien individual partner 
that submits a certificate to a partnership under this paragraph 
(c)(1)(ii) must notify the partnership in writing and revoke such 
certificate within 10 days of the date that the partner invests or 
otherwise engages in another activity that may give rise to effectively 
connected income, gain, deduction, or loss for the partner's taxable 
year. For example, while an investment in a U.S. real property interest 
(as defined in section 897(c)) would not give rise to an activity 
requiring a notification (unless an election is in effect under section 
871(d)), the disposition of the U.S. real property interest would give 
rise to an activity requiring a notification.
    (iii) Consideration of certain current year state and local taxes. 
In addition to any deductions and losses certified by a foreign partner 
to a partnership under paragraph (c)(1)(i) of this section, the 
partnership may consider as a deduction of such partner 90-percent of 
any state and local income taxes withheld and remitted by the 
partnership on behalf of such partner with respect to the partner's 
allocable share of partnership ECTI. The partnership may consider the 
amount of state and local taxes of the foreign partner determined under 
this paragraph (c)(1)(iii) regardless of whether the foreign partner 
submits a certificate to the partnership under paragraph (c)(1)(i) or 
(ii) of this section.
    (2) Form and time of certification--(i) Form of certification. A 
partner's certification to a partnership under paragraph (c)(1)(i) or 
(iii) of this section shall be made using Form 8804-C, ``Certificate Of 
Partner-Level Items to Reduce Section 1446 Withholding'' in accordance 
the instructions of the form and the rules of this section.
    (ii) 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, a partnership may only rely 
on the first certificate received from a foreign partner for any 1446 
tax installment due or Form 8804 filing due (without regard to 
extensions) on or after the date on which the certificate is received. 
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) Preceding year tax 
returns not yet filed. If a foreign partner's U.S. income tax return 
for a preceding taxable year has not been filed as of the time the 
partner submits to the partnership its first certificate under this 
paragraph (c), the certificate shall specify this fact and set forth 
the filing due date for such return set forth in section 6072(c), plus 
any extension of time to file such return granted under section 6081 
and the regulations under section 6081. The partner shall also submit 
an updated certificate to the partnership in accordance with this 
paragraph (c) within 10 days of the date the partner files its U.S. 
income tax return for any such taxable year. In addition, prior to the 
partnership's final 1446 tax installment due date the partner shall 
provide to the partnership, under penalties of perjury, a status update 
regarding any U.S. income tax return for the prior taxable year that 
has not (or will not) be filed as of the final installment due date. 
The status update must identify the due date, set forth in section 
6072(c), plus any extension of time to file such return granted under 
section 6081 and the regulations under section 6081, for any un-filed 
return identified in the first certificate and state whether the first 
certificate submitted may continue to be considered by the partnership. 
If the partnership does not receive an updated certificate or a status 
update from the partner prior to the partnership's final

[[Page 23079]]

installment due date, the partnership shall disregard the partner's 
certificate when computing the 1446 tax due with respect to that 
partner for the final installment period and when completing its Form 
8804 for the taxable year. In addition, the foreign partner shall not 
be permitted to submit an additional or substitute certificate for the 
disregarded certificate. See Sec.  1.1446-3(b)(2)(i) for computation 
requirements for installment payments of 1446 tax when a partnership 
receives, or fails to receive, an updated certificate or status update. 
See also paragraph (e)(2) Examples 4 and 8 of this section. 
Notwithstanding this paragraph (c)(2)(ii)(B)(1), a partner that can 
meet the requirements of this section for a subsequent partnership 
taxable year may submit a certificate to the partnership under this 
section for such taxable year.
    (2) Other circumstances requiring an updated certificate. If at any 
time during the partnership taxable year the partner determines that 
its most recent certificate furnished to the partnership for such 
taxable year is incorrect, then the partner shall submit to the 
partnership an updated certificate in accordance with this paragraph 
(c) within 10 days of such determination. For example, if the partner 
determines that the amount or character of the certified deductions or 
losses is incorrect, the partner shall submit an updated certificate to 
the partnership. See Sec.  1.1446-3(b)(2)(i) for computation 
requirements for installment payments of 1446 tax when a partnership 
receives an updated certificate.
    (3) Form and content of updated certificate. The updated 
certificate required by this paragraph (c)(2)(ii) must be provided 
using the form and instructions identified in paragraph (c)(2)(i) of 
this section. The updated certificate must indicate that it is an 
updated certificate filed in accordance with this paragraph (c)(2)(ii). 
The partner is not required to attach to the updated certificate a copy 
of the certificate that is being updated (superseded certificate).
    (4) Partnership consideration of an updated certificate. A 
partnership may consider an updated certificate, that meets the 
requirements of this paragraph (c), that is received prior to an 
installment due date in the same partnership taxable year for which the 
superseded certificate was provided, or prior to the due date of its 
Form 8804 (without regard to extensions) to be filed for the year the 
superseded certificate was provided. A partnership must consider an 
updated certificate that meets all the requirements of this paragraph 
(c) if it would increase the amount of 1446 tax the partnership would 
pay by the next installment due date, if any, or the due date of its 
Form 8804. An updated certificate considered by the partnership under 
this paragraph (c)(2)(ii)(B)(4) 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 considers the updated certificate. See paragraph 
(e)(2) Example 4 of this section.
    (3) Notification to partnership when a partner's certificate cannot 
be relied upon. If the IRS determines, in its discretion based on all 
the facts and circumstances, that a foreign partner's certificate is 
defective (or that it lacks information sufficient to make this 
determination after providing written request for such information to 
the partnership), the IRS shall notify the partnership of such 
determination in writing. Upon receipt of such written notification, 
the partnership shall not rely on any certificate submitted by that 
foreign partner for the partnership taxable year to which the defective 
certificate relates (or any subsequent partnership taxable year), until 
the IRS provides written notification to the partnership revoking or 
modifying the original written notification. For purposes of this 
section, a foreign partner's certificate of deductions and losses shall 
be defective if--
    (i) The partner is not described in paragraph (b) of this section;
    (ii) Any deductions or losses set forth in such certificate are not 
described in paragraph (c)(1)(i) of this section;
    (iii) The timing requirements under paragraph (c)(2) of this 
section for submitting an original certificate, an updated certificate 
or a status update to the partnership are not met;
    (iv) The certificate does not include all of the information 
required by paragraph (c)(2)(i) of this section;
    (v) Any representation made on the certificate is incorrect;
    (vi) The actual amount of deductions and losses available to the 
partner is less than the amount of deductions and losses certified to 
the partnership for the partnership taxable year and considered by the 
partnership in determining its 1446 tax due; or
    (vii) There is a failure to comply with any other provision of this 
section.
    (4) Partner to receive copy of notice. If the IRS notifies a 
partnership under paragraph (c)(3) of this section that a certificate 
of a foreign partner is defective, the IRS shall send a copy of such 
notice to the partner's address as shown on the certificate. The 
partnership shall also promptly furnish a copy of the IRS notice to 
such partner.
    (5) Notification to partnership when no foreign partner's 
certificate can be relied upon. If the IRS determines, in its 
discretion based on all the facts and circumstances, that there would 
be a substantial reduction in section 1446 tax as a result of the 
submission of one or more defective certificates or that a substantial 
portion of all certificates being submitted by partners to the 
partnership and by the partnership to the IRS are defective (or lack 
information sufficient to make this determination), then the IRS shall 
notify the partnership of such determination in writing. Upon receipt 
of such written notification, the partnership shall not rely on any 
certificate submitted by any partner for the partnership taxable year 
to which the notice relates or any subsequent partnership taxable year, 
until the IRS provides written notification to the partnership revoking 
or modifying the original notice.
    (6) Partnership notification to partner regarding use of deductions 
and losses. Unless Sec.  1.1446-3(d)(1)(i)(A) or (B) applies (relating 
to waiver of notice of tax paid during the partnership taxable year), a 
partnership must notify each foreign partner of the amount of such 
partner's certified deductions and losses and state and local taxes, if 
any, taken into account under this paragraph (c) in determining the 
1446 tax due with respect to such partner for each installment period 
or Form 8804 filing date, as applicable.
    (7) Partner's certificate valid only for partnership taxable year 
for which submitted. A partnership that receives a certificate from a 
partnership under this paragraph (c) shall consider such certificate 
only for the partnership taxable year for which the certificate is 
submitted, as set forth on the certificate.
    (d) Effect of certificate of deductions and losses on partners and 
partnership--(1) Effect on partner--(i) No effect on liability for 
income tax of foreign partner. A foreign partner that certifies 
deductions and losses to a partnership under this section is not 
relieved of liability for income tax on its allocable share of ECTI 
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 therein.
    (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

[[Page 23080]]

with respect to income or gain allocated to such partner from the 
partnership.
    (iii) No effect on partner's obligation to file U.S. income tax 
return. The submission of a certificate under paragraph (c) of this 
section does not relieve the foreign partner from its obligation to 
file a U.S. income tax return even if as a result of the partnership 
considering the certificate the partner would have no additional tax 
due with such return. See also Sec.  1.1446-3(f).
    (2) Effect on partnership--(i) Reasonable reliance to relieve 
partnership from addition to tax under section 6655. A partnership that 
has reasonably relied on a certificate received from a foreign partner 
and complied with the filing requirements of paragraph (d)(3)(i) of 
this section, shall not be liable for any addition to 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 such 
certificate is later determined to be defective 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.
    (ii) Continuing liability for withholding tax under section 1461 
and for applicable interest and penalties--(A) In general. Except as 
otherwise provided in this section, a partnership that has reasonably 
relied on a certificate received from a foreign partner and complied 
with the filing requirements of paragraph (d)(3)(i) of this section, is 
not relieved from liability for the 1446 tax (or any installment of 
such tax) under section 1461, any additions to the tax, interest or 
penalties. However, the partnership may be relieved of additions to the 
tax or penalties in certain circumstances. See Sec. Sec.  301.6651-1(c) 
and 301.6724-1 of this chapter. Further, 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. See also paragraph 
(e)(2) Example 5 of this section.
    (B) Certificate defective because of amount or character of 
deductions and losses. If a certificate is determined to be defective 
because the actual amount of deductions and losses available to the 
partner is less than the amount reflected on the certificate (other 
than when it is determined that the partner certified the same 
deduction or loss to more than one partnership), or because the 
character of the certified deductions and losses is erroneous, the 
partnership shall be liable for 1446 tax under section 1461 (or any 
installment of such tax) with respect to such partner to the extent the 
partnership considered an amount of certified deductions and losses 
greater than the amount actually available to the partner and permitted 
to be used under Sec. Sec.  1.1446-1 through 1.1446-5 and this section, 
or to the extent that the proper character of the certified deductions 
and losses results in a greater amount of 1446 tax due with respect to 
such partner. See paragraph (e)(2) Example 6 of this section.
    (3) Partnership level rules and requirements--(i) Filing 
requirement. A partnership that relies in whole or in part on a 
certificate received from a partner under this section in computing its 
1446 tax due with respect to such partner must still file Form 8813 or 
Form 8804 and 8805, whichever is applicable, for the period for which 
the certificate is considered, even if as a result of relying on the 
certificate no 1446 tax (or an installment of such tax) is due with 
respect to such foreign partner. See generally Sec.  1.1446-3(d)(1). 
Except as otherwise provided in this paragraph (d)(3)(i), the 
partnership must attach a copy of the foreign partner's certificate, 
and the computation of the 1446 tax due with respect to such partner, 
to both the Form 8813 and Form 8805 filed with the IRS for any 
installment period or year for which such certificate is considered in 
computing the partnership's 1446 tax. See Sec.  1.1446-3(d)(1)(iii) 
requiring the partnership to furnish Form 8805 to the IRS and such 
foreign partner even if no 1446 tax is paid on behalf of the partner. 
The partnership must include in that computation the amount of state 
and local taxes described in paragraph (c)(1)(iii) of this section 
taken into account in computing the 1446 tax due with respect to that 
partner. The partnership must also attach a computation of the 1446 tax 
due with respect to a partner for whom only state and local taxes 
described in paragraph (c)(1)(iii) are taken into account. For an 
installment period other than the first installment period for which 
the partnership considers a foreign partner's certificate or updated 
certificate, the partnership may, instead of attaching any partner's 
certificate, attach to Form 8813 a list containing the name, TIN, the 
amount of certified deductions and losses, and the amount of state and 
local taxes the partnership may consider under paragraph (c)(1)(iii) of 
this section for each foreign partner whose certificate was relied 
upon. For purposes of the preceding sentence, if the partnership is 
relying on a certificate received under paragraph (c)(1)(ii) of this 
section, instead of providing the amounts described in the prior 
sentence, it should attach a statement to Form 8813 which provides 
that, relying on that certificate, no 1446 tax is due with respect to 
that partner.
    (ii) Reasonable cause for failure to timely file a valid 
certificate and computation. This paragraph (d)(3)(ii) provides the 
sole source of relief for a partnership that fails to timely file a 
valid certificate or attach a computation of 1446 tax as required under 
paragraph (d)(3)(i) of this section. To permit the partnership to 
reasonably rely on such certificate, the partnership shall be 
considered to have satisfied the requirements of paragraph (d)(3)(i) of 
this section if the partnership demonstrates to the Area Director, 
Field Examination, Small Business/Self-Employed or the Director, Field 
Operations, Large and Mid-Size Business (Director) having jurisdiction 
of the partnership's return for the taxable year, that such failure was 
due to reasonable cause and not willful neglect and if once the 
partnership becomes aware of the failure, the partnership attaches the 
certificate and computation, as well as a written statement setting 
forth the reasons for the failure to comply with the requirements of 
paragraph (d)(3)(i) of this section, to an amended Form 8813 or amended 
Forms 8804 and 8805 for the relevant period.
    (A) Determining reasonable cause. In determining whether the 
partnership has reasonable cause, the Director shall consider whether 
the partnership acted reasonably and in good faith considering all the 
facts and circumstances.
    (B) Notification. If the IRS has notified, as provided in paragraph 
(c)(3) of this section, the partnership that the certificate is 
defective or that no foreign partner's certificate may be relied upon, 
as provided in paragraph (c)(5) of this section, the partnership will 
be deemed not to have acted reasonably and in good faith. Otherwise, 
the Director shall notify the partnership in writing within 120 days of 
the amended filing if it is determined that the failure to comply was 
not due to reasonable cause, or if additional time will be needed to 
make such determination. If the Director fails to notify the 
partnership within 120 days of the amended filing, the partnership 
shall be considered to have demonstrated to the Director that such 
failure was due to reasonable cause and not willful neglect.
    (e) Examples. (1) The rules of this section are illustrated by the 
examples in paragraph (e)(2) of this section. Except as otherwise 
provided, in each example assume:

[[Page 23081]]

    (i) Section 1.1446-3(b)(2)(v)(F) (relating to the de minimis 
exception to paying 1446 tax) does not apply;
    (ii) Paragraph (c)(1)(ii) of this section (relating to a 
nonresident alien individual partner whose sole investment generating 
effectively connected income or gain is the partnership) does not 
apply;
    (iii) All income and losses are ordinary;
    (iv) For purposes of applying paragraph (c)(1)(i)(C) of this 
section, the percentage limitation under section 56(a)(4) and (d) is 90 
percent;
    (v) Any loss is not a passive activity loss within the meaning of 
section 469;
    (vi) The partnership uses an acceptable annualization method under 
Sec.  1.1446-3;
    (vi) NRA is a nonresident alien individual who maintains a calendar 
taxable year for U.S. tax purpose;
    (vii) B and C are U.S. individuals who maintain a calendar taxable 
year; and
    (viii) Any partnership maintains a calendar taxable year.
    (2) The examples are as follows:

    Example 1. Qualifying U.S. income tax return. (i) NRA and B form 
a partnership (PRS) in year 4 to conduct a trade or business in the 
United States. NRA and B provide PRS appropriate documentation under 
Sec.  1.1446-1 to establish their status for purposes of section 
1446. NRA submits a certificate to PRS (using Form 8804-C) on March 
20, year 4, to be considered by PRS in determining its 1446 tax due 
with respect to NRA for the first installment period in the year 4. 
The Form 8804-C states that NRA reasonably expects to have an 
effectively connected net operating loss of $5,000 available to 
offset its allocable share of ECTI from PRS in year 4. Prior to year 
4, NRA had not submitted a certificate to a partnership under this 
section. NRA filed (or will file) its year 1 U.S. income tax return 
on March 11, year 3; its year 2 U.S. income tax return on February 
12, year 4; its year 3 U.S. income tax return on April 13, year 4; 
and its year 4 U.S. income tax return on May 14, year 5. NRA paid or 
(will pay) all amounts due with respect to the returns (including 
interest, penalties, and additions to tax, if any) by the date they 
are filed. NRA's years 1 though 3 U.S. income tax returns report 
income or gain effectively connected with a U.S. trade or business 
or deductions or losses properly allocated and apportioned to such 
activities.
    (ii) To be eligible to submit a certificate of deductions and 
losses to PRS under this section, NRA must satisfy the requirements 
of paragraph (b)(1) of this section. In accordance with Sec.  
1.1446-1, NRA provided valid documentation to PRS to establish its 
status for purposes of section 1446. NRA's year 1 U.S. income tax 
return is a qualifying U.S. income tax return because it reported 
income or gain effectively connected with a U.S. trade or business 
or deductions or losses properly allocated and apportioned to such 
activities and is described under paragraph (b)(2)(iii)(A) of this 
section. Although NRA filed its year 1 return after the due date of 
the return (determined under section 6072(c) without regard to any 
extension of time to file) the return was filed on March 11, year 3, 
which was on or before the earlier of June 15, year 3, the date one 
year after its section 6072(c) due date without regard to any 
extension of time to file, and March 20, year 4, the date on which 
NRA submitted the certificate to PRS. NRA's year 2 U.S. income tax 
return is a qualifying U.S. income tax return because it reported 
income or gain effectively connected with a U.S. trade or business 
or deductions or losses properly allocated and apportioned to such 
activities and is described under paragraph (b)(2)(iii)(A) of this 
section. Although NRA filed its year 2 return after the due date of 
the return (determined under section 6072(c) without regard to any 
extension of time to file) the return was filed on February 12, year 
4, which was on or before the earlier of June 15, year 4, the date 
one year after its section 6072(c) due date without regard to any 
extension of time to file, and March 20, year 4, the date on which 
NRA submitted the certificate to PRS. NRA's year 3 U.S. income tax 
return is a qualifying U.S. income tax return because it reported 
income or gain effectively connected with a U.S. trade or business 
or deductions or losses properly allocated and apportioned to such 
activities and is described under paragraph (b)(2)(iii)(B) of this 
section. Because NRA filed its year 3 U.S. income tax return on 
April 13, year 4, the return will be considered timely-filed under 
paragraph (b)(2)(ii) of this section, as the due date under section 
6072(c) was June 15, year 4. NRA's year 4 U.S. income tax return is 
a qualifying U.S. income tax return because it reported income or 
gain effectively connected with a U.S. trade or business or 
deductions or losses properly allocated and apportioned to such 
activities and is described under paragraph (b)(2)(iii)(C) of this 
section. Because NRA filed its year 4 U.S. income tax return on May 
14, year 5, the return will be considered timely-filed under 
paragraph (b)(2)(ii) of this section. Accordingly, NRA meets the 
conditions of paragraph (b)(1) of this section and is eligible to 
provide a certificate of deductions and losses to PRS for year 4.
    Example 2. Subsequent year qualifying U.S. income tax return. 
(i) Assume the same facts as in Example 2. Further, NRA and C form a 
second partnership (XYZ) in year 7 to conduct a trade or business in 
the United States. NRA and C provide XYZ appropriate documentation 
under Sec.  1.1446-1 to establish their status for purposes of 
section 1446. NRA did not submit a certificate under this section to 
any partnership for years 5 and 6. NRA submits a certificate to XYZ 
(using Form 8804-C) on April 10, year 7, to be considered by XYZ in 
determining its 1446 tax due with respect to NRA for its first 
installment period in year 7. The certificate states that NRA 
reasonably expects to have an effectively connected net operating 
loss of $8,000 available to offset its allocable share of ECTI from 
XYZ in year 7. Further, the certificate contains all of the 
necessary representations required under this section. NRA will file 
its U.S. income tax return for year 5 on March 25, year 7, (after 
its section 6072(c) due date and any extension of time to file that 
could have been granted under section 6081), its U.S. income tax 
return for year 6 on April 26, year 7; and its U.S. income tax 
return for year 7 on May 27, year 8. NRA will pay all amounts due 
with the returns (including interest, penalties, and additions to 
tax, if any) by the dates they are filed. NRA's years 5, 6, and 7 
U.S. income tax returns will report income or gain that is 
effectively connected with a U.S. trade or business or deductions or 
losses properly allocated and apportioned to such activities.
    (ii) To be eligible to submit a certificate of deductions and 
losses to XYZ under this section, NRA must satisfy the requirements 
of paragraph (b)(1) of this section. NRA provided valid 
documentation to XYZ in accordance with Sec.  1.1446-1. As described 
in Example 2, NRA's year 4 U.S. income tax return is a qualifying 
U.S. income tax return because it will report income or gain 
effectively connected with a U.S. trade or business and is described 
under paragraph (b)(2)(iii)(C) of this section. Although NRA's year 
5 U.S. income tax return reports income or gain effectively 
connected with a U.S. trade or business or deductions or losses 
properly allocated and apportioned to such activities it is not a 
qualifying U.S. tax return under paragraph (b)(2)(iii) of this 
section. Because NRA submitted a certificate to PRS in year 4, to 
constitute a qualifying U.S. income tax return the year 5 U.S. 
income tax return must be timely-filed and all amounts due with such 
return must be timely paid. See paragraph (b)(2)(iii)(C) of this 
section. However, NRA will not file its U.S. income tax return for 
year 5 until March 25, year 7, (after its section 6072(c) due date 
and any extension of time to file that could have been granted under 
section 6081). Because the year 5 tax return is not a qualifying 
U.S. income tax return under paragraph (b)(2)(iii) of this section, 
NRA does not satisfy the requirements of paragraph (b)(1)(ii) of 
this section and, therefore, may not submit a certificate of 
deductions and losses to XYZ under this section in year 7.
    Example 3. General application of the rules of this section. NRA 
and B form a partnership (PRS) to conduct a trade or business in the 
United States. NRA and B are equal partners under the partnership 
agreement. NRA and B provide PRS appropriate documentation under 
Sec.  1.1446-1 to establish their status for purposes of section 
1446. Prior to the formation of PRS, NRA had not invested in or 
engaged in the conduct of a U.S. trade or business. PRS incurs a 
$1,500 effectively connected net operating loss in years 1 and 2. 
The loss incurred in each is allocated equally between NRA and B. 
NRA has filed a qualifying U.S. income tax return (within the 
meaning of paragraph (b)(2)(iii) of this section) for years 1 and 2 
that report its allocable share of effective connected net operating 
loss allocated to it from PRS, as reported on the Form 1065 
(Schedule K-1) issued to NRA for each year.
    (i) In year 3, NRA may not submit a certificate to PRS under 
paragraph (c) because it will not have filed qualifying U.S. income 
tax returns for the preceding three years. In year 3, PRS has ECTI 
of $1,000 that is allocated equally between NRA and B. PRS

[[Page 23082]]

satisfies its 1446 tax obligation with respect to NRA for year 3.
    (ii) In year 4, PRS estimates that it will have ECTI of $4,000, 
which will be allocated equally between NRA and B. On or before 
April 15th of year 4 (the first installment due date), NRA submits a 
certificate to PRS under this section (using Form 8804-C) certifying 
that it reasonably expects to have an effectively connected net 
operating loss of $1,000 ($750 loss in both years 1 and 2, less $500 
of income in year 3) available to offset its allocable share of ECTI 
from PRS in year 4. As of the date the certificate is submitted, NRA 
has received the Form 1065 (Schedule K-1) from PRS for year 3 but 
has not yet filed its U.S. income tax return for year 3.
    (iii) With respect to year 4, and based upon paragraph (b)(1) of 
this section, NRA can include year 3 (NRA's preceding taxable year) 
as one of the preceding three years that it has filed or will file 
qualifying U.S. income tax returns (within the meaning of paragraph 
(b)(2)(iii) of this section). Therefore, provided PRS has, in 
accordance with paragraph (a)(2) of this section, no actual 
knowledge or reason to know the certificate is defective, PRS may 
reasonably rely on NRA's certificate. Accordingly, PRS may consider 
NRA's certificate to reduce the 1446 tax that would otherwise be 
required to be paid on NRA's behalf. Specifically, subject to 
paragraph (c)(1)(i)(C) of this section, the $1,000 of net losses 
that have been reported on Forms 1065 (Schedule K-1) 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 $1,100 
of NRA's allocable share of partnership ECTI for the first 
installment period in year 5 ($2,000-($1,000 x .90)). PRS must pay 
1446 tax of $96.25 for its first installment period with respect to 
the ECTI allocable to NRA ($1,100 (net ECTI after considering 
certified losses) x .35 (withholding tax rate) x .25 (section 
6655(e)(2)(B) percentage for the first installment period)). See 
Sec.  1.1446-3(b)(2). Pursuant to paragraph (d)(3) of this section, 
PRS must 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)(ii)(B) of this 
section, NRA is required to provide an updated certificate on or 
before the 10th day after NRA files its U.S. income tax return for 
year 3, even if the updated certificate results in no change to the 
amount of deductions and losses reported on the superseded 
certificate.
    (iv) The results are the same if NRA had not yet received a Form 
1065 (Schedule K-1) from PRS for year 3. See paragraph (c)(1)(i)(A) 
of this section.
    Example 4. Updated certificate submitted for losses. On January 
1, year 8, NRA and B form a partnership (PRS) to conduct a trade or 
business in the United States. NRA and B are equal partners in PRS. 
NRA and B provide PRS appropriate documentation under Sec.  1.1446-1 
to establish their status for purposes of section 1446. During years 
1 through 7 NRA held an interest in another partnership (XYZ) that 
conducted a trade or business in the United States. NRA timely-filed 
(within the meaning of paragraph (b)(2) of this section) a U.S. 
income tax return years 1 through 6 reporting its allocable year of 
ECTI (or loss) from XYZ (and timely paid all tax shown on such 
returns). NRA files its U.S. income tax return for year 7 on June 9, 
year 8 (and timely pays all tax due with such return). Therefore, 
NRA has filed qualifying U.S. income tax returns (within the meaning 
of paragraph (b)(2)(iii) of this section) for years 1 through 7. 
During years 1 through 7, NRA's only investment generating 
effectively connected items was its interest in XYZ. The XYZ 
partnership liquidated and ceased doing business on December 31, 
year 7.
    (i) On or before April 15, year 8, PRS receives from NRA a valid 
certificate under this section using Form 8804-C 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 yet filed its year 7 U.S. income tax 
return, but will timely file such return (and timely pay all tax due 
with such return). For its first installment period in year 8, 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 PRS's ECTI is $5,000).
    (ii) Provided PRS has, in accordance with paragraph (a)(2) of 
this section, no actual knowledge or reason to know the certificate 
is defective, PRS may reasonably rely on NRA's certificate when 
computing its 1446 tax obligation for the first installment period. 
PRS is limited under paragraph (c)(1)(i)(C) of this section and PRS 
may only consider $4,500 ($5,000 x .90) of the 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)(i)(C)) x .35 (1446 tax applicable 
percentage) x .25 (section 6655(e)(2)(B) percentage for the first 
installment period)). See Sec.  1.1446-3(b)(2). Pursuant to 
paragraph (d)(3) of this section, PRS must attach a copy of NRA's 
certificate and the computation of 1446 tax due with respect to NRA 
to the Form 8813 filed with respect to NRA.
    (iii) PRS's estimate of ECTI allocable to NRA for the second 
installment period remains unchanged from the first installment 
period. On June 10, year 8, NRA provides PRS an updated certificate 
reporting that NRA now reasonably expects to have an effectively 
connected net operating loss of $4,000 available to offset its 
allocable share of ECTI from PRS in year 4. NRA provided the updated 
certificate within 10 days of filing its U.S. income tax return for 
the year 7 taxable year, as required by paragraph (c)(2)(ii)(B) of 
this section. Provided the updated certificate is otherwise valid, 
PRS may rely on the updated certificate for the second installment 
period (due date June 15, year 8). Even if the updated certificate 
were not valid, PRS could no longer rely on the original 
certificate.
    (iv) Under paragraph (d) of this section, PRS is not relieved 
from liability for the 1446 tax due with respect to NRA under 
section 1461 if it relies on a certificate determined to be 
defective, or if it receives an updated certificate reporting an 
amount of deductions and losses less than the amount reported on the 
superseded certificate. Under the principles of section 6655 (as 
applied through Sec.  1.1446-3), PRS is required to have paid 50-
percent of the annualized 1446 tax due with respect to NRA on or 
before the due date of the second installment period (section 
6655(e)(2)(B) percentage for the second installment period). Under 
paragraph (c)(2)(ii)(B) of this section, because NRA's updated 
certificate is valid for the second installment period, if PRS 
considers a certificate for that period it must consider the updated 
certificate. Under paragraph (c)(1)(i)(C) of this section, PRS can 
only consider $3,600 ($4,000 x .90) of NRA's updated effectively 
connected net operating loss. Assuming PRS considers NRA's updated 
certificate for the second installment period, PRS must have paid a 
total of $245 of 1446 tax with respect to the ECTI estimated to be 
allocable to NRA as of the second installment due date ($1,400 
($5,000 ECTI less $3,600 net operating loss deduction) x .35 
(withholding tax rate) x .50 (section 6655(e)(2)(B) percentage for 
the second installment period)). After considering PRS's payment of 
1446 tax for the first installment period, PRS is required to pay 
$201.25 for the second installment period ($245 less previous 
payment of $43.75). See Sec.  1.1446-3(b)(2). Further, if PRS 
considers NRA's updated certificate for the second installment 
period, when PRS files Form 8813 it must attach the updated 
certificate along with PRS's computation of 1446 tax due with 
respect to NRA.
    (v) 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 installment period because PRS reasonably 
relied on NRA's certificate of losses for that period.
    (vi) Assume that PRS's estimate of its ECTI allocable to NRA for 
the third and fourth installment periods is the same as for the 
first and second installment periods. Assume PRS may reasonably rely 
on NRA's updated certificate in calculating its payment of 1446 tax 
for the third and fourth installment periods. The third installment 
of 1446 tax would be $122.50 (($5,000 - $3,600) x .35 x .75 = 
$367.50 - $245 (total previous payments)). The fourth installment of 
1446 tax would be $122.50 (($5,000 - $3,600) x .35 x 1.00 = $490 - 
$367.50 (total previous payments)). See Sec.  1.1446-3(b)(2). PRS 
must attach to each Form 8813 a computation of the 1446 tax due with 
respect to NRA that takes into account the amount of effectively 
connected net operating loss reported on NRA's updated certificate.
    (vii) Because NRA's certified net operating loss has not changed 
for the third and fourth installments, in lieu of attaching NRA's 
certificate, PRS may attach a statement containing NRA's name, TIN, 
and the certified net operating loss amount. However, PRS must 
attach NRA's certificate and a computation of the 1446 tax due with 
respect

[[Page 23083]]

to NRA that takes into account NRA's certified net operating loss to 
the Form 8805 filed with respect to NRA. See paragraph (d)(3) of 
this section.
    Example 5. IRS determines in subsequent taxable year that 
partner's certificate is defective because partner failed to timely 
file a U.S. income tax return. NRA and B form a partnership (PRS) in 
year 1 to conduct a trade or business in the United States. NRA and 
B provide PRS appropriate documentation under Sec.  1.1446-1 to 
establish their status for purposes of section 1446. In year 4, NRA 
timely submits a certificate under this section (using Form 8804-C) 
to be considered by PRS for its first installment period. The 
certificate reports that NRA reasonably expects to have an 
effectively connected net operating loss of $5,000 available to 
offset its allocable share of ECTI from PRS in year 4. Further, the 
certificate contains all of the necessary representations required 
under this section. PRS estimates for each installment period that 
NRA's allocable share of ECTI will be $5,000 for the taxable year. 
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 
(a)(2) of this section) NRA's certificate when computing each 
installment payment during year 4 and the 1446 tax due on Form 8804 
and appropriately considers the limitation in paragraph (c)(1)(i)(C) 
of this section. As a result, PRS paid $175 of 1446 tax on behalf of 
NRA for the taxable year ($5,000 of ECTI less $4,500 net operating 
loss deduction x .35 applicable percentage). As required under 
paragraph (d) of this section, PRS attached the certificate to the 
Form 8813 for the first installment period and the Form 8805 for 
year 4. Because NRA did not submit an updated certificate to PRS in 
year 4, PRS attached to the Forms 8813 for the second, third and 
fourth installment periods a statement containing NRA's name, TIN, 
and the certified net operating loss as well as the computation of 
1446 tax due with respect to NRA reflecting the amount of net 
operating loss considered.
    (ii) In year 5, NRA timely submits to PRS a certificate under 
this section to be considered for the first installment period. The 
certificate represents that NRA reasonably expects to have an 
effectively connected net operating loss of $5,000 available to 
offset its allocable share of ECTI from PRS in year 5. For the first 
installment period, PRS estimates that NRA's allocable share of 
partnership ECTI is $5,000. PRS reasonably relies on the certificate 
for the first installment period and determines that it is required 
to make a 1446 tax installment payment of $43.75 ($5,000 allocable 
ECTI less $4,500 (certified net operating loss as limited under 
paragraph (c)(1)(i)(C) of this section) x .35 (1446 tax applicable 
percentage) x .25 (section 6655(e)(2)(B) percentage for the first 
installment period)). See Sec.  1.1446-3(b)(2). PRS makes the 
installment payment with the Form 8813 filed for the first 
installment period, and complies with paragraph (d)(3) of this 
section by attaching NRA's certificate and the computation of 1446 
tax due with respect to NRA to the Form 8813.
    (iii) The IRS provides written notification to PRS on June 1, 
year 5, (pursuant to paragraph (c)(3) of this section) that the 
certificate received from NRA in year 4 is defective because NRA 
failed to file a qualifying U.S. income tax return (within the 
meaning of paragraph (b)(2)(iii) of this section) for one of the 
preceding taxable years as required under paragraph (b)(1) of this 
section. The notice further states that PRS is not to rely on any 
certificate received from NRA in year 5.
    (iv) Under paragraph (d)(2)(ii) of this section, because the 
certificate submitted by NRA in year was determined to be defective 
for a reason other than the amount or character of the certified 
deductions and losses, under section 1461 PRS is fully liable for 
the 1446 tax due with respect to NRA's allocable share of ECTI year 
4 without regard to the certificate. The total 1446 tax due for year 
4 without regard to the certificate is $1,750 ($5,000 ECTI x .35) 
and PRS paid $175 of 1446 tax in year 4. Therefore, PRS owes $1,575 
of 1446 tax. However, PRS may be deemed to have paid the outstanding 
1446 tax due if NRA paid all of its U.S. tax due in year 4. See 
Sec.  1.1446-3(e).
    (v) However, because PRS did not have actual knowledge or reason 
to know that the certificate NRA submitted in year 4 was defective, 
PRS reasonably relied on the certificate for purposes of paragraph 
(d)(2) of this section. Therefore, PRS is not liable for an addition 
to the tax with respect to its underpayment of 1446 tax under the 
principles of section 6655 (as applied through Sec.  1.1446-3) for 
any installment period in year 4.
    (vi) However, PRS is generally liable for interest under section 
6601 and for the failure to pay addition to tax under section 
6651(a)(2) on the $1,575 of 1446 tax due for year 4 for the period 
from April 15, year 5 (last date prescribed for payment of 1446 tax) 
to the date PRS pays the 1446 tax or is deemed to have paid the 1446 
tax under Sec.  1.1446-3(e).
    (vii) With respect to the year 5, PRS reasonably relied on NRA's 
certificate when computing its first installment payment (due on 
April 15, year 5). Therefore, in accordance with paragraph (d)(2)(i) 
of this section, PRS will not be liable for an addition to the tax 
under the principles of section 6655 (as applied through Sec.  
1.1446-3) for the first installment period. However, because the IRS 
provided written notification to PRS on June 1, year 5, to disregard 
any certificate received from NRA for year 5, PRS may not rely on 
any certificate received from NRA certificate (or any new 
certificate provided by NRA) when it computes its second installment 
payment in year 5. PRS is not permitted to consider any certificate 
submitted by NRA until the IRS provides written notification to PRS 
revoking or modifying the original notice. PRS's second installment 
payment in year 5 must include the additional amount of 1446 tax it 
would have paid for the first installment period without regard to 
the certificate received from NRA.
    Example 6. 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 5, except that the IRS 
determines that NRA's certificate submitted in year 4 is defective 
because the actual effectively connected net operating loss 
available to NRA for year 4 was $1,000 rather than the $5,000 
certified.
    (i) Under paragraph (d)(2)(ii) of this section, PRS is not 
relieved from its liability for 1446 tax under section 1461 when it 
relies on a certificate of losses from a foreign partner that is 
later determined to be defective. However, when the IRS determines 
that a partner's certificate is defective because of the amount of 
the certified deductions and losses, the partnership is liable for 
the 1446 tax, interest, additions to tax, and penalties to the 
extent the amount of certified deductions and losses taken into 
account when computing 1446 tax (or, unless there was reasonable 
reliance on the certificate, any installment of such tax) is greater 
than the actual amount of available deductions and losses. Here, PRS 
considered the certified deductions and losses in the amount of 
$4,500. The IRS subsequently determined that NRA only had $1,000 of 
actual losses, only $900 of which were permitted to be considered 
under paragraph (c)(1)(i)(C) of this section. 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 year 4 is $1,260 ($3,600 ($4,500 less 
$900) of excess losses considered x .35). However, PRS may be deemed 
to have paid the $1,260 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 $900 (or a lesser amount)) of 
NRA's certified net operating loss when computing and paying its 
1446 tax during year 4 then, under paragraph (d)(2)(iii) of this 
section, PRS would not be liable for 1446 tax because it did not 
consider a net operating loss greater than the amount actually 
available to NRA.
    Example 7. 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. FC and DC are the only 
persons that have ever been partners in PRS. For its year 1 through 
year 3 taxable years, PRS issued Forms 1065 (Schedule K-1) reporting 
in the aggregate $100 of net loss to each partner. For its year 4 
taxable year, PRS issued Forms 1065 (Schedule K-1) to its partners 
reporting $150 of loss to each partner. All of the losses reported 
on the Forms 1065 (Schedule K-1) are effectively connected to PRS's 
and FC's trade or business in the United States.
    (i) Assume that FC submits a valid certificate under this 
section certifying losses to the partnership for the partnership's 
year 5 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 year 5, FC may only 
certify deductions and

[[Page 23084]]

losses under this section in the amount of $100 (the losses as 
reported on the Forms 1065 (Schedule K-1) issued for PRS's year 1 
through 3 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. PRS's year 4 calendar taxable 
year ends during FC's fiscal taxable year ending June 30, year 5. 
Therefore, under paragraph (c)(1) of this section, as of April 15, 
year 5 (the last date FC may submit its first certificate under 
paragraph (c) of this section to have it considered for PRS's first 
installment due date of April 15, year 5), FC's allocable share of 
the PRS losses for years 1 through 3 are the only losses that FC can 
represent have been or will be reported on an FC U.S. income tax 
return filed for a taxable year ending prior to such installment due 
date.
    (iii) The result in paragraph (ii) of this Example 7 is the same 
for the year 5 second installment period, the due date of which is 
June 15, year 5.
    (iv) FC may submit an updated certificate under this section 
after June 30, year 5, which includes the $150 loss for year 4. PRS 
may consider such an updated certificate for its third installment 
period (due date September 15, year 5), provided the updated 
certificate is received by the due date for such installment in 
accordance with paragraph (c) of this section.
    Example 8. Failure to provide status update with respect to 
prior year unfiled returns. FC, a foreign corporation, and DC, a 
domestic corporation, form a partnership (PRS) to conduct a trade or 
business in the United States. FC and DC provide PRS appropriate 
documentation under Sec.  1.1446-1 to establish their status for 
purposes of section 1446. FC and DC are equal partners in PRS, and 
all partnership items are allocated equally between FC and DC.
    (i) In the current taxable year FC submits a certificate under 
this section using Form 8804-C prior to PRS's first installment due 
date. FC represents that it has filed or will file a qualifying U.S. 
income tax return (within the meaning of paragraph (b)(2)(iii) of 
this section) in each of the preceding three taxable years. 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 partnership taxable 
year during which the certificate is considered (and will timely pay 
all tax due with such return). Assume 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 under paragraph 
(a)(2) 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 to PRS either an updated certificate 
or a status update as required by paragraph (c)(2)(ii)(B)(1) of this 
section by December 15th (PRS's final installment due date), 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. PRS's payment of 1446 tax for its fourth 
installment period must include the additional amount of 1446 tax it 
would have paid in the first, second and third installment periods 
had it not considered FC's certificate. Further, even if the status 
update is provided by December 15th, PRS may only rely on the 
certificate if the status update does not contradict the original 
certificate and such update indicates that the immediately preceding 
year's return will be timely filed. Finally, even if the status 
update is provided by December 15th, FC must also submit an updated 
certificate to the partnership in accordance with paragraph (c) of 
this section within 10 days of the date FC timely files its U.S. 
income tax return for the preceding taxable year.
    Example 9. Partnership consideration of certified deductions and 
losses or de minimis certificate. For purposes of this example 
assume paragraph (c)(1)(ii) of this section may apply. On January 1, 
year 4, NRA and B form a partnership (PRS) to conduct a trade or 
business in the United States. NRA and B are equal partners in PRS 
and all partnership items are shared equally. NRA and B provide PRS 
appropriate documentation under Sec.  1.1446-1 to establish their 
status for purposes of section 1446. During years 1 through 3, NRA's 
only activity generating effectively connected items was an interest 
in partnership XYZ. XYZ allocated NRA a loss for all three years. 
NRA filed qualifying U.S. income tax returns (within the meaning of 
paragraph (b)(2)(iii) of this section) reporting its allocable share 
of losses from XYZ in years 1 through 3. The XYZ partnership 
dissolved on December 31, year 3.
    (i) In year 4, NRA's only activity giving rise to effectively 
connected income, gain, deduction, or loss is its interest in PRS. 
NRA submits to PRS a valid certificate (using Form 8804-C) 
certifying under paragraph (c)(1)(i) its effectively connected net 
operating losses from years 1 through 3 and under (c)(1)(ii) of this 
section that its only activity giving rise to effectively connected 
income, gain, deduction, or loss for the PRS taxable year that ends 
with or within its taxable year is (and will be) its investment in 
PRS.
    (ii) During year 4, PRS allocates ECTI to NRA. If the 1446 tax 
otherwise due on the annualized amount allocated to NRA is less than 
$1,000, determined without regard to any deductions and losses 
certified by NRA under paragraph (c)(1)(i) of this section, PRS may 
consider the certificate received from NRA under paragraph 
(c)(1)(ii) of this section and not pay 1446 tax (or any installment 
of such tax) with respect to NRA. Alternatively, PRS may consider 
the deductions and losses certified by NRA under paragraph (c)(1)(i) 
of this section.
    (iii) Regardless of whether PRS considers NRA's certification 
under paragraph (c)(1)(i) or (c)(1)(ii) of this section in computing 
its 1446 tax due with respect to NRA, PRS must file Form 8813 for 
all installment periods as well as a Form 8805 for NRA with its Form 
8804. If PRS considers NRA's certification under paragraph (c)(1)(i) 
or (c)(1)(ii) of this section, PRS must attach to each Form 8813, as 
well as to the Form 8805, a computation of the 1446 tax with respect 
to NRA that takes into account its consideration of NRA's 
certificate. In addition, PRS must attach NRA's certificate to the 
Form 8813 for the first installment period it considers the 
certificate, as well as to the Form 8805. For all subsequent 
installment periods, PRS may attach a statement containing NRA's 
name, and TIN. If PRS is relying on NRA's certified losses under 
paragraph (c)(1)(i) of this section, the statement must indicate the 
amount of losses and deductions NRA certified. If PRS is relying on 
NRA's certification under paragraph (c)(ii) of this section, the 
statement must indicate that it is relying on NRA meeting the 
requirements under paragraph (c)(1)(ii) of this section and the 1446 
tax on the annualized amount allocated to NRA is less than $1,000. 
See paragraph (d)(3)(i) of this section.
    Example 10. Application of transition rule. NRA and B form a 
partnership (PRS) on January 1, 2004, to conduct a trade or business 
in the United States. NRA and B are equal partners in PRS and all 
partnership items are shared equally. NRA and B provide PRS 
appropriate documentation under Sec.  1.1446-1 to establish their 
status for purposes of section 1446. For its 2004 through 2007 tax 
years, PRS issued Forms 1065 (Schedule K-1) to NRA and B reporting a 
$1,000 net loss from its U.S. trade or business to each partner for 
each year (for an aggregate loss of $4,000 per partner). During the 
2004 through 2007 tax years, NRA's only activity generating 
effectively connected items was its investment in PRS.
    (i) On February 10, 2008, NRA submitted a certificate to PRS, 
reporting its aggregate $4,000 effectively connected loss to PRS, 
that met the requirements of Sec.  1.1446-6T(c) (See 26 CFR Part 1, 
revised as of April 1, 2007), as in effect before January 1, 2008. 
The certificate stated that NRA had timely filed its U.S. income tax 
returns for the 2004, 2005 and 2006 tax years, and that it would 
timely file a U.S. income tax return for its 2007 tax year. For the 
first and second installments period in 2008, PRS estimates that it 
will earn ECTI of $10,000.
    (ii) Because the certificate submitted by NRA to PRS on February 
10, 2008, met the requirements of Sec.  1.1446-6T (See 26 CFR Part 
1, revised as of April 1, 2007), as in effect before January 1, 
2008, PRS may consider such certificate when computing its 1446 tax 
due for the first and second installment period even if the 
certificate does not meet all the requirements of paragraph (c) of 
this section.
    (iii) NRA timely files its U.S. income tax return for the 2007 
tax year on July 24, 2008. In accordance with paragraph 
(c)(2)(ii)(B)(1) of this section, within 10 days of filing such 
return NRA prepares an updated certificate to be submitted to PRS 
certifying that it reasonably expects to have only $3,500 of losses 
available to reduce its allocable share of ECTI from PRS. Because 
the updated certificate will be submitted after July 28, 2008, to be 
valid the updated certificate must meet the requirements of 
paragraph (c) this section.

    (f) Effective/Applicability date. Except as otherwise provided in 
this paragraph (f), the rules of this section are

[[Page 23085]]

applicable for partnership taxable years beginning after December 31, 
2007. The rules of paragraphs (b)(3)(i)(B) through (D) shall apply to 
partnership taxable years beginning after July 28, 2008.
    (g) Transition rule. A certificate that met the requirements of 
Sec.  1.1446-6T(c) (See 26 CFR Part 1, revised as of April 1, 2007), as 
in effect before January 1, 2008, submitted on or before July 28, 2008 
by a partner that met the requirements of Sec.  1.1446-6T(b) (See 26 
CFR Part 1, revised as of April 1, 2007), as in effect before January 
1, 2008, shall not be considered defective because it does not meet the 
requirements of this section. However, any certificate (including any 
updated certificates and status updates) submitted, or required to be 
submitted, under paragraph (c) of this section after July 28, 2008, 
must meet the requirements of this section. See paragraph (e)(2) 
Example 10 of this section.

0
Par. 8. In Sec.  1.1446-7, the section heading is revised and two new 
sentences are added at the end of the paragraph to read as follows:


Sec.  1.1446-7  Effective/Applicability date.

    * * * The revisions to Sec. Sec.  1.1446-3(b)(2), 1.1446-
3(b)(3)(i)(A) and 1.1446-5(c)(2) contained in the final regulations 
published in 2008 apply to partnership taxable years beginning after 
December 31, 2007. See Sec.  1.1446-6(f) and (g) for the Effective/
Applicability date and Transition rule for Sec.  1.1446-6.

0
Par. 9. In Sec.  1.1464-1, paragraph (a) is amended by adding one 
sentence at the end of the paragraph and new paragraph (c) is added to 
read as follows:


Sec.  1.1464-1  Refunds or credits.

    (a) * * * With respect to section 1446, this section shall only 
apply to a publicly traded partnership described in Sec.  1.1446-4.
* * * * *
    (c) Effective/Applicability date. The last two sentences in 
paragraph (a) of this section shall apply to partnership taxable years 
beginning after April 29, 2008.

0
Par. 10. In Sec.  1.6071-1, paragraph (c)(15) is revised and paragraph 
(d) is added to read as follows:


Sec.  1.6071-1  Time for filing returns and other documents.

* * * * *
    (c) * * *
    (15) For provisions relating to the time for filing an annual 
information return on Form 1042-S, ``Foreign Person's U.S. Source 
Income subject to Withholding,'' or Form 8805, ``Foreign Partner's 
Information Statement of Section 1446 Withholding Tax,'' for any tax 
withheld under chapter 3 of the Internal Revenue Code (relating to 
withholding of tax on nonresident aliens and foreign corporations and 
tax-free covenant bonds), see Sec.  1.1461-1(c) and Sec.  1.1446-3(d).
* * * * *
    (d) Effective/Applicability date. The references to Form 8805 and 
Sec.  1.1446-3(d) in paragraph (c)(15) of this section shall apply to 
partnership taxable years beginning after April 29, 2008.

0
Par. 11. In Sec.  1.6091-1, paragraph (b)(17) and paragraph (c) are 
added to read as follows:


Sec.  1.6091-1  Place for filing returns or other documents.

* * * * *
    (b) * * *
    (17) For the place for filing information returns on Form 8805, 
``Foreign Partner's Information Statement of Section 1446 Withholding 
Tax,'' with respect to certain amounts paid on behalf of foreign 
partners, see the instructions to the form.
    (c) Effective/Applicability date. Paragraph (b)(17) of this section 
shall apply to partnership taxable years beginning after April 29, 
2008.

0
Par. 12. In Sec.  1.6151-1, paragraph (d)(2) is amended by adding one 
sentence at the end of the paragraph and paragraph (e) is added to read 
as follows:


Sec.  1.6151-1  Time and place for paying tax shown on returns.

* * * * *
    (d) * * *
    (2) * * * With respect to section 1446, the previous sentence shall 
apply only to a publicly traded partnership described in Sec.  1.1446-
4.
    (e) Effective/Applicability date. Paragraph (d)(2) of this section 
shall apply to publicly traded partnerships described in Sec.  1.1446-4 
for partnership taxable years taxable years beginning after April 29, 
2008.

0
Par. 13. In Sec.  1.6302-2, paragraphs (a)(1)(i), (a)(2) and (g) are 
revised to read as follows:


Sec.  1.6302-2  Use of Government depositaries for payment of tax 
withheld on nonresident aliens and foreign corporations.

    (a) * * * (1) * * *
    (i) Monthly deposits. Except as provided in paragraphs (a)(1)(ii) 
and (iv) of this section, every withholding agent who, pursuant to 
chapter 3 of the Internal Revenue Code, has accumulated at the close of 
any calendar month beginning on or after January 1, 1973, an aggregate 
amount of undeposited taxes of $200 or more shall deposit such 
aggregate amount with an authorized financial institution (see 
paragraph (b)(1)(ii) of this section) within 15 days after the close of 
such calendar month. However, the preceding sentence shall not apply if 
the withholding agent has made a deposit of taxes pursuant to paragraph 
(a)(1)(ii) of this section with respect to a quarter monthly period 
which occurred during such month. With respect to section 1446, this 
section shall only apply to a publicly traded partnership described in 
Sec.  1.1446-4.
* * * * *
    (2) Cross reference. For rules relating to the adjustment of 
deposits, see Sec. Sec.  1.1461-2(b) and 1.6414-1. For rules requiring 
payment of any undeposited tax, see Sec.  1.1461-1.
* * * * *
    (g) Effective/Applicability date. Except as otherwise provided, 
this section shall apply to tax required to be withheld under chapter 3 
of the Internal Revenue Code after 1966. The last sentence of paragraph 
(a)(1)(i) of this section shall apply to partnership taxable years 
beginning after April 29, 2008.

0
Par. 14. Section 1.6414-1 is amended by:
0
1. Adding two sentences at the end of paragraph (a)(2).
0
2. Revising the third sentence of paragraph (b).
0
3. Adding paragraph (d).
    The additions and revision read as follows:


Sec.  1.6414-1  Credit or refund of tax withheld on nonresident aliens 
and foreign corporations.

    (a) * * *
    (2) * * * With respect to the payment of withholding tax under 
section 1446, this section shall only apply to a publicly traded 
partnership described in Sec.  1.1446-4. See Sec.  1.1446-3(d)(2)(iv) 
for rules regarding refunds to a withholding agent under section 1446.
    (b) * * * The amount claimed as a credit may be applied, to the 
extent it has not been applied under Sec.  1.1461-2(b), by the 
withholding agent to reduce the amount of a payment or deposit of tax 
required by Sec.  1.1461-1 or Sec.  1.6302-2(a) for any payment period 
occurring in the calendar year following the calendar year of 
overwithholding. * * *
* * * * *
    (d) Effective/Applicability date. The last two sentences of 
paragraph (a) of this section shall apply to partnership taxable years 
beginning after April 29, 2008.

[[Page 23086]]

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 15. The authority for 26 CFR part 301 continues to read in part as 
follows:

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


0
Par. 16. In Sec.  301.6402-3, the second and third sentences of 
paragraph (e) are revised and paragraph (f) is added to read as 
follows:


Sec.  301.6402-3  Special rules applicable to income tax.

* * * * *
    (e) * * * Also, if the overpayment of tax resulted from the 
withholding of tax at source under chapter 3 of the Internal Revenue 
Code, a copy of the Form 1042-S, ``Foreign Person's U.S. Source Income 
subject to Withholding,'' Form 8805, ``Foreign Partner's Information 
Statement of Section 1446 Withholding Tax,'' or other statement (see 
Sec.  1.1446-3(d)(2) of this chapter) required to be provided to the 
beneficial owner or partner pursuant to Sec.  1.1461-1(c)(1)(i) or 
Sec.  1.1446-3(d) of this chapter must be attached to the return. For 
purposes of claiming a refund, the Form 1042-S, Form 8805, or other 
statement must include the taxpayer identification number of the 
beneficial owner or partner even if not otherwise required. * * *
    (f) Effective/Applicability date. References in paragraph (e) of 
this section to Form 8805 or other statements required under Sec.  
1.1446-3(d)(2) shall apply to partnership taxable years beginning after 
April 29, 2008.

0
Par. 17. In Sec.  301.6722-1, paragraph (d)(3) is revised and paragraph 
(e) is added to read as follows:


Sec.  301.6722-1  Failure to furnish correct payee statements.

* * * * *
    (d) * * *
    (3) Other items. The term payee statement also includes any form, 
statement, or schedule required to be furnished to the recipient of 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 the recipient copy of Form 1042-S, ``Foreign Person's U.S. 
Source Income subject to Withholding,'' or Form 8805, ``Foreign 
Partner's Information Statement of Section 1446 Withholding Tax.'')
    (e) Effective/Applicability date. The reference in paragraph (d)(3) 
of this section to Form 8805 shall apply to partnership taxable years 
beginning after April 29, 2008.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 18. The authority citation for part 602 continues to read as 
follows:

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


0
Par. 19. In Sec.  602.101, paragraph (b) is amended by removing the 
entry for Sec.  1.1446-6T from the table, adding an entry for Sec.  
1.1446-6, and revising the entries to the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

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


Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
    Approved: April 23, 2008
Eric Solomon,
Assistant Secretary of the Treasury.
 [FR Doc. E8-9356 Filed 4-28-08; 8:45 am]
BILLING CODE 4830-01-P