IRS Issues Proposed Regulations Under IRC §1446(f)

May 9, 2019  | By Erik Lincoln


In newly issued proposed regulations, the IRS outlines withholding rules for dispositions of interests in non-publicly traded partnerships where there is gain treated as effectively connected with the conduct of a US trade or business under IRC §864(c)(8). See REG-105476-18.


IRC §1446(f), was added to the Internal Revenue Code (the “Code”) by IRC §13501 of the Tax Cuts and Jobs Act, Public Law 115-97 (2017) (the “Act”).  This new Code section provides rules for withholding on the transfer of a partnership interest described in IRC §864(c)(8). IRC §1446(f)(1) provides that, except as otherwise provided in IRC §1446(f), if a portion of the gain (if any) on any disposition of an interest in a partnership would be treated under IRC §864(c)(8) as effectively connected with the conduct of a trade or business within the United States, the transferee is required to deduct and withhold a tax equal to 10 percent of the amount realized on the disposition. IRC §1446(f)(2)(A) provides an exception to the general withholding requirement described in IRC §1446(f)(1) if the transferor furnishes an affidavit to the transferee stating, under penalties of perjury, the transferor’s United States taxpayer identification number and that the transferor is not a foreign person. IRC §1446(f)(2)(B)(i) provides that the exception to withholding described in IRC §1446(f)(2)(A) will not apply if the transferee has actual knowledge that the affidavit furnished is false, or if the transferee receives a notice from a transferor’s agent or transferee’s agent that the affidavit is false.

IRC §1446(f)(4) provides that if a transferee fails to withhold any amount required to be withheld under IRC §1446(f)(1) then the partnership must deduct and withhold from distributions to the transferee a tax in an amount equal to the amount the transferee failed to withhold, plus interest.

On December 29, 2017, the Department of the Treasury (the “Treasury Department”) and the Internal Revenue Service (the “IRS”) released Notice 2018-08, 2018-7 I.R.B. 352, which temporarily suspends the requirement to withhold on amounts realized in connection with the sale, exchange, or disposition of certain interests in a publicly traded partnership not treated as a corporation under IRC §7704 and the regulations thereunder. On April 2, 2018, the Treasury Department and the IRS released Notice 2018-29, 2018-16 I.R.B. 495, which provides temporary guidance and announces an intent to issue proposed regulations under IRC §1446(f) with respect to the sale, exchange, or disposition of certain interests in non-publicly traded partnerships. Notice 2018-29, and IRC §1446(f)(1) generally, rely on the principles contained within the IRC §1445 withholding regime. Under IRC §1445, if a foreign person disposes of a United States real property interest (“U.S. real property interest”), as defined in IRC §897(c), a withholding obligation is imposed on the transferee of the interest.

Erik Lincoln is a founding member of Lincoln. In addition to being an attorney he is also a CPA. Erik has consistently been recognized as one of the top attorneys in North Carolina, by Business North Carolina.