Bulletin No. 2005-23 HIGHLIGHTS OF THIS ISSUE

Bulletin No. 2005-23June 6, 2005

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2005–32, page 1156.Federal rates; adjusted federal rates; adjusted federallong-term rate and the long-term exempt rate. For pur-poses of sections 382, 642, 1274, 1288, and other sectionsof the Code, tables set forth the rates for June 2005.

Rev. Rul. 2005–33, page 1155.Insurance companies; premium stabilization reserves.This ruling holds that additions to premium stabilization re-serves are return premiums for purposes of determining theamount of premiums earned on insurance contracts during ataxable year.

T.D. 9200, page 1158.REG–108524–00, page 1209.Final, temporary, and proposed regulations under section 1446of the Code provide guidance on the withholding tax liability ofa partnership with income that is effectively connected with itsU.S. trade or business, all or a portion of which is allocable un-der section 704 to foreign partners. The regulations also pro-vide rules permitting a partnership under certain circumstancesto consider partner-level deductions and losses when comput-ing its section 1446 withholding tax obligation with respect toa foreign partner. A public hearing on the proposed regulationsis scheduled for October 3, 2005.

Notice 2005–41, page 1203.Charitable contributions; qualified intellectual property.This notice explains how amendments to section 170 of theCode made by the American Jobs Creation Act of 2004 limitthe initial charitable contribution deduction allowable to a donorof qualified intellectual property. The notice also provides guid-ance on how, under the amendments, the donor may qualify

for additional charitable contribution deductions based on theincome received by or accrued to the donee organization withrespect to the donated property.

Notice 2005–42, page 1204.This notice allows employers sponsoring cafeteria plans the op-tion to amend the cafeteria plan document to provide a graceperiod after the end of the plan year, during which unused ben-efits or contributions remaining at the end of the immediatelypreceding plan year may be paid or reimbursed to participantsfor qualified benefit expenses incurred during the grace period.The grace period must not extend beyond the fifteenth day ofthe third calendar month following the end of the immediatelypreceding plan year.

ADMINISTRATIVE

T.D. 9201, page 1153.Final regulations under section 330 of title 31 of the U.S. Codemodify section 10.35 which prescribes specific requirementsfor covered opinions. Certain written advice issued after a taxreturn is filed, advice provided by taxpayer’s in-house coun-sel, and negative advice are excluded from the requirementsof covered opinions. These regulations also clarify “principalpurpose” and “prominently disclose”.

(Continued on the next page)

Actions Relating to Court Decisions is on the page following the Introduction.Finding Lists begin on page ii.

Rev. Proc. 2005–32, page 1206.This procedure provides guidance on when an IRS examinationis considered closed, when a closed examination may be re-opened (to include reinspecting a taxpayer’s books of account),and who may approve a reopening. The procedure also de-scribes by category certain IRS contacts with taxpayers andother actions taken as to taxpayers that are not examinations,inspections of books of account, or reopenings. Rev. Proc.94–68 modified and superseded.

Announcement 2005–41, page 1212.This document contains corrections to final regulations and re-moval of temporary regulations (T.D. 9198, 2005–18 I.R.B.972) that relate to the recognition of gain on certain distribu-tions of stock or securities of a controlled corporation in con-nection with an acquisition.

June 6, 2005 2005–23 I.R.B.

The IRS MissionProvide America’s taxpayers top quality service by helpingthem understand and meet their tax responsibilities and by

applying the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Sec-retary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2005–23 I.R.B. June 6, 2005

Actions Relating to Decisions of the Tax CourtIt is the policy of the Internal Rev-

enue Service to announce at an early datewhether it will follow the holdings in cer-tain cases. An Action on Decision is thedocument making such an announcement.An Action on Decision will be issued atthe discretion of the Service only on unap-pealed issues decided adverse to the gov-ernment. Generally, an Action on Decisionis issued where its guidance would be help-ful to Service personnel working with thesame or similar issues. Unlike a TreasuryRegulation or a Revenue Ruling, an Actionon Decision is not an affirmative statementof Service position. It is not intended toserve as public guidance and may not becited as precedent.

Actions on Decisions shall be reliedupon within the Service only as conclu-sions applying the law to the facts in theparticular case at the time the Action onDecision was issued. Caution should beexercised in extending the recommenda-tion of the Action on Decision to similarcases where the facts are different. More-over, the recommendation in the Action onDecision may be superseded by new legis-lation, regulations, rulings, cases, or Ac-tions on Decisions.

Prior to 1991, the Service publishedacquiescence or nonacquiescence only in

certain regular Tax Court opinions. TheService has expanded its acquiescenceprogram to include other civil tax caseswhere guidance is determined to be help-ful. Accordingly, the Service now mayacquiesce or nonacquiesce in the holdingsof memorandum Tax Court opinions, aswell as those of the United States DistrictCourts, Claims Court, and Circuit Courtsof Appeal. Regardless of the court decid-ing the case, the recommendation of anyAction on Decision will be published inthe Internal Revenue Bulletin.

The recommendation in every Actionon Decision will be summarized as ac-quiescence, acquiescence in result only,or nonacquiescence. Both “acquiescence”and “acquiescence in result only” meanthat the Service accepts the holding ofthe court in a case and that the Servicewill follow it in disposing of cases withthe same controlling facts. However, “ac-quiescence” indicates neither approvalnor disapproval of the reasons assignedby the court for its conclusions; whereas,“acquiescence in result only” indicatesdisagreement or concern with some or allof those reasons. “Nonacquiescence” sig-nifies that, although no further review wassought, the Service does not agree withthe holding of the court and, generally,

will not follow the decision in disposingof cases involving other taxpayers. Inreference to an opinion of a circuit courtof appeals, a “nonacquiescence” indicatesthat the Service will not follow the hold-ing on a nationwide basis. However, theService will recognize the precedentialimpact of the opinion on cases arisingwithin the venue of the deciding circuit.

The Actions on Decisions published inthe weekly Internal Revenue Bulletin areconsolidated semiannually and appear inthe first Bulletin for July and the Cumula-tive Bulletin for the first half of the year. Asemiannual consolidation also appears inthe first Bulletin for the following Januaryand in the Cumulative Bulletin for the lasthalf of the year.

The Commissioner does NOT ACQUI-ESCE in the following decision:

Estate of Mitchell v. Commissioner,1

250 F.3d 696 (9th Cir. 2001), aff’g inpart, rev’g in part, and remanding

(T.C. Memo. 1997–461; on remand,T.C. Memo. 2002–98.

1 Nonacquiescence relating to whether the Court of Appeals erred in shifting the burden of proving the valuation of stock to the Commissioner on the basis that the Commissioner’s determi-nation of the value of the stock was arbitrary and excessive.

June 6, 2005 2005–23 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof June 2005. See Rev. Rul. 2005-32, page 1156.

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-term ratesare set forth for the month of June 2005. See Rev.Rul. 2005-32, page 1156.

Section 330 (31USC).—Best Practicesfor Tax Advisors31 CFR 10.35: Requirements for covered opinions.

T.D. 9201

DEPARTMENT OFTHE TREASURYOffice of the Secretary31 CFR Part 10

Regulations GoverningPractice Before the InternalRevenue Service

AGENCY: Office of the Secretary, Trea-sury.

ACTION: Final regulations.

SUMMARY: This document contains finalregulations revising the regulations gov-erning practice before the Internal Rev-enue Service (Circular 230). These regu-lations affect individuals who practice be-fore the Internal Revenue Service. Theseregulations clarify the standards for cov-ered opinions.

DATES: Effective Date: These regulationsare effective May 19, 2005.

Applicability Date: For dates of appli-cability, see §10.35(g).

FOR FURTHER INFORMATIONCONTACT: Heather L. Dostaler at (202)622–4940, or Brinton T. Warren at (202)622–7800 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Section 330 of title 31 of the UnitedStates Code authorizes the Secretary of theTreasury to regulate practice before theTreasury Department. The Secretary haspublished the regulations in Circular 230(31 CFR part 10). On December 20, 2004,the Treasury Department and the IRS pub-lished in the Federal Register (T.D. 9165,2005–4 I.R.B. 357 [69 FR 75839]) finalregulations (Final Regulations) applicableto written advice that is rendered after June20, 2005. Since publication of the FinalRegulations, Treasury and the IRS have re-ceived a number of comments highlightingareas where the language of the Final Reg-ulations might have consequences incon-sistent with their intent. Upon considera-tion of those comments, the Treasury De-partment and the IRS have made revisionsto the Final Regulations, as described be-low, to clarify the language of the FinalRegulations.

Explanation of Provisions

Written Advice Issued After a Tax Returnis Filed

Commentators have expressed concernthat advice given after a tax return is filed,in particular advice given in the contextof an IRS examination or litigation, mightconstitute a covered opinion within themeaning of the Final Regulations. In re-sponse to this concern, the definition ofexcluded advice in §10.35 is expanded toinclude written advice prepared for andprovided to a taxpayer, solely for use bythat taxpayer, after the taxpayer has fileda tax return reflecting the tax benefits ofthe transaction described in or referred toin the written advice. This exclusion doesnot apply if the practitioner knows or hasreason to know that the taxpayer will relyupon the written advice to take a positionon a return (including an amended returnthat claims tax benefits not reported onthe original return) filed after the date onwhich the advice is provided to the tax-payer.

Advice Provided by Taxpayer’s In-HouseCounsel

Commentators have also expressedconcern that written advice provided byin-house counsel to the employer for pur-poses of determining the employer’s taxliability could constitute a covered opinionand that the concept of a covered opinionin that context raises numerous issues. Inresponse to these concerns, the definitionof excluded advice in §10.35 is expandedto include advice provided to an employerby a practitioner in that practitioner’s ca-pacity as an employee of that employersolely for purposes of determining the taxliability of the employer. Written adviceprovided by in-house counsel that fallswithin the revised definition of excludedadvice will continue to be subject to therequirements set forth in §10.37 for otherwritten advice. The exclusion of writ-ten advice provided by in-house counselfrom the covered opinion standards of§10.35 is in no way intended to affectother aspects of the relationship betweenin-house counsel and the employer, suchas whether, and in what circumstances, theattorney-client privilege applies to com-munications involving in-house counsel,or the circumstances in which written ad-vice provided by in-house counsel mightbe relevant to determining the employer’sgood faith and reasonable cause.

Negative Advice

Several commentators have suggestedthat negative advice, i.e., advice conclud-ing that a Federal tax issue will not be re-solved in the taxpayer’s favor, could con-stitute a covered opinion. This concern ismost prevalent (1) in the context of writtenadvice relating to a listed transaction or atransaction having the principal purpose oftax avoidance and (2) where written adviceaddresses more than one Federal tax issueand the advice concludes that one or moreFederal tax issues will not be resolved inthe taxpayer’s favor.

Treasury and the IRS encourage practi-tioners to advise taxpayers that a transac-tion is not appropriate or that one or moreFederal tax issues will not be resolved inthe taxpayer’s favor. Treasury and the IRS

2005–23 I.R.B. 1153 June 6, 2005

are concerned, however, about written ad-vice that could be construed as encourag-ing taxpayers to take aggressive positionson their tax returns, such as advice thatconcludes one or more Federal tax issueswill not be resolved in the taxpayer’s fa-vor, but also reaches a conclusion favor-able to the taxpayer at any confidence level(e.g., not frivolous, realistic possibility ofsuccess, reasonable basis or substantial au-thority) with respect to that issue(s). Con-sequently, the regulations are revised toprovide that written advice that concludesthat a Federal tax issue will not be resolvedin the taxpayer’s favor is not a coveredopinion with respect to that issue, unlessthe written advice also reaches a conclu-sion favorable to the taxpayer at any con-fidence level (e.g., not frivolous, realis-tic possibility of success, reasonable ba-sis or substantial authority) with respect tothat issue. If written advice concerns morethan one Federal tax issue, the advice mustcomply with the requirements of §10.35(c)with respect to any Federal tax issue that isnot treated as excluded advice pursuant tothe preceding sentence.

Prominently Disclosed

Commentators have raised questionsabout how to apply the definition of promi-nently disclosed under §10.35(b)(8). Theprominent disclosure requirement is in-tended to ensure transparency betweentaxpayers and practitioners and to providetaxpayers with notice of any limitationon their ability to rely on written advice.To achieve these goals while minimizingthe burden of compliance on practitioners,these regulations modify the definition ofprominently disclosed.

Transactions with The Principal Purposeof Tax Avoidance or Evasion

Commentators have asked for clarifi-cation of the term the principal purpose oftax avoidance or evasion and in particularhave asked whether the definition in 26CFR 1.6662–4(g)(2)(i) and (ii) is incor-porated into §10.35. In response, theseregulations define the principal purposein §10.35(b)(10) similar to the definitionin 26 CFR 1.6662–4(g)(2)(ii). This defi-nition also provides that a transaction canbe a listed transaction or can have a sig-nificant purpose of tax avoidance even ifit lacks the principal purpose of tax avoid-

ance. Practitioners must evaluate transac-tions under the rules in §10.35(b)(2)(i)(A)and (C), even if those transactions are notcovered by §10.35(b)(2)(i)(B) becausethey do not have the principal purpose ofavoidance or evasion within the meaningof §10.35(b)(10) of these regulations.

Special Analyses

This final rule clarifies and narrows theapplication of final regulations publishedin the Federal Register on December 20,2004 (69 FR 75839). Accordingly, pur-suant to 5 U.S.C. 553(b)(B), there is goodcause to issue this final rule without priornotice and opportunity for public com-ment, because such would be contrary tothe public interest. For these same reasons,and because the previously published finalregulations apply to written advice ren-dered after June 20, 2005, under 5 U.S.C.553(d)(1) and (3) a delayed effective dateis not required. This final rule is not asignificant regulatory action for purposesof Executive Order 12866. Accordingly, aregulatory impact analysis is not required.Because no notice of proposed rulemakingis required, the Regulatory Flexibility Act(5 U.S.C. chapter 6) does not apply.

Drafting Information

The principal author of the regulationsis Heather L. Dostaler of the Office ofthe Associate Chief Counsel (Procedureand Administration), Administrative Pro-visions and Judicial Practice Division.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 31 CFR part 10 isamended as follows:

PART 10 — PRACTICE BEFORE THEINTERNAL REVENUE SERVICE

Paragraph 1. The authority citation for31 CFR part 10 continues to read as fol-lows:

[Authority: Sec. 3, 23 Stat. 258, secs.2–12, 60 Stat. 237 et. seq.; 5 U.S.C. 301,500, 551–559; 31 U.S.C. 330, 118 Stat.1418; Reorg. Plan No. 26 of 1950, 15 FR4935, 64 Stat. 1280, 3 CFR, 1949–1953Comp., P. 1017.]

Par. 2. Section 10.35 is amended by:

1. Revising paragraph (b)(2)(ii).2. Revising paragraph (b)(8).3. Adding paragraph (b)(10).The additions and revisions read as fol-

lows:

§10.35 Requirements for coveredopinions.

* * * * *(b) * * *(2) * * *(ii) Excluded advice. A covered opinion

does not include—(A) Written advice provided to a client

during the course of an engagement if apractitioner is reasonably expected to pro-vide subsequent written advice to the clientthat satisfies the requirements of this sec-tion;

(B) Written advice, other than advicedescribed in paragraph (b)(2)(i)(A) of thissection (concerning listed transactions) orparagraph (b)(2)(i)(B) of this section (con-cerning the principal purpose of avoidanceor evasion) that—

(1) Concerns the qualification of a qual-ified plan;

(2) Is a State or local bond opinion; or(3) Is included in documents required to

be filed with the Securities and ExchangeCommission;

(C) Written advice prepared for andprovided to a taxpayer, solely for use bythat taxpayer, after the taxpayer has fileda tax return with the Internal RevenueService reflecting the tax benefits of thetransaction. The preceding sentence doesnot apply if the practitioner knows or hasreason to know that the written advice willbe relied upon by the taxpayer to take a po-sition on a tax return (including for thesepurposes an amended return that claimstax benefits not reported on a previouslyfiled return) filed after the date on whichthe advice is provided to the taxpayer;

(D) Written advice provided to anemployer by a practitioner in that practi-tioner’s capacity as an employee of thatemployer solely for purposes of determin-ing the tax liability of the employer; or

(E) Written advice that does not resolvea Federal tax issue in the taxpayer’s favor,unless the advice reaches a conclusion fa-vorable to the taxpayer at any confidencelevel (e.g., not frivolous, realistic possibil-ity of success, reasonable basis or substan-tial authority) with respect to that issue.

June 6, 2005 1154 2005–23 I.R.B.

If written advice concerns more than oneFederal tax issue, the advice must complywith the requirements of paragraph (c) ofthis section with respect to any Federal taxissue not described in the preceding sen-tence.

* * * * *(8) Prominently disclosed. An item is

prominently disclosed if it is readily ap-parent to a reader of the written advice.Whether an item is readily apparent willdepend on the facts and circumstances sur-rounding the written advice including, butnot limited to, the sophistication of the tax-payer and the length of the written ad-vice. At a minimum, to be prominentlydisclosed an item must be set forth in a sep-arate section (and not in a footnote) in atypeface that is the same size or larger thanthe typeface of any discussion of the factsor law in the written advice.

* * * * *(10) The principal purpose. For pur-

poses of this section, the principal pur-pose of a partnership or other entity, invest-ment plan or arrangement, or other planor arrangement is the avoidance or eva-sion of any tax imposed by the InternalRevenue Code if that purpose exceeds anyother purpose. The principal purpose of apartnership or other entity, investment planor arrangement, or other plan or arrange-ment is not to avoid or evade Federal taxif that partnership, entity, plan or arrange-ment has as its purpose the claiming of taxbenefits in a manner consistent with thestatute and Congressional purpose. A part-nership, entity, plan or arrangement mayhave a significant purpose of avoidance orevasion even though it does not have theprincipal purpose of avoidance or evasionunder this paragraph (b)(10).

* * * * *

Mark E. Matthews,Deputy Commissioner for

Services and Enforcement,Internal Revenue Service.

Approved May 12, 2005.

James W. Carroll,Acting General Counsel,

Department of the Treasury.

(Filed by the Office of the Federal Register on May 18, 2005,8:45 a.m., and published in the issue of the Federal Registerfor May 19, 2005, 70 F.R. 28824)

Section 382.—Limitationon Net Operating LossCarryforwards and CertainBuilt-In Losses FollowingOwnership Change

The adjusted applicable federal long-term rate isset forth for the month of June 2005. See Rev. Rul.2005-32, page 1156.

Section 412.—MinimumFunding Standards


Section 467.—CertainPayments for the Use ofProperty or Services


Section 468.—SpecialRules for Mining and SolidWaste Reclamation andClosing Costs


Section 482.—Allocationof Income and DeductionsAmong Taxpayers


Section 483.—Interest onCertain Deferred Payments


Section 642.—SpecialRules for Credits andDeductions


Section 807.—Rules forCertain Reserves


Section 832.—InsuranceCompany Taxable Income26 CFR 1.832–4.— Gross income.

Insurance companies; premium sta-bilization reserves. This ruling holdsthat additions to premium stabilizationreserves are return premiums for purposesof determining the amount of premiumsearned on insurance contracts during ataxable year.

Rev. Rul. 2005–33

ISSUE

Are additions to a premium stabiliza-tion reserve return premiums for purposesof determining the amount of premiumsearned on insurance contracts during thetaxable year under § 832(b)(4)?

FACTS

IC is an insurance company other thana life insurance company, taxable under§ 831(a) of the Internal Revenue Code.More than half of IC’s business is the issu-ing of insurance and annuity contracts, in-cluding group insurance contracts. Manyof IC’s group insurance contracts are expe-rience rated and provide for premium sta-bilization reserves.

IC’s premium stabilization reserves arefunds that it maintains under its groupinsurance contracts to stabilize the grouppolicyholders’ premiums over a number ofyears. These reserves are funded by expe-rience rate credits on the group insurancepolicies. Specifically, rather than rebateamounts already included in gross premi-ums written to group policyholders basedon experience, IC retains the amountsin premium stabilization reserves to payextraordinary claims or to offset futurepremium increases for those policyhold-ers. Each premium stabilization reservearrangement is individually negotiatedwith the affected group policyholder. IC iscontractually obligated to follow the for-mula outlined in the insurance contract forapplying the premium stabilization reserve

2005–23 I.R.B. 1155 June 6, 2005

against future increases in premiums; theoperation of the premium stabilizationreserves is not subject to IC’s experienceor discretion. The premium stabilizationreserves are refundable to the group pol-icyholders in the event the related groupinsurance contracts are cancelled. Thus,the premium stabilization reserves are notpart of IC’s surplus.

LAW AND ANALYSIS

Section 831(a) imposes a tax for eachtaxable year on the taxable income of ev-ery insurance company other than a life in-surance company. Section 832(a) providesthat, for this purpose, the term “taxable in-come” means the gross income as definedin § 832(b)(1) less the deductions allowedby § 832(c).

Section 832(b)(1) provides that thegross income of an insurance companythat is subject to the tax imposed by§ 831 includes the combined gross amountearned during the taxable year from in-vestment income and from underwritingincome as provided in § 832(b), computedon the basis of the underwriting and in-vestment exhibit of the annual statementapproved by the National Association ofInsurance Commissioners (NAIC). Under§ 832(b)(3), underwriting income consistsof the premiums earned on insurance con-tracts during the taxable year, less lossesincurred and expenses incurred.

Section 832(b)(4) provides that theamount of premiums earned on insurancecontracts during the taxable year is com-puted by subtracting from gross premiumswritten any return premiums and amountspaid for reinsurance. The amount so ob-tained is increased by 80 percent of theunearned premiums on outstanding busi-ness at the end of the preceding taxableyear, and reduced by 80 percent of the un-earned premiums on outstanding businessat the end of the taxable year.

Section 1.832–4(a)(6)(i) of the IncomeTax Regulations provides that an insurancecompany’s liability for return premiumsincludes amounts previously included inan insurance company’s gross premiumswritten, which are refundable to a policy-holder or ceding company, provided thatthe amounts are fixed by the insurancecontract and do not depend on the experi-ence of the insurance company or the dis-cretion of its management.

Section 1.832–4(a)(4)(i) of the regula-tions provides that gross premiums writtenare amounts payable for insurance cover-age, and that gross premiums written onan insurance contract include all amountspayable for the effective period of an insur-ance contract. Section 1.832–4(a)(4)(ii)enumerates specific items that must be in-cluded in gross premiums written, includ-ing amounts subtracted from a premiumstabilization reserve to pay for insurancecoverage.

The amounts that IC adds to its pre-mium stabilization reserves with re-spect to group insurance contracts arereturn premiums within the meaning of§ 1.832–4(a)(6)(i) of the regulations. Theamounts were previously included in IC’sgross premiums written. They do notdepend on the experience of IC or thediscretion of IC’s management. Pursuantto formulas that are fixed in the groupinsurance contracts, the amounts are re-fundable to IC’s group policyholders,either to pay extraordinary claims, to off-set future premium increases, or (in theevent the contract is cancelled) to rebatethe amounts previously paid as premiums.

Because the amounts that IC adds toits premium stabilization reserves arereturn premiums within the meaning of§ 1.832–4(a)(6)(i) of the regulations, thoseamounts are subtracted from gross premi-ums written to compute premiums earnedon insurance contracts under § 832(b)(4).When IC subtracts amounts from its pre-mium stabilization reserves in the futureto pay for insurance coverage on behalf ofthe same group policyholders, the amountsubtracted will increase gross premiumswritten under § 1.832–4(a)(4)(ii)(B).

HOLDING

Additions to a premium stabilization re-serve are return premiums for purposesof determining the amount of premiumsearned on insurance contracts during thetaxable year under § 832(b)(4).

DRAFTING INFORMATION

The principal author of this revenue rul-ing is Sheryl B. Flum of the Office of As-sociate Chief Counsel (Financial Institu-tions & Products). For further informa-tion regarding this revenue ruling, contact

Sheryl B. Flum at (202) 622–3970 (not atoll-free call).

Section 846.—DiscountedUnpaid Losses Defined


Section 1274.—Determi-nation of Issue Price in theCase of Certain Debt Instru-ments Issued for Property(Also Sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate and thelong-term exempt rate. For purposes ofsections 382, 642, 1274, 1288, and othersections of the Code, tables set forth therates for June 2005.

Rev. Rul. 2005–32

This revenue ruling provides vari-ous prescribed rates for federal incometax purposes for June 2005 (the currentmonth). Table 1 contains the short-term,mid-term, and long-term applicable fed-eral rates (AFR) for the current monthfor purposes of section 1274(d) of theInternal Revenue Code. Table 2 containsthe short-term, mid-term, and long-termadjusted applicable federal rates (adjustedAFR) for the current month for purposesof section 1288(b). Table 3 sets forth theadjusted federal long-term rate and thelong-term tax-exempt rate described insection 382(f). Table 4 contains the ap-propriate percentages for determining thelow-income housing credit described insection 42(b)(2) for buildings placed inservice during the current month. Finally,Table 5 contains the federal rate for deter-mining the present value of an annuity, aninterest for life or for a term of years, ora remainder or a reversionary interest forpurposes of section 7520.

June 6, 2005 1156 2005–23 I.R.B.

REV. RUL. 2005–32 TABLE 1

Applicable Federal Rates (AFR) for June 2005

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-Term

AFR 3.46% 3.43% 3.42% 3.41%110% AFR 3.81% 3.77% 3.75% 3.74%120% AFR 4.16% 4.12% 4.10% 4.09%130% AFR 4.51% 4.46% 4.44% 4.42%

Mid-Term

AFR 4.01% 3.97% 3.95% 3.94%110% AFR 4.42% 4.37% 4.35% 4.33%120% AFR 4.82% 4.76% 4.73% 4.71%130% AFR 5.23% 5.16% 5.13% 5.11%150% AFR 6.05% 5.96% 5.92% 5.89%175% AFR 7.07% 6.95% 6.89% 6.85%

Long-Term

AFR 4.57% 4.52% 4.49% 4.48%110% AFR 5.03% 4.97% 4.94% 4.92%120% AFR 5.49% 5.42% 5.38% 5.36%130% AFR 5.97% 5.88% 5.84% 5.81%


Adjusted AFR for June 2005

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjustedAFR

2.75% 2.73% 2.72% 2.71%

Mid-term adjusted AFR 3.17% 3.15% 3.14% 3.13%

Long-term adjustedAFR

4.20% 4.16% 4.14% 4.12%


Rates Under Section 382 for June 2005

Adjusted federal long-term rate for the current month 4.20%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjustedfederal long-term rates for the current month and the prior two months.) 4.37%


Appropriate Percentages Under Section 42(b)(2) for June 2005

Appropriate percentage for the 70% present value low-income housing credit 8.00%

Appropriate percentage for the 30% present value low-income housing credit 3.43%

2005–23 I.R.B. 1157 June 6, 2005


Rate Under Section 7520 for June 2005

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,or a remainder or reversionary interest 4.8%

Section 1288.—Treatmentof Original Issue Discounton Tax-Exempt Obligations


Section 1446.—WithholdingTax on Foreign Partners’Share of EffectivelyConnected Income26 CFR 1.1446–1: Withholding tax on foreign part-ner’s share of effectively connected taxable income.

T.D. 9200

DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Parts 1, 301, and 602

Section 1446 Regulations;Withholding on EffectivelyConnected Taxable IncomeAllocable to Foreign Partners

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final and temporary regula-tions.

SUMMARY: This document contains finalregulations regarding a partnership’s obli-gation to pay withholding tax under sec-tion 1446 on effectively connected taxableincome allocable under section 704 to aforeign partner. The regulations interpretthe rules added to the Internal RevenueCode by section 1246(a) of the Tax ReformAct of 1986 (1986 Act), as amended bysection 1012(s)(1)(A) of the Technical andMiscellaneous Revenue Act of 1988 (1988Act), and section 7811(i)(6) of the Om-nibus Budget Reconciliation Act of 1989(1989 Act). The regulations will affectpartnerships engaged in a trade or business

in the United States that have one or moreforeign partners. The final regulations alsoinclude conforming amendments to sec-tions 871, 1443, 1461, 1462, 1463, 6109,and 6721. This document also containstemporary regulations under section 1446that may apply to reduce or eliminate apartnership’s obligation to pay withhold-ing tax in certain circumstances.

DATES: Effective Date: May 18, 2005.Applicability Dates: The final and tem-

porary regulations included in this docu-ment are applicable to partnership taxableyears beginning after May 18, 2005. How-ever, a partnership may elect to apply theprovisions of the final regulations to part-nership taxable years beginning after De-cember 31, 2004. Further, a partnershipmay elect to apply the temporary regula-tions to partnership taxable years begin-ning after December 31, 2004, providedthe partnership also elects to apply the fi-nal regulations to partnership taxable yearsbeginning after December 31, 2004.

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


Paperwork Reduction Act

The collections of information con-tained in the final regulations have beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act of1995 (44 U.S.C. 3507(d)) under controlnumbers 1545–1852 and 1545–1934. Re-sponses to these collections of informationare required to determine the extent towhich a partnership is required to pay awithholding tax with respect to a foreignpartner, to provide information concern-ing the tax paid on such partner’s behalf,and to determine the foreign person re-quired to report the effectively connectedtaxable income earned by such partner-ship and entitled to claim credit for thewithholding tax paid by the partnership.

The estimated annual burden per respon-dent/recordkeeper for the collections inthe final regulation varies from 15 min-utes to 1 hour, depending on individualcircumstances, with an estimated averageof 30 minutes.

The collections of information con-tained in the temporary regulation havebeen reviewed, and pending public com-ment, approved by the Office of Man-agement and Budget in accordance withthe Paperwork Reduction Act of 1995 (44U.S.C. 3507(d)) under control number1545–1934. To comment on the collectionof information in the temporary regulation,please refer to the cross-referenced NPRM(REG–108524–00) published elsewherein this issue of the Bulletin.

An agency may not conduct or sponsor,and a person is not required to respondto, a collection of information unless thecollection of information displays a validcontrol number assigned by the Office ofManagement and Budget.

Books or records relating to a collectionof information must be retained as longas their contents may become material inthe administration of any internal revenuelaw. Generally, tax returns and tax returninformation are confidential, as requiredby 26 U.S.C. 6103.

Background

On September 3, 2003, the IRS andTreasury Department published in theFederal Register a notice of proposedrulemaking (REG–108524–00, 2003–2C.B. 869 [68 FR 52466]), corrected at 68FR 62553 (November 5, 2003)) under sec-tions 871, 1443, 1446, 1461, 1462, 1463,6109, and 6721 of the Internal RevenueCode (Code). The regulations interpretrules added to the Code by the 1986 Act,as amended by the 1988 Act and the 1989Act. The regulations provide guidance forpartnerships required to pay withholdingtax under section 1446 of the Code (1446tax). Written comments were received inresponse to the notice of proposed rule-making, and a public hearing was held on

June 6, 2005 1158 2005–23 I.R.B.

December 4, 2003. After considerationof all the comments, the proposed regu-lations under sections 871, 1443, 1446,1461, 1462, 1463, 6109, and 6721 areadopted, as revised by this Treasury De-cision. The comments received and therevisions are discussed below.

In addition, this document containstemporary regulations that set forth rulesto reduce or eliminate a partnership’s1446 tax obligation with respect to a for-eign partner in certain circumstances.Specifically, the temporary regulationsaddress when a partnership is permittedto consider partner-level deductions andlosses when computing its 1446 tax (orany installment of such tax) with respectto a foreign partner’s allocable share ofpartnership effectively connected taxableincome (ECTI). The temporary regula-tions are also being issued as proposedregulations in another section of this bul-letin. The temporary regulations applyto partnership taxable years beginningafter May 18, 2005. However, a part-nership may elect to apply the temporaryregulations to partnership taxable yearsbeginning after December 31, 2004, pro-vided the partnership also elects to applythe final regulations to partnership taxableyears beginning after December 31, 2004.

Explanation of Provisions

A. Determining the Status andClassification of Partners—§1.1446–1

Under §1.1446–1 of the proposed regu-lations, a partnership generally determinesthe status of its partners based upon FormW–8BEN, “Certificate of Foreign Statusof Beneficial Owner for United StatesTax Withholding,” Form W–8IMY, “Cer-tificate of Foreign Intermediary, FlowThrough Entity, or Certain U.S. Branchesfor United States Tax Withholding,” orForm W–9, “Request for Taxpayer Iden-tification Number and Certification,”submitted by its partners. A partnershipmay also rely on other means to determinethe non-foreign status of its partners, pro-vided that the partnership’s determinationis correct. As described below, severalcommentators suggest that the final regu-lations permit the submission of additionalforms to more closely align the section1446 documentation requirements with

the requirements under the section 1441withholding regime.

1. Recognition of Form W–8ECI

Under section 6.01 of Rev. Proc.89–31, 1989–1 C.B. 895, as modified byRev. Proc. 92–66, 1992–2 C.B. 428, apartnership is required to include incomesubject to a partner’s election under sec-tion 871(d) or section 882(d) (relatingto the treatment of real property incomeas effectively connected income) in itscomputation of partnership ECTI whendetermining its 1446 tax obligation. Rev.Proc. 89–31 also provides that if a partnersubmits Form 4224 (predecessor form toForm W–8ECI, “Certificate of ForeignPerson’s Claim for Exemption From With-holding on Income Effectively ConnectedWith the Conduct of a Trade or Business inthe United States”), the partner’s allocableshare of income and gain is deemed to beeffectively connected income for purposesof section 1446 (deemed ECI rule). Underthe section 1441 withholding regime, apayee may provide Form W–8ECI to awithholding agent and thereby be exemptfrom withholding under section 1441 be-cause the income paid is effectively con-nected income to the payee. Accordingly,under Rev. Proc. 89–31, a foreign partnerthat has made an election under section871(d) or section 882(d) can submit FormW–8ECI to a partnership to satisfy its doc-umentation requirements under section1441 and section 1446.

Consistent with Rev. Proc. 89–31,the proposed regulations require a partner-ship to include income subject to a part-ner’s election under section 871(d) or sec-tion 882(d) in its computation of partner-ship ECTI for purposes of section 1446.However, the proposed regulations do notexplicitly recognize Form W–8ECI as aform establishing the status of a partner.One commentator notes that the deemedECI rule in Rev. Proc. 89–31 is usefuland provides a clear mechanism for a part-nership to discharge its 1446 tax obliga-tion. Accordingly, the commentator sug-gests that the final regulations recognizeForm W–8ECI and the deemed ECI rulefor purposes of section 1446.

Treasury and the IRS agree with thecommentator’s suggestion. Accordingly,the final regulations allow a partner to sub-mit Form W–8ECI to satisfy the docu-

mentation requirements of section 1446.Thus, if a partner provides Form W–8ECIto a partnership to claim exemption fromwithholding under sections 1441 and 1442,then the form will be accepted for purposesof section 1446, and will operate, consis-tent with the information on such form, tocause the partnership to consider the part-ner’s allocable share of income as effec-tively connected and subject to withhold-ing under section 1446.

2. Recognition of Form W–8EXP

The proposed regulations do not rec-ognize Form W–8EXP, “Certificate ofForeign Government or Other ForeignOrganization for United States Tax With-holding,” as a form that can establish theforeign status of a partner for purposes ofsection 1446. However, under the section1441 withholding regime, for example, aforeign tax-exempt organization may sub-mit Form W–8EXP to a payer of incometo claim that the organization is a foreigntax-exempt organization that is exemptfrom withholding under sections 1441 and1443(a) because the income being paidwill not be includible in the organization’scomputation of its unrelated business tax-able income (UBTI). One commentatornotes that a foreign tax-exempt organi-zation may be required to provide FormW–8EXP to a partnership for purposes ofthe section 1441 withholding regime, andForm W–8BEN for purposes of the sec-tion 1446 withholding regime. The sameissue exists with respect to other foreignpersons (e.g., foreign governments) thatmay provide Form W–8EXP for purposesof sections 1441 through 1443. The com-mentator suggests that the final regulationspermit a foreign tax-exempt organization(and other applicable persons) to provideForm W–8EXP to a partnership to estab-lish the foreign status of such partner forpurposes of section 1446 to eliminate thecircumstances where such person has tobe “double documented.”

The final regulations adopt this sugges-tion. Treasury and the IRS believe that thedocumentation requirements of sections1441 and 1446 should be coordinatedwhere feasible. As a result, a partner seek-ing to be relieved from withholding undersections 1441 through 1443 that providesForm W–8EXP to a partnership, will notbe required to submit an additional form

2005–23 I.R.B. 1159 June 6, 2005

to establish foreign status for purposes ofsection 1446. Except with respect to cer-tain tax-exempt organizations described insection 501(c) (see part A.5. of this pream-ble), the submission of a Form W–8EXPshall have no effect on whether there is a1446 tax due with respect to such partner’sallocable share of partnership ECTI. Forexample, a partnership must still pay 1446tax with respect to a foreign governmentpartner’s allocable share of ECTI becausesuch partner is treated as a foreign corpo-ration under section 892(a)(3).

3. Acceptable substitute form foridentification of partners

As noted above, the proposed regu-lations permit a partnership to use othermeans to ascertain the non-foreign statusof its partners, provided that the part-nership is correct in its determination.Further, under the proposed regulations, apartnership must generally presume thata partner that does not furnish a FormW–8BEN, Form W–8IMY, or Form W–9is a foreign person. One commentatorrequests that the final regulations permit apartnership to use a substitute form to iden-tify its partners, provided the informationgiven to the partnership is substantiallythe same as that found on the above-men-tioned forms.

Treasury and the IRS agree with thecommentator’s proposed change to the ex-tent that the section 1441 regime wouldgenerally permit the acceptable substituteform. As a result, the final regulationsadopt this comment and permit a partner-ship or nominee required to pay 1446 taxto develop its own form, consistent with§1.1441–1(e)(4)(vi), to serve as its substi-tute form upon which partners will submitinformation.

4. Clarification of miscellaneousdocumentation issues

Several commentators request that thefinal regulations clarify certain issues re-garding a partnership’s obligation to iden-tify its foreign partners. One commentatorrequests that the final regulations addressa partnership’s duty, if any, to inquire asto whether a partner has made an electionunder section 871(d) or 882(d), or whetherthe partner is a dealer in securities. As de-scribed in part A.1. of this preamble, theproposed regulations provide that income

subject to a partner’s election under sec-tion 871(d) or 882(d) shall be considered inthe partnership’s computation of the part-ner’s allocable share of partnership ECTI.Further, the proposed regulations requirea partner that has made an election undersection 871(d) or section 882(d) to notifythe partnership that the election has beenmade so that the partnership can correctlydetermine the partner’s allocable share ofECTI. The proposed regulations do not ad-dress when a partner is a dealer.

The final regulations retain the require-ment that a partner notify the partnershipof an election it has made (or will make)under section 871(d) or section 882(d).Further, to the extent that an election hasbeen made, the partner is required to pro-vide the partnership a copy of such elec-tion. However, the final regulations do notexplicitly require a partner to notify thepartnership that it is a dealer. Further, thefinal regulations do not impose an affirma-tive duty on the partnership to inquire asto a partner’s status as a dealer or whetheran election under section 871(d) or section882(d) has been made.

Another commentator requests clarifi-cation regarding the ability of a lower-tierpartnership (LTP) to use other means toidentify partners of an upper-tier partner-ship (UTP). Under proposed regulation§1.1446–5, an LTP may be required tolook through a UTP to the partners of suchpartnership if adequate documentationis provided to the LTP and the LTP canreliably associate (within the meaning of§1.1441–1(b)(2)(vii)) all or a portion ofthe UTP’s allocable share of ECTI withone or more partners of the UTP. To the ex-tent that a UTP has not provided adequatedocumentation as to the status of its part-ners to the LTP, the LTP is to treat the UTPas an entity and withhold at the highest ap-plicable rate under section 1446(b). In thisregard, the regulations cross reference pro-posed regulation §1.1446–1(c)(3), whichallows a partnership to rely on other meansto determine the non-foreign status of itspartners, provided that the partnership iscorrect in its determination. The commen-tator requests clarification as to whetheran LTP that has not received adequatedocumentation from a UTP regarding thestatus of one or more partners of the UTPmay, nevertheless, rely on other means todetermine that certain partners of the UTPare U.S. persons.

In response to the commentator’s ques-tion, the final regulations remove the crossreference to §1.1446–1(c)(3). The look-through rules of §1.1446–5 are intendedto be consistent with the section 1441 reg-ulations and the concept of reliable asso-ciation through documentation. Accord-ingly, an LTP may not rely on other meansand look through a UTP to the partners ofthe UTP to the extent that the UTP hasfailed to provide adequate documentationregarding the status of its partners. Rather,to the extent the documentation submittedis insufficient to permit the LTP to lookthrough, the LTP is to treat the UTP asa foreign entity and pay 1446 tax at thehigher of the rates in section 1 or section11.

Another commentator notes that pro-posed regulation §1.1446–1 provides thata foreign partnership is treated as a foreignpartner under section 1446(e). The com-mentator then notes that §1.1446–5 of theproposed regulations provides that all ora portion of the allocable share of a UTPshall be treated as allocable to the part-ners of the UTP to the extent that the LTPcan reliably associate the ECTI allocableto the UTP with the partners of such part-nership. The effect of this rule is that forpurposes of the LTP’s 1446 tax computa-tion, the UTP is not treated as the partner ofthe LTP. The commentator requests clarifi-cation regarding coordination of the abovetwo sections of the proposed regulations.We note that the issue the commentatorraises also arises under the proposed reg-ulations with respect to trusts part or all ofwhich are treated as owned by a grantor orother owner under subpart E of SubchapterJ of the Code.

In response to this question, §1.1446–1of the final regulations includes a cross ref-erence to §1.1446–5 and language clari-fying that the partners of a UTP are con-sidered the direct partners of an LTP onlyto the extent the LTP is applying the lookthrough rules of §1.1446–5 in computingits 1446 tax obligation. This treatment isonly for purposes of computing the LTP’s1446 tax liability and has no effect onLTP’s reporting. Thus, whether or notan LTP computes its 1446 tax by lookingthrough a UTP, the LTP shall furnish Form8805 with respect to the 1446 tax it paysto and in the name of the UTP so that suchUTP may then, in turn, take such amountsinto account in computing its 1446 tax

June 6, 2005 1160 2005–23 I.R.B.

obligation. UTP will then claim a creditfor the 1446 tax LTP paid and will allo-cate the credit to its partners (or claim arefund), as appropriate, and report the al-location of the tax on the Forms 8805 itfurnishes to its foreign partners. Similarly,the final regulations clarify that a grantoror other owner under subpart E of subchap-ter J of the Code of a domestic or foreigntrust is the beneficial owner of income andit (rather than the trust) is considered thepartner only for purposes of computing thepartnership’s 1446 tax liability.

5. Coordination with section 1443 andforeign tax-exempt organizations

Section 1443(a) provides that withhold-ing under chapter 3 of the Code shall applyto income includible under section 512 incomputing the UBTI of a foreign organiza-tion subject to the tax imposed by section511 only to the extent and subject to suchconditions as may be provided by regula-tions. The proposed regulations providethat if an amount is allocable from a part-nership to an entity described in section1443(a), then the partnership must with-hold under section 1446. One commenta-tor notes that section 1443(a) only appliesto the extent that an item of income is in-cludible in the computation of UBTI, andthat the proposed regulations fail to rec-ognize that some income items compris-ing part of the partnership’s ECTI will notbe includible by a partner in computing itsUBTI. See §§1.512(b)–1 and 1.512(c)–1.Further, the commentator notes that in thecontext of section 1441, section 1443(a)is enforced by a presumption contained in§1.1441–9(b)(3) that income will be in-cludible in computing a foreign tax-ex-empt organization’s UBTI if the documen-tation the payee provides is unreliable oris lacking, and that the final regulationsshould include a similar presumption in thecase of section 1446 with respect to foreigntax-exempt partners.

In response to the commentator’s sug-gestions, the final regulations clarify thatonly the portion of a tax-exempt partner’sallocable share of partnership ECTI that isincludible in the partner’s computation ofUBTI is subject to section 1446. The fi-nal regulations also provide that the pro-cedures in §1.1441–9 for claiming an ex-emption from withholding under section1441 will apply for claiming an exemption

from withholding under section 1446. Un-der those procedures, the organization mayspecify the portion of its allocable share ofpartnership income that will not be includi-ble in the organization’s computation of itsUBTI. Thereafter, the partnership may de-termine that a partner’s representation asto amounts not includible in the organiza-tion’s UBTI is unreliable or lacking. Ifsuch a determination is made, the partner-ship must then presume, consistent with§1.1441–9(b)(3) as applied for purposes ofsection 1446, that the partnership item willbe includible in computing the partner’sUBTI.

In response to another comment, thelanguage of the final regulations has beenchanged to follow more closely the lan-guage of section 1443(a) and the regula-tions thereunder.

6. Corresponding changes to forms

The IRS intends to modify severalforms (e.g., Forms W–8, 8804, 8805,8813) to accommodate the adoption of thefinal and temporary regulations set forthin this document. Until such time as theforms are modified, partners, nominees,and partnerships may use the current ver-sion of a form and attach a statement tosuch form, to the extent necessary, to ex-plain the use of the form for purposes ofsection 1446.

B. Determining a Foreign Partner’sAllocable Share of PartnershipECTI—§1.1446–2

1. Cancellation of indebtedness incomeand gain from foreclosure and deed in lieuof foreclosure

The proposed regulations requestedcomments on the appropriate treatmentunder section 1446 of partnership can-cellation of indebtedness income (COD).Several comments, discussed below, werereceived.

One commentator suggests that a part-nership should be relieved of its 1446 taxobligation with respect to COD incomeallocable to foreign partners providedthe partnership files with the IRS an ex-planatory statement that substantiates itsfinancial hardship. A second commentatorcites the rules set forth in §1.1445–2(d)(3),applicable to a foreclosure that results in adisposition of a United States real property

interest. Consistent with §1.1445–2(d)(3),the commentator proposes that so long asthe partnership receives no cash or otherproperty as part of the cancellation of in-debtedness or the foreclosure on property(or deed in lieu of foreclosure), incomeattributable to such amounts should beexcluded from partnership ECTI and thepartnership should not be required towithhold on such amounts. However,the commentator states that to the extentthat the partnership makes a distributionwithin the same taxable year that the CODincome or gain arising from a foreclosure(or deed in lieu of foreclosure) is realized,the partnership ECTI for the year of real-ization should include the COD income orgain from foreclosure up to the amount ofthe distribution. Finally, one commenta-tor focuses on a partnership in a Chapter11 bankruptcy proceeding and cites apotential conflict between the deemeddistribution rule of section 1446(d) andthe prohibition on preferential treatmentof non-creditors found in the BankruptcyCode. This commentator recommendsthat a partnership in a Chapter 11 bank-ruptcy proceeding that incurs COD incomeshould be relieved from paying 1446 taxon such income.

Treasury and the IRS believe that sec-tion 1446 requires a partnership to pay1446 tax on COD income and gain recog-nized by reason of a foreclosure or deedin lieu of foreclosure on property whensuch income or gain is allocated to for-eign partners. The purpose of the statuteis to collect taxes that foreign persons maynot otherwise pay, regardless of the liquid-ity or financial situation of the withhold-ing agent. Further, unlike section 1441,section 1446 does not require that a part-nership have control, receipt, custody, dis-posal, or payment over the income that issubject to withholding. As a result, no ex-ception is mandated. In addition, Treasuryand the IRS do not believe that a deemeddistribution under section 1446(d) wouldviolate any provisions of the BankruptcyCode. Accordingly, the final regulationsdo not adopt the commentators’ sugges-tions regarding COD income or gain aris-ing from the foreclosure (or deed in lieu offoreclosure) on property. However, Trea-sury and the IRS are issuing temporary andproposed regulations that permit a foreignpartner, in certain circumstances, to certifyto the partnership that it has deductions and

2005–23 I.R.B. 1161 June 6, 2005

losses it reasonably expects to be availableto reduce the partner’s U.S. income tax li-ability on the partner’s allocable share ofeffectively connected income or gain fromthe partnership. This certification proce-dure may apply to reduce the partnership’s1446 tax obligation with respect to CODincome allocable to a foreign partner inappropriate circumstances. Treasury andthe IRS believe that this approach, whichis consistent with the statute and legisla-tive history, appropriately balances the in-terests of taxpayers and the government.

2. Consideration of a foreign partner’sdeductions and losses in computing thepartner’s share of partnership ECTI.

See §1.1446–6T and part G. of thispreamble regarding when a partnershipmay consider partner-level deductions andlosses in determining its 1446 tax due withrespect to a partner.

C. Calculating, Paying Over, andReporting the 1446 Tax—§1.1446–3

1. Applicable percentage for computing1446 tax

The proposed regulations require a part-nership to pay withholding tax (1446 tax)using the highest rate of tax specified insection 1 (with respect to ECTI allocableto a non-corporate foreign partner) or sec-tion 11(b)(1) (with respect to ECTI alloca-ble to a corporate foreign partner). Sev-eral commentators note that the proposedregulations effectively require a partner-ship to pay 1446 tax in excess of a part-ner’s actual tax liability because the part-nership is not permitted to consider pref-erential tax rates that apply to long-termcapital gain or other special items of in-come or gain at the partner-level (e.g., un-recaptured section 1250 gain). The com-mentators note that at the time that Con-gress enacted and amended section 1446there was no difference between the taxrate for capital gains and ordinary incomeand, therefore, section 1446 should not beread to prohibit consideration of the high-est rate that may apply to special items ofincome or gain. The commentators requestthat the final regulations permit a partner-ship to consider the character of income orgain allocable to a foreign partner and pay1446 tax at the highest rate applicable to

the type of income or gain allocable to aforeign partner.

Treasury and the IRS have carefullyconsidered these comments and generallybelieve that permitting a partnership toconsider the highest rate of tax associatedwith particular partnership items of in-come and gain is a reasonable approachunder the statute that would reduce theinstances of overwithholding without un-dermining the purpose or effectiveness ofthe statute. In response, the final regula-tions provide that while a partnership isgenerally required to use the highest rateof tax in section 1 or section 11 (currently35 percent) applicable to a partner, it mayalso consider (subject to exceptions dis-cussed below) the type of income or gainallocable to a foreign partner during thetaxable year when computing its 1446 taxobligation. As a result, a partnership cangenerally pay 1446 tax using the highestcapital gains rate (currently 15 percent)to the extent long-term capital gain isallocable to a non-corporate foreign part-ner. Similarly, the highest rate of tax forcollectibles gain under section 1(h)(6)(currently 28 percent) may generally beconsidered when such gain is allocableto a non-corporate foreign partner. Fur-ther, a partnership can generally pay 1446tax using the maximum tax rate for unre-captured section 1250 gain (currently 25percent) to the extent such gain is allocableto a non-corporate foreign partner. Whenapplicable, the partnership must use thehighest preferential rate for a particulartype of income or gain without regard tothe amount of the foreign partner’s allo-cable share of such income or gain, or theforeign partner’s other income.

As discussed above, several preferen-tial rates depend upon the status of theperson (corporate or non-corporate) allo-cated the income or gain (e.g., long-termcapital gain). Further, in some circum-stances under the final regulations docu-mentation may be lacking as to the cor-porate or non-corporate status of a part-ner. Accordingly, the final regulations in-clude a rule that prohibits a partnershipfrom using a preferential rate in comput-ing its 1446 tax on income or gain alloca-ble to a foreign partner where the prefer-ential rate depends upon the corporate ornon-corporate status of the partner and ei-ther such status has not been establishedby documentation or the regulations oth-

erwise instruct the partnership to pay 1446tax at the higher of the applicable rates insection 1446(b).

For example, under §1.1446–1(c)(3) apartnership that has not received documen-tation from a partner must presume that thepartner is a foreign person, unless the part-nership relies on other means to determinethe non-foreign status of the partner. Fur-ther, the regulations instruct that if the part-nership knows that the partner is an indi-vidual, then the partnership must pay 1446tax using the applicable percentage appro-priate for a non-corporate foreign partner(highest rate in section 1). Notwithstand-ing the foregoing, under the rule in the finalregulations, the partnership may not con-sider the preferential rate applicable to anynet long-term capital gain allocable to suchpartner because the preferential rate appli-cable to that type of gain depends on thestatus of the person reporting such gain,and the partner has failed to provide docu-mentation in accordance with §1.1446–1.

Similarly, under §1.1446–5 a partner-ship may not be able to reliably associate100 percent of an upper-tier partnership’sallocable share of ECTI with the partnersof the upper-tier partnership. In such cir-cumstances, §1.1446–5(c)(2) requires thelower-tier partnership to pay 1446 tax onthe portion it cannot reliably associate withpartners of the upper-tier partnership atthe higher of the rates in section 1446(b).Even though the upper-tier partnership hasprovided documentation on its own be-half (e.g., Form W–8IMY), and the lower-tier partnership therefore knows that theupper-tier partnership is a non-corporateentity, the lower-tier partnership may notconsider any preferential rate when com-puting its 1446 tax due on the portion ofthe ECTI the lower-tier partnership cannotreliably associate with partners of the up-per-tier partnership.

2. Deemed cash distributions undersection 1446(d)

Section 1446(d) states that, except asprovided in regulations, a partnership’spayment of 1446 tax with respect to aforeign partner is treated as a distributionto the partner on the earlier of the daythe partnership paid the tax or the lastday of the partnership’s taxable year forwhich such tax was paid. The legislativehistory provides that the above rule may

June 6, 2005 1162 2005–23 I.R.B.

be altered by regulations to account formid-year dispositions of partnership in-terests. See H.R. Rep., 101–247, 101st

Cong., 1st Sess. (Sept. 20, 1989). UnderRev. Proc. 89–31, 1989–1 C.B. 895, if the1446 tax is paid in a subsequent taxableyear with respect to ECTI allocable to thepreceding taxable year, the deemed distri-bution is considered to have occurred onthe last day of the preceding taxable yearor the last day during such year that theperson was a partner. The proposed regu-lations follow the rules outlined above.

Several commentators note that thedeemed distribution under section 1446(d)may cause a partner to recognize gain un-der sections 731 and 741. Under section731, a partner recognizes gain on a part-nership distribution only to the extent thepartner receives cash in excess of its basisin the partnership. To the extent a partnerreceives cash in excess of the partner’sbasis in its partnership interest, section731 considers the partner to have engagedin a sale or exchange of the interest, thetax consequences of which are describedin section 741. Under section 1446(d),if the partnership is deemed to distributecash during the taxable year (i.e., on thedate the 1446 tax is paid), before the datethat the partner may consider an increasein the partner’s basis in the partnershipunder section 705 for income allocablefrom the partnership for the entire taxableyear, then the partner may recognize gainunder sections 731 and 741.

One commentator proposes that, forpurposes of section 1446(d), a partnershipshould look to the partnership agreementto determine whether a distribution undersection 1446(d) has occurred. Specifically,the commentator states that a partnershipshould not treat a payment of 1446 tax onbehalf of a foreign partner as a deemeddistribution under section 1446(d) to theextent the partnership agreement prohibitsa distribution to the partner, or the partneris required to pay back to the partnershippart or all of the 1446 tax paid on thepartner’s behalf. The commentator sug-gests that the regulations should considerboth explicit provisions of the partnershipagreement that require a foreign partnerto contribute to the partnership an amountequal to the 1446 tax the partnership paidon behalf of the partner and provisions thathave the effect of requiring a contribution,

though not explicitly referring to section1446.

Another commentator suggests that adeemed distribution under section 1446(d)that results from a partnership’s install-ment payment of 1446 tax should beconsidered an advance or drawing againsta partner’s distributive share of incomewithin the meaning of §1.731–1(a)(1)(ii)and treated as a current distribution madeon the last day of the partnership taxableyear with respect to such partner. Adopt-ing this suggestion would reduce the likeli-hood of a foreign partner recognizing gainbecause the deemed distribution wouldbe measured against the partner’s basis inits partnership interest after the partner’sbasis has been increased for income allo-cable to the partner for the partnership’staxable year under section 705.

A third commentator notes a conflictwith the deemed distribution rule in thecontext of a partnership in bankruptcy. Seediscussion at Part B.1. of this preamble.

Treasury and the IRS believe thatdeemed distributions under section1446(d) should not unnecessarily resultin a foreign partner having to recognizegain under sections 731 and 741, andthat the deemed distributions should betreated consistently with other distribu-tions under subchapter K. Further, section1446(d) provides Treasury and the IRSwith explicit authority to alter the rulesto accomplish the objectives of the sec-tion. Accordingly, the final regulationsgenerally provide that a deemed distribu-tion under section 1446(d) is treated as anadvance or drawing within the meaningof §1.731–1(a)(1)(ii) against the partner’sdistributive share of income from the part-nership. See also Rev. Rul. 94–4, 1994–1C.B. 195. As a result, the tax ramificationsof a partnership’s payment of 1446 tax ona foreign partner’s allocable share of ECTIwill be considered by the partner at the endof the partnership’s taxable year, or thelast day of the partnership’s taxable yearduring which such person was a partnerin the partnership. The advance or draw-ing treatment applies only to installmentpayments of 1446 tax made during thepartnership’s taxable year with respect toECTI earned in the same taxable year. Any1446 tax paid after the close of the part-nership’s taxable year, including amountspaid with the filing of Form 8804, “An-nual Return for Partnership Withholding

Tax (Section 1446),” that are on accountof partnership ECTI allocated to partnersfor the prior taxable year shall be treatedunder section 1446(d) and the regulationsas a distribution from the partnership onthe earlier of the last day of the partner-ship’s prior taxable year for which the taxis paid, or the last day in such prior taxableyear on which such foreign partner held aninterest in the partnership. The rules in thefinal regulations apply only for purposesof determining the tax ramifications of thedeemed distribution to a foreign partnerunder sections 705, 731, and 733, anddo not affect the date that the partnership(or partner) is otherwise considered (ordeemed) to have paid tax for purposes ofsection 6654 and section 6655.

The final regulations do not adopt thesuggestion that a deemed distribution un-der section 1446(d) should occur only tothe extent the partnership agreement per-mits a distribution to the foreign partnerand does not require the foreign partnerto contribute an amount to the partner-ship. Treasury and the IRS believe thatthe suggestion is inconsistent with section1446(d) and the treatment of distributionsunder subchapter K of the Code. To theextent that 1446 tax has been paid onbehalf of a partner and a Form 8805 hasbeen issued to a partner, section 1446(d)requires that such amount be treated asa distribution. Further, such an approachwould not be administrable because itwould require the IRS to review eachpartnership agreement and interpret theprovisions of the agreement for purposesof section 1446. Moreover, Treasury andthe IRS are concerned that the suggestedapproach would inappropriately result indifferent treatment for similarly situatedforeign partners.

3. Overlap between section 1445 and1446

The proposed regulations provide thatwhen section 1445 and section 1446 bothtechnically apply, a partnership is requiredto pay withholding tax on behalf of its for-eign partners in accordance with section1446. This rule, referred to as the trump-ing rule, primarily relates to a domesticpartnership’s disposition of a United Statesreal property interest within the meaningof section 897, which is subject to with-holding under section 1445(e)(1). The

2005–23 I.R.B. 1163 June 6, 2005

proposed regulations also permit a foreignpartnership to credit the amount withheldby a transferee under section 1445(a) whencomputing its 1446 tax obligation.

Several commentators note that thetrumping rule has the effect of prohibit-ing a partnership and/or its partners fromseeking a certificate from the IRS, whereappropriate, that would reduce withhold-ing to an amount more closely relatedto a partner’s actual tax liability on thegain allocated. See Rev. Proc. 2000–35,2000–2 C.B. 211, §8.01. As a result,several commentators suggest that the fi-nal regulations remove the trumping ruleand modify the section 1445 withholdingcertificate program so that partnershipsand partners subject to section 1446 canconsider anticipated current year deduc-tions and losses and obtain withholdingcertificates to reduce the withholding taxotherwise required to be paid. In addition,one commentator requests clarification ofthe consequences for failure to complywith section 1446 under the trumping rule.

After consideration of the commentsdescribed above, the trumping rule is re-tained in the final regulations. Treasuryand the IRS do not believe Congress in-tended for section 1445 to apply to the ex-clusion of section 1446 where the sectionsoverlap. Treasury and the IRS believe thatwith the changes made in the final regu-lations (e.g., consideration of the charac-ter of income allocable to a foreign part-ner, see part C.1. of this preamble) and theissuance of the temporary regulations thatpermit foreign partners to certify availabledeductions and losses to a partnership, thesection 1446 withholding regime will, inmost circumstances, arrive at a withhold-ing result that approximates the result thatwould otherwise be reached under section1445. The final regulations clarify that apartnership that fails to comply with sec-tion 1446 under the rule described abovemay be subject to all additions to the tax,interest, and penalties that otherwise applyto a failure to pay 1446 tax.

4. Notice to foreign partners of 1446 taxpaid by partnership

The proposed regulations require a part-nership that pays 1446 tax on behalf of aforeign partner to notify the partner whena payment of tax has been made. Be-cause the 1446 tax installment due dates

are the 15th day of the 4th, 6th, 9th, and 12th

months of the partnership’s taxable year, apartnership must generally notify a foreignpartner four times during the taxable yearof the 1446 tax paid on the partner’s be-half. The notice provided during the tax-able year of the 1446 tax paid is not re-quired to be in any particular form but mustcontain, among other items, informationsufficient to identify the partnership, thepartner, the annualized amount of ECTI es-timated to be allocated to the partner, andthe amount of 1446 tax paid to the IRS onbehalf of the foreign partner.

After the close of the partnership tax-able year, the partnership is required to fileForms 8804 and 8805 with the IRS and toprovide a Form 8805 to each foreign part-ner. The Form 8805 furnished to a for-eign partner will set forth the 1446 tax paidon the partner’s behalf for the entire tax-able year. Each foreign partner receivinga Form 8805 from the partnership is gen-erally permitted to claim a tax credit undersection 33 on its U.S. Federal income taxreturn in the amount shown on the form aspaid on the partner’s behalf. When com-pleting its Form 8804 and Form 8805, thepartnership will use the actual results of thepartnership’s operations for the previousyear. When completing its Form 8804, ifthe partnership determines that its 1446 taxis an amount greater than previously esti-mated, the partnership is required to payany shortfall when filing the form.

One commentator submits that it is ad-ministratively burdensome and costly torequire a partnership to notify its foreignpartners four times during the year wheneach installment of 1446 tax is paid ontheir behalf. The commentator also con-tends that it is burdensome on a partnershipto have to explain to each foreign partnerany discrepancy between the four noticesprovided during the taxable year, whichare based on estimates, and the Form 8805issued after the close of the taxable year,which is based on the partnership’s actualoperating results. Finally, the commenta-tor contends that it is burdensome, costly,and inefficient in large non-publicly tradedpartnerships, where the net income to beallocated to a partner is often small, to haveto provide notice to thousands of foreignpartners four times during the taxable yearand again after the taxable year.

A second commentator makes twopoints concerning the requirement that

a partnership provide notice during thetaxable year for each 1446 tax installmentpayment. First, the commentator suggeststhat because the section 1446 tax rate is thehighest rate applicable to a foreign partner,most foreign partners do not need noticeduring the taxable year because they al-ready assume the partnership’s 1446 taxinstallment payments will exceed any es-timated tax they might otherwise owe ontheir allocable share of ECTI. Second, thecommentator submits that in practice thenotices are often not received before aforeign partner’s estimated tax due datefor the same period and, therefore, providelittle or no benefit to the foreign partner.

Both commentators propose that unlessa foreign partner requests information foreach installment payment of 1446 tax, apartnership should only be required to re-port to the foreign partner the amounts paidto the IRS on behalf of the partner after theclose of the taxable year on Form 8805.

Treasury and the IRS believe that thenotice requirement in the proposed regu-lations serves the useful function of advis-ing a foreign partner of amounts paid onits behalf. The notice may aid a partner incomputing its estimated tax liability eitherfor the same installment period or a sub-sequent installment period during the tax-able year. This is particularly true wherethe estimated tax payment dates of the for-eign partner do not coincide with the 1446tax installment dates. See section 6654(j).Based upon the foregoing, the final regula-tions retain the notice requirement set forthin the proposed regulations.

However, Treasury and the IRS recog-nize that situations may exist where thenotice requirement is particularly burden-some. Accordingly, the final regulationscontain two exceptions to the requirementthat the partnership provide notice duringits taxable year as it pays each installmentof 1446 tax. First, where an agent of thepartnership charged with providing noticeto the foreign partners of the partnershipduring the taxable year for each install-ment of 1446 tax is the same person thatalso acts as an agent on behalf of a for-eign partner for purposes of filing the for-eign partner’s U.S. income tax return, thenotice requirement is deemed to be sat-isfied with respect to such partner. Sec-ond, a partnership with 500 or more for-eign partners is not required to provide no-tice to a foreign partner of amounts paid

June 6, 2005 1164 2005–23 I.R.B.

on such partner’s behalf during the courseof the taxable year, unless requested, if thepartnership estimates that the 1446 tax onsuch partner’s allocable share of partner-ship ECTI is less than $1,000. If one of theexceptions applies to a foreign partner foran installment payment of 1446 tax, thenthe partnership is not required to providenotice of the installment payment (and thetax paid on the partner’s behalf) unless re-quested by the partner. However, in allevents, the partnership is required to pro-vide notice of the tax paid on the partner’sbehalf after the close of the taxable year byissuing Form 8805 to the partner.

5. Refunds by partnership for amountswithheld

Under the proposed regulations, a part-nership is entitled to obtain a refund for1446 tax paid over to the IRS only if a re-fund is permissible under section 1464 andthe regulations thereunder. The positionin the proposed regulations varies from theposition in Rev. Proc. 92–66, which per-mits a partnership to obtain a refund of1446 tax to the extent an amount paid tothe IRS is not reflected on a Form 8805 is-sued to a partner for the taxable year. Onecommentator notes that because actual op-erating results can vary significantly fromthe estimates the partnership uses duringthe year to calculate its 1446 tax, withhold-ing in excess of the partner’s actual tax li-ability can occur. That is, where a part-nership annualizes its income under one ofthe accepted methods but events occur thatare not taken into account until the partner-ship files its Form 8804, and such eventshave the effect of reducing or eliminatingthe 1446 tax otherwise due, the partnershipshould be entitled to a refund of the over-paid amounts. The commentator proposesthat the final regulations adopt the refundsystem set forth in Rev. Proc. 92–66.

In response to the commentator’s sug-gestion, the final regulations adopt theposition taken in Rev. Proc. 92–66 withrespect to refunds to withholding agents,thereby permitting non-publicly tradedpartnerships subject to section 1446 toobtain refunds for 1446 tax paid to theIRS to the extent that the amounts arenot reflected on a Form 8805 issued to apartner. Publicly traded partnerships (andnominees) required to pay 1446 tax basedon distributions of effectively connected

income will continue to be subject to sec-tion 1464 and the regulations thereunder.The standard in the regulation is intendedto follow the approach set forth in Rev.Proc. 92–66 in all respects.

6. Additions to the tax, interest andpenalties for noncompliance with section1446

i. In General

The proposed regulations provide thatif a partnership fails to file and pay its1446 tax, but a partner files a U.S. Fed-eral income tax return for the taxable yearand pays all tax required to be shown onthat return, then the partnership is deemedto have filed Forms 8804 and 8805 andpaid its 1446 tax with respect to such for-eign partner as of the date that the partnersatisfied the aforementioned conditions.Therefore, the proposed regulations con-tain a deemed filing and payment ruleapplicable to a partnership that is basedupon a foreign partner completing twoactions: 1) filing its U.S. Federal incometax return, and 2) paying all tax requiredto be shown on such return. Treasury andthe IRS have modified the deemed filingand payment rules in the final regulationsto better coordinate section 1446 with sec-tion 1463, as well as with any additionsto the tax, interest, and penalties that mayapply.

First, the final regulations modify therule in the proposed regulations that deemsa partnership to have paid 1446 tax withrespect to a partner. As modified, the finalregulations make a partnership’s deemedpayment dependent only on the partner’spayment of all the tax the partner is re-quired to pay, and disregard the partner’sactual filing of a U.S. Federal income taxreturn. As modified, the deemed paymentrule is consistent with general principles ofwhen a tax is considered paid.

Second, the final regulations removethe deemed filing rule in the proposed reg-ulations because of the administrative dif-ficulties in such cases where there are mul-tiple foreign partners. Therefore, under thefinal regulations, a partnership will not bedeemed to have filed Forms 8804 and 8805at any time. As a result, once the failureto file penalty under section 6651(a)(1) be-gins to accrue, as discussed below, a part-

nership may affirmatively stop the accrualof the penalty only by filing Form 8804.

Third, the final regulations clarify thedate upon which a partnership will bedeemed to have paid 1446 tax under thedeemed payment rule. The rule appliesfor purposes of sections 1446, 1461, 1463,6601, 6651, 6655, and any other penaltiesor additions to the tax that may apply. Therule provides that a partnership will bedeemed to have paid the 1446 tax associ-ated with ECTI allocable to a particularpartner on the later of the date that thepartner is considered to have paid all itstax under section 6513(a) and (b)(2) (pre-scribing the date tax is considered paid forpurposes of sections 6511(b)(2), (c), and6512), or the last date for paying the 1446tax without extensions (the unextendeddue date for Form 8804). In application,the rule ensures that a partner’s paymentsof estimated tax will have no effect on thecomputation of the partnership’s under-payment addition to the tax under section6655 and §1.1446–3 of the regulations.

Fourth, the final regulations change themethod required for a partnership to showthat a partner has paid all tax required tobe shown on the partner’s U.S. Federalincome tax return. In response to onecommentator, the final regulations adoptthe method set forth in §1.1445–1(e)(3)because such method is more familiarand easier for partnerships to apply thanobtaining Form 4669, “Statement of Pay-ments Received,” the method set forth inthe proposed regulations. Under the finalregulations, a partnership must providesufficient information for the IRS to de-termine that the partner’s tax liability wassatisfied or established to be zero.

More specific discussion of various ad-ditions to the tax, interest, and penalties isprovided below.

ii. Current Year Safe Harbor UnderSection 6655 and §1.1446–3

Section 1446 imposes a withhold-ing regime that applies the principles ofsection 6655, as modified by these regula-tions. Under section 6655, a corporation isnot liable for an underpayment addition tothe tax if the corporation pays 25 percentof either the preceding year’s or the cur-rent year’s tax liability in each quarterlyinstallment. These safe harbors are oftenreferred to as the prior year safe harbor and

2005–23 I.R.B. 1165 June 6, 2005

the current year safe harbor. The proposedregulations provide for a modification ofthe prior year safe harbor that is consistentwith Rev. Proc. 89–31, but do not mentionthe potential application of the current yearsafe harbor. The final regulations clarifythat the current year safe harbor of section6655(d)(1)(B)(i) can apply to a partner-ship subject to section 1446. Further, thefinal regulations retain the language in theproposed regulations that sets forth theprior year safe harbor.

iii. Accrual of Addition to the Tax UnderSection 6655, Interest Under Section6601, and Penalties

One commentator requests clarificationregarding the accrual of the addition tothe tax under section 6655, interest undersection 6601, and penalties under the pro-posed regulations. Specifically, the com-mentator requests that the final regulationsclarify whether a partnership’s deemedpayment of 1446 tax under proposedregulation §1.1446–3(e)(2) will stop theaccrual of the addition to the tax, interest,and penalties that may be applicable un-der proposed regulation §1.1446–3(e)(3)or other sections of the regulations. Thecommentator requests that the final regula-tions address the accrual of the addition tothe tax, interest and penalties, and explic-itly provide that such additions, penaltiesand interest will stop accruing on the datethe partnership’s liability is deemed paid.

The final regulations do not explicitlyaddress the accrual of all of the potentialpenalties that may apply to a partnershiprequired to pay 1446 tax, but do includeprovisions and examples that illustrate theapplication of sections 6655 (relating tothe addition to the tax for an underpaymentof an installment of 1446 tax), 6601 (relat-ing to interest), and 6651 (relating to fail-ure to file and failure to pay penalties).

Regarding the addition to the tax un-der section 6655, the final regulations pro-vide that the addition to the tax will be-gin to accrue on the date that the partner-ship underpays an installment of 1446 taxand will stop accruing on the earlier of thedate when all the 1446 tax is satisfied, orthe 15th day of the 4th month followingthe close of the partnership’s taxable year(15th day of the 6th month in the case of apartnership keeping its books and recordsoutside the United States and Puerto Rico).

As discussed in part C.6.i. of this pre-amble, the final regulations provide that apartner’s payment of tax that deems a part-nership to have paid 1446 tax will not becredited to the partnership’s account untilthe later of the date that the tax is consid-ered to have been paid by the partner un-der section 6513(a) and (b)(2) (prescribingthe date tax is considered paid for purposesof sections 6511(b)(2), (c), and 6512), orthe last date for paying 1446 tax withoutextensions (i.e., the unextended due datefor Form 8804). Under this “later of” rule,the earliest that a partner’s payments canbe credited to the partnership is the lastdate for paying the 1446 tax without exten-sions (the unextended due date for Form8804), the date that the accrual of the sec-tion 6655 addition to the tax would stopin any event. As a result, a partner’s pay-ments of estimated tax will not provide apartnership with any benefit with respectto the partnership’s computation of the un-derpayment addition to the tax under sec-tion 6655, as applied in the regulations.

Regarding interest under section 6601,if a partnership’s 1446 liability has notbeen satisfied, or deemed satisfied, by thelast date prescribed for payment of the1446 tax under section 1461 without ex-tensions (see section 6601(b)(1)), then in-terest under section 6601 will begin to ac-crue on the unpaid 1446 tax liability. Thefinal regulations provide that interest willstop accruing on the date and to the extentthat the partnership actually pays the 1446tax or is deemed to have paid the 1446 taxunder the deemed payment rule in the reg-ulations.

Section 6651(a)(1) generally applies tothe failure to file any tax return by thedue date (including extensions) prescribedtherefore and applies in the context of sec-tion 1446 to a failure to file Form 8804.The penalty accrues at 5 percent of theamount of the tax that is required to beshown on the return for each month or frac-tion of a month during which the requiredreturn is not filed but not exceeding, inthe aggregate, 25 percent of the amountrequired to be shown as tax on the re-turn. Similarly, under section 6651(a)(2),for each month after the date prescribedfor payment that a taxpayer fails to paythe amount shown as tax on any return,there is added to the amount shown as tax0.5 percent of such tax not to exceed 25percent in the aggregate. While section

6651(a)(1) applies upon a failure to file areturn, and section 6651(a)(2) only appliesif a return has been filed, there are cir-cumstances where both penalties can ap-ply. See 6651(c). Both penalties providean exception if it is shown that such fail-ure is due to reasonable cause and not dueto willful neglect.

Under the deemed payment rule ofthe final regulations, discussed above,a partnership that fails to pay 1446 taxwith respect to a foreign partner will bedeemed to have paid the 1446 tax asso-ciated with the ECTI allocable to suchforeign partner on the later of the date thatsuch partner is considered to have paidits U.S. income tax under section 6513(a)and (b)(2), or the last date for payment ofthe 1446 tax without extensions. Section6651(b)(1) reduces the base upon whichthe section 6651(a)(1) penalty is computed(the amount required to be shown as taxon the return) by the partnership’s actualand deemed payment of tax, provided theactual or deemed payment occurs on orbefore the date prescribed for payment ofthe tax. To the extent the partnership hasnot paid (or been deemed to have paid)all 1446 tax due with respect to a partneras of the date prescribed for payment ofthe tax, the failure to file penalty undersection 6651(a)(1) will begin to accrue onthe Form 8804 filing due date and willcontinue to accrue until the earlier of thedate that Form 8804 is actually filed, or thedate that the maximum monthly accrualhas occurred under the section; i.e., fivemonths. Stated differently, if a partnershipfails to file Form 8804 and the 1446 taxhas not been paid or deemed paid by thedate prescribed for payment of the tax, thefailure to file penalty will begin to accrueand may only be stopped by the partner-ship filing such form or the statutory limitof the penalty being reached; payment ofthe 1446 tax (actual or deemed) after thedate prescribed for payment of the tax,without actually filing Form 8804, willnot stop the accrual of the penalty.

A similar analysis applies to the accrualof the failure to pay penalty under section6651(a)(2). However, the failure to paypenalty cannot be imposed unless Form8804 is filed and the accrual of the penaltycan be stopped by paying the 1446 tax.Once Form 8804 is filed, the penalty ac-crues at a rate of 0.5 percent of the amountof the unpaid 1446 tax beginning on the

June 6, 2005 1166 2005–23 I.R.B.

due date for payment of such tax (withregard to extensions), regardless of whenthe form was filed, and continues to ac-crue each month on the unpaid 1446 taxuntil the earlier of the date the 1446 tax iscompletely paid, deemed paid, or the max-imum monthly accrual of 25 percent in theaggregate is reached. The time at which apartnership is deemed to have paid 1446tax for purposes of sections 1446, 1461,1463, 6601, 6651, and 6655 is discussedabove.

7. Application of de-minimis rule ofsection 6655(f)

The proposed regulations state that theprinciples of section 6655 shall apply to apartnership computing its 1446 tax. Sec-tion 6655(f) provides that a corporation isnot required to pay estimated tax when theamount of such tax is less than $500. How-ever, the proposed regulations under sec-tion 1446 do not address the application ofthe principles of section 6655(f) in the con-text of section 1446.

One commentator proposes that a part-nership with more than 100 nonresidentalien partners should not be required topay 1446 tax (or any installment of suchtax) on behalf of a nonresident alien part-ner if the estimated ECTI allocable to thenonresident alien partner does not exceedthe annual personal exemption provided tosuch partner under section 151 of the In-ternal Revenue Code. The commentatorstates that the administrative costs associ-ated with the payment of 1446 tax for suchpartners is burdensome when consideredin light of the fact that these foreign part-ners are often entitled to refunds of suchamounts. Further, the commentator sug-gests that these nonresident alien partners,who otherwise have no presence in theUnited States, often have difficulty in se-curing refunds and, as a result, are discour-aged from seeking such refunds because ofthe small dollar amounts involved.

The final regulations describe the appli-cation of the principles of section 6655(f)for purposes of section 1446. The finalregulations provide that a partnership shallapply the principles of section 6655(f) bytaking into account all foreign partners.That is, the partnership must compareits total 1446 tax liability for all foreignpartners to the $500 threshold in sec-tion 6655(f). However, Treasury and the

IRS believe that the section 1446 regimeshould operate so that it does not discour-age investment in the United States byimposing administrative costs on partner-ships that are unrelated to insuring thatthe appropriate amount of tax is collected.Consequently, the temporary regulationscontain an exception to this rule that ap-plies in certain circumstances. See partG.9. of this preamble, below.

8. Application of section 6655(i)

The proposed regulations under section1446 state that the principles of section6655 shall apply to a partnership requiredto pay 1446 tax. Section 6655(i)(2) pro-vides that section 6655 shall apply to tax-able years of less than 12 months in accor-dance with regulations prescribed by theSecretary. However, the proposed regu-lations under section 1446 do not addressthe application of the principles of section6655(i)(2).

The final regulations provide that evenif a partnership has a taxable year of lessthan 12 months, the partnership is requiredto pay 1446 tax (including installments ofsuch tax) if the partnership has ECTI allo-cable to foreign partners. In such a case,the partnership shall adjust its installmentpayments of 1446 tax in a reasonable man-ner (e.g., the annualized amounts of ECTIestimated to be allocable to a foreign part-ner, and the percentage of tax to be paidwith each installment) to account for theshort taxable year. However, if the partner-ship’s taxable year is a period of less thanfour months, the partnership shall only berequired to file Form 8804 in accordancewith the regulations and report and pay theappropriate 1446 tax for the short taxableyear.

D. Special Rule for Tiered Trust or EstateStructures—§1.1446–3(d)(2)(iii)

1. Background

The proposed regulations contain sev-eral rules applicable to domestic and for-eign trusts and estates. First, the proposedregulations require that a domestic grantortrust provide a statement to the partner-ship that it is a grantor trust and also pro-vide documentation (e.g., Form W–8BEN,Form W–9) of the grantor or other ownerof the trust. A foreign grantor trust mustprovide Form W–8IMY to the partnership

along with documentation of the grantoror other owner of the trust. In both ofthese situations, the partnership computesits 1446 tax based on the status of thegrantor or other owner, rather than thetrust, to the extent of such grantor or otherowner’s interest. All other trusts are re-quired to provide Form W–8BEN or FormW–9, as appropriate, to the partnership ontheir own behalf.

Second, the proposed regulations re-quire a foreign non-grantor trust (includ-ing an estate) to allocate the 1446 tax paidby the partnership with respect to the trustor estate’s allocable share of ECTI be-tween the trust or estate and its beneficia-ries. This allocation is based upon the tax-payer (trust/estate or beneficiary) that willultimately report and pay tax on the ECTIallocable from the partnership. The ruleis designed to match the tax credit undersection 33 for the 1446 tax the partnershippaid with the taxpayer that is ultimately re-sponsible for bearing the income tax lia-bility on the net income allocated from thepartnership.

Third, the proposed regulations containa rule to backstop the rule described in theprevious paragraph. This so-called domes-tic trust rule provides that if a partnershipknows or has reason to know that a foreignperson that is the ultimate beneficial ownerof the ECTI holds its interest in the partner-ship through a domestic non-grantor trust,or possibly other entities, and such trustwas formed or availed of with a princi-pal purpose of avoiding the 1446 tax, thensuch domestic trust will be treated as a for-eign trust and the rule described in the pre-vious paragraph with respect to the alloca-tion of the credit for 1446 tax paid will ap-ply. When applicable, this rule permits theIRS to impose the 1446 tax obligation on apartnership as if each domestic trust in thechain is a foreign trust. Several comments,discussed below, were received regardingthe trust rules in the proposed regulations.

2. Documentation requirement fordomestic grantor trusts

One commentator notes a difference inthe documentation requirements for do-mestic grantor trusts under sections 1441and 1446. The commentator states that un-der section 1441, a domestic grantor trustcan provide Form W–9 to the withhold-ing agent in its own right, but under sec-

2005–23 I.R.B. 1167 June 6, 2005

tion 1446, the domestic grantor trust mustprovide the partnership a statement thatit is a grantor trust and include the doc-umentation of the grantor or other owner(e.g., Form W–8BEN). The commentatorsuggests that the final regulations elimi-nate this difference and allow a domesticgrantor trust to provide Form W–9 in itsown right for purposes of section 1446, justas the trust is entitled to do under section1441.

The final regulations do not adopt thissuggestion. Treasury and the IRS believethat it is appropriate for a partnership tocompute its 1446 tax liability with respectto a grantor or other owner of a trust ratherthan the trust itself because it is the grantoror other owner that is responsible for re-porting the ECTI on its U.S. income taxreturn and paying tax with respect to theincome. Further, unlike section 1441, thewithholding obligation under section 1446applies only to partnerships rather than tothe last U.S. person in a chain leading tothe foreign beneficial owner of income. Asa result, if a partnership does not pay the1446 tax there is no assurance that the for-eign person will file an income tax returnand pay the underlying tax liability.

3. Documentation requirement for foreignsimple trusts

One commentator notes a difference inthe documentation requirements for for-eign simple trusts under sections 1441 and1446. The commentator states that undersection 1441, a payer of income is requiredto look through a foreign simple trust andconsider the documentation of the benefi-ciary of such trust, but under section 1446,the foreign simple trust is permitted to pro-vide a Form W–8 (e.g., Form W–8BEN)on its own behalf to the partnership to es-tablish its foreign status. The commenta-tor suggests that the final regulations elim-inate this difference and require a partner-ship to look through a foreign simple trustto the beneficiary of such trust; i.e., requirethe beneficiary of such trust to provide aForm W–8 or Form W–9 to establish itsnon-foreign or foreign status for purposesof section 1446, just as the beneficiary isrequired to do under section 1441.

The final regulations do not adopt thiscomment. Unlike most situations undersection 1441 where the withholding taxarises by reason of a payment of income,

the income subject to withholding undersection 1446 is generally based upon anamount that may or may not be distributed.As a result, partnership income that is al-locable to a foreign simple trust may notenter into a simple trust’s computation ofincome it is required to distribute. Thefinal regulations provide an example ofthis circumstance where a foreign simpletrust does not act as a mere conduit be-tween the partnership and the beneficiarywith respect to the trust’s allocable share ofpartnership ECTI. Consequently, Treasuryand the IRS believe that it is appropriatefor a partnership to compute its 1446 taxliability with respect to a foreign simpletrust rather than the trust’s beneficiary, andplace the obligation on the trust to allo-cate the tax credit for 1446 tax paid on thetrust’s share of partnership ECTI betweenthe trust and its beneficiary.

4. Domestic trust rule

One commentator requests severalmodifications to the so-called domestictrust rule. The commentator suggests thatthe final regulations limit the applicationof the “reason to know” standard in therule to situations where the partnership andthe partner are related under section 707(b)or where the IRS has formally notified thepartnership in writing that the claim ofa named partner to be a domestic personexempt from section 1446 withholding isunreliable and must be disregarded. Thecommentator also suggests that the finalregulations specifically provide that therule does not apply to publicly traded part-nerships, nominees, or paying agents thatare financial institutions that are otherwiseunrelated to the partnership.

Treasury and the IRS believe that thedomestic trust rule serves as an importantbackstop to the foreign trust rules in theregulation and should not be as narrowlylimited as the commentator suggests. Asa result, the final regulations do not limitthe “reason to know” standard to situationswhere a minimum threshold of ownershipcan be shown. However, the final regula-tions provide that a publicly traded part-nership within the meaning of §1.1446–4(or a nominee required to pay 1446 tax un-der §1.1446–4) will not be considered toknow or have reason to know that a do-mestic trust is formed or availed of to avoidthe 1446 tax, provided the interest held in

such entity by the domestic trust is publiclytraded.

Finally, the commentator suggests thatthe final regulations clarify the term otherentities found in the domestic trust rule. Inresponse to this comment, the final regula-tions have removed the reference to otherentities to avoid confusion.

E. Publicly TradedPartnerships—§1.1446–4

1. Background

The proposed regulations contain spe-cial rules for publicly traded partnershipsto pay withholding tax under section 1446.The rules generally require a publiclytraded partnership to pay 1446 tax on dis-tributions of effectively connected income(ECI) to its foreign partners, rather thanbased upon a foreign partner’s allocableshare of partnership ECTI. The rules alsopermit the withholding obligation to be as-sumed by a domestic nominee holding aninterest in the partnership on behalf of oneor more foreign partners. The proceduralaspects for having the nominee assumethis liability were the subject of severalcomments.

2. Receipt of a qualified notice andassumption of the 1446 tax liability by anominee holding an interest in a publiclytraded partnership

Under §1.1446–4(b)(4) of the pro-posed regulations, a nominee assumes the1446 tax obligation for a foreign partneron whose behalf it holds an interest inthe partnership if the nominee receivesa qualified notice from a publicly tradedpartnership regarding a distribution thatis attributable to effectively connected in-come, gain or loss of the partnership, andthat is provided in accordance with the no-tice requirements with respect to dividendsdescribed in 17 C.F.R. 240.10b–17(b)(1)or (3) issued pursuant to the SecuritiesExchange Act of 1934 (15 U.S.C. 78a).The proposed regulations provide that anominee shall be treated as a withholdingagent only to the extent of the amountspecified in the qualified notice. Further,the proposed regulations require a nom-inee to provide Form W–9, “Request forTaxpayer Identification Number and Cer-tification,” to the partnership, along witha statement containing certain information

June 6, 2005 1168 2005–23 I.R.B.

regarding the foreign persons on whosebehalf the nominee holds the interest.The proposed regulations provide that ifa nominee furnishes Form W–9 and thestatement to the partnership, but a quali-fied notice is not received by the nomineefrom the partnership, the nominee shallnot be a withholding agent subject to therules of section 1446. Further, in suchcase the partnership shall presume thatsuch nominee is a nonresident alien orforeign corporation, whichever classifi-cation results in a higher 1446 tax beingdue, and pay 1446 tax consistent with suchpresumption.

One commentator states that a literalreading of proposed regulation §1.1446–4requires that a publicly traded partnershipprovide notice directly to a nominee beforethe notice is considered a qualified noticeunder the regulations. The commentatorstates that if this interpretation of the reg-ulations was intended, then the qualifiednotice requirement conflicts with standardpractice under which a nominee would notreceive the qualified notice directly fromthe partnership when the notice require-ments of 17 C.F.R. 240.10b–17(b)(1) or (3)are followed. Instead, under §1.1445–8and standard practice, notice is deemed tohave been received by the nominee whennotice is given to the National Associationof Securities Dealers (NASD) or the Se-curities Exchange on which the publiclytraded partnership is registered, and suchnotice is published following certain pro-cedures. Accordingly, the commentatorrequests clarification as to whether a pub-licly traded partnership must directly no-tify a nominee to provide a qualified no-tice under the regulations, or whether thepartnership can follow the general noticeprocedures of 17 C.F.R. 240.10b–17(b)(1)or (3).

In response, the final regulations clar-ify when a qualified notice is receivedby a nominee. The final regulations donot require a publicly traded partnershipto directly notify a nominee to provide aqualified notice under §1.1446–4. Rather,the regulations provide, consistent with§1.1445–8 and standard practice, that apublicly traded partnership can provide thequalified notice in accordance with the no-tice requirements with respect to dividendsdescribed in 17 C.F.R. 240.10b–17(1) or(3) issued pursuant to the Securities Ex-change Act of 1934, 15 U.S.C. §78a

et. seq., and such notice will be sufficientnotice to all nominees to designate themas withholding agents under §1.1446–4when such notice is published in accor-dance with 17. C.F.R. 240.10b–17(b)(1)or (3).

3. Identification of nominees under§1.1446–4

Under §1.1446–4(d) and (e) of the pro-posed regulations, a nominee is requiredto provide Form W–9 to the partnershipto establish its status as a nominee andinclude a statement regarding the foreignpersons on whose behalf it holds an in-terest in the partnership. In response tocomments, the final regulations removethis requirement. Publicly traded partner-ships are provided information concern-ing nominees in preparation of complet-ing the Schedule K–1s issued for a taxableyear. See §1.6031(c)–1T. Further, pub-licly traded partnerships are able to deter-mine the nominees holding interests in thepartnership by other means. Accordingly,Treasury and the IRS have determined thatthe notification requirement is not neces-sary to further the purposes of the statuteand shift the withholding responsibility toa nominee.

4. Extension of publicly tradedpartnership regime to other partnerships

The proposed regulations requestedcomments as to whether the special rulesapplicable to publicly traded partnershipsshould be extended to other partnerships.No comments were received in responseto the request. Accordingly, no changehas been made in the final regulations toextend these rules.

5. Election to pay 1446 tax based uponpartners’ allocable share of ECTI

The proposed regulations provide thata publicly traded partnership may elect topay 1446 tax based upon its foreign part-ners’ allocable share of ECTI, rather thanbased upon distributions. In response tocomments, Treasury and the IRS agree thatthis election provision is not administrableas a practical matter. Accordingly, the fi-nal regulations remove this election so thatall publicly traded partnerships will paytax based upon distributions of effectively

connected income under §1.1446–4 of theregulations.

In addition to the change discussedabove, the final regulations update theordering rule with respect to distributionsby removing two provisions that are nolonger relevant.

F. Tiered PartnershipStructures—§1.1446–5

1. Application of the look through rules

Under the proposed regulations, alower-tier partnership (LTP) that has re-ceived documentation and informationfrom a partner that is a foreign partner-ship (UTP) may look through the UTPto the partners of the UTP when comput-ing its 1446 tax obligation. The touch-stone of proposed regulation §1.1446–5is that the LTP must be able to reli-ably associate (within the meaning of§1.1441–1(b)(2)(vii)) the UTP’s allocableshare of ECTI from the LTP with the part-ners of the UTP. Several commentatorsrequest clarification as to whether an LTPcan look through a UTP if the LTP can-not reliably associate 100 percent of theUTP’s allocable share with the partners ofthe UTP.

In response to this comment, the fi-nal regulations modify the language foundin proposed regulation §1.1446–5(c)(2) toclarify that the look through regime is notan all or nothing proposition. Rather, to theextent that an LTP can reliably associate aportion of a UTP’s allocable share of ECTIwith a partner of the UTP, the LTP willlook through when computing its 1446 tax(or an installment of such tax). This resultis consistent with the regime under section1441. See §1.1441–1(b)(2)(vii)(B)(2), Ex-ample 3 and Example 4.

2. Upper-tier domestic partnershippermitted to elect to have look through byLTP

The proposed regulations requestedcomments on whether the final regulationsshould permit a domestic UTP to electto have an LTP look through the UTP inaccordance with the rules of §1.1446–5.Several commentators note that this al-ternative would be desirable and shouldbe permitted in the final regulations. Inaddition, one commentator requests that,for administrative reasons, an LTP should

2005–23 I.R.B. 1169 June 6, 2005

be required to consent to the election andagree to undertake the look through.

In response to the above comments, thefinal regulations permit a domestic UTPto elect to have the look through rules of§1.1446–5 apply. Further, the final regula-tions require that the LTP consent in writ-ing to the election and thereby agree toapply the rules. The UTP must providea Form W–9 to the LTP to establish itsnon-foreign status. In addition, the UTPmust attach to the Form W–9 its electionto have the look through provisions ap-ply. UTP’s election must be in writing tothe LTP and received by the LTP at least15 days prior to any installment due dateor Form 8804 filing due date for whichit will be considered. The LTP must alsoconsent to undertake the look through inwriting. To make an election to whichthe LTP can consent, the domestic UTPmust provide information, consistent with§1.1446–5, to the LTP to enable such part-nership to reliably associate (within themeaning of §1.1441–1(b)(2)(vii)) at least aportion of the UTP’s allocable share with aforeign partner of the UTP. If the LTP doesnot consent to the election, then the LTP isto treat the domestic UTP as a U.S. personfor purposes of section 1446. Whether theUTP is a domestic or foreign partnership,and regardless of whether the LTP looksthrough the UTP in computing its with-holding tax, the UTP is still obligated toreport and pay tax under section 1446.

3. Clarify the application of thelook through rules to publicly tradedpartnerships in tiered structures

Section 1.1446–5 of the proposed regu-lations sets forth the look-through regimeapplicable to UTPs. The last sentenceof proposed regulation §1.1446–5(c)(2)states “[t]he approach set forth in thisparagraph (c) shall not apply to partner-ships whose interests are publicly traded,See §1.1446–4.” However, since the focusof §1.1446–5(c)(2) is on the UTP, onecommentator requests clarification as towhether the look-through regime can ap-ply if the LTP is publicly traded but theUTP is not publicly traded.

In response to the request, the finalregulations provide two new paragraphsto describe the application of the lookthrough rules to publicly traded partner-ships in tiered structures. The rules are

based upon whether the publicly tradedpartnership is an LTP or UTP. Under thefinal regulations, the look through rules of§1.1446–5 apply to a publicly traded part-nership (or its nominees required to pay1446 tax) that is an LTP if all the require-ments of §1.1446–5 are met. However,the final regulations also provide that thelook through regime of §1.1446–5 will notapply to look through a publicly tradedpartnership where such partnership is aUTP.

G. §1.1446–6T and Withholding in Excessof a Partner’s Actual Tax Liability

1. Background regarding withholding inexcess of a foreign partner’s tax liability

The preamble to the proposed regula-tions notes that a partnership may be re-quired to pay 1446 tax in excess of a for-eign partner’s actual tax liability becausesection 1446 does not take into accounta foreign partner’s deductions and lossesfrom outside the partnership during theyear, or a foreign partner’s loss carryoversand, as discussed above, section 1446 re-quires withholding at the highest statu-tory rates generally applicable to a foreignpartner with effectively connected income.The preamble requested comments on ap-proaches to adjust the amount of a partner-ship’s 1446 tax obligation that would beconsistent with the statute and legislativehistory and administrable by partnerships,partners, and the IRS. One such approachwas discussed in part C.1. of this pream-ble, above.

2. Overview of comments received

Treasury and the IRS received numer-ous comments requesting that a partner-ship be permitted to take into accounta foreign partner’s available deductionsand losses that are connected with grossincome that is effectively connected (ef-fectively connected deductions and losses)when computing the partnership’s 1446tax liability. Most commentators proposethat a partnership be permitted to relyon a certificate by a foreign partner re-garding the partner’s available effectivelyconnected deductions and losses for thetaxable year. However, each commentatorproposes qualifications and limitations ona foreign partner’s ability to certify such

deductions and losses. The proposals arediscussed below.

Several commentators propose that aforeign partner with a substantial presencein the United States be permitted to certifydeductions and losses to the partnership.The commentators differ on what consti-tutes substantial presence in the UnitedStates. For example, one commentatorsuggests that only foreign partners with a10 percent or greater interest in the capi-tal or profits of the partnership be permit-ted to certify deductions and losses. An-other commentator suggests that the finalregulations permit a foreign partner to cer-tify deductions and losses to the partner-ship only if the partner has substantial as-sets in the United States, defined as a mul-tiple of the 1446 tax that the partnershipotherwise would be required to pay. Athird commentator proposes an exemptionfrom paying 1446 tax where ECTI is allo-cable to a publicly traded foreign corpora-tion, a foreign corporation owned by a pub-licly traded corporation, or any other for-eign partners with substantial assets, em-ployees, or business activities in the UnitedStates to the extent such entity informs thepartnership that overwithholding will oc-cur. Finally, one commentator proposesthat a U.S. branch of a foreign bank or in-surance company be entitled to certify de-ductions and losses to the partnership, posta security, or otherwise reduce withholdingbecause such banks and insurance compa-nies typically have substantial investmentsin the United States.

Most of the proposals also suggest someadditional measure designed to provide se-curity to the government that the appro-priate partner-level U.S. income tax duewill be paid. One commentator’s pro-posal conditions a foreign partner’s cer-tificate of deductions and losses on thetax book value of the partnership’s as-sets being at least equal to the decrease in1446 tax that results from considering allforeign partners’ certified deductions andlosses. This same commentator also sug-gests that a partnership remain liable forthe 1446 tax if it is later determined thata foreign partner’s deductions and losseswere overstated. A second commentatorproposes that at least a portion of a foreignpartner’s certified deductions and lossesshould have to be reviewed and approvedby a certified tax professional, and consid-ered by a partnership only if at least one

June 6, 2005 1170 2005–23 I.R.B.

U.S. person is involved in the partnership’sactivities (e.g., the Tax Matters Partner un-der section 6231).

With respect to which deductions andlosses may be certified, most of the com-mentators propose that the final regula-tions permit a foreign partner to certify de-ductions and losses from preceding years,as reflected on a partner’s prior U.S. in-come tax return. One commentator pro-poses that a partnership should be able toconsider anticipated current year deduc-tions and losses of a foreign partner, suchas state and local taxes the partnership willpay on behalf of a foreign partner. An-other commentator suggests that the prioryear safe harbor in the proposed regula-tions should be broadened to permit a part-nership to consider a foreign partner’s ac-tual partner-level deductions and tax lia-bility for the prior year when the partner’sonly U.S. business activity is the partner’sinvestment in the partnership. Further,one commentator proposes a tiered systemwhere deductions related to the partnershipcould be certified to the partnership with-out IRS involvement, but deductions thatarise from activities that are unrelated tothe partnership would be subject to a morestringent procedure.

With respect to other requirements,most of the commentators premise theirproposals on a foreign partner having filedtax returns in previous years. There wasno consensus regarding the appropriatefiling history that should be required of aforeign partner. However, one commenta-tor proposes a special category, so-called“good driver” partners; that is, foreignpartners that have established that theyhave timely filed Federal income tax re-turns in the United States for the precedingthree taxable years, who would be permit-ted to certify deductions and losses to thepartnership without IRS involvement.

Several commentators propose thatpartner certificates under section 1446should be processed similar to the regimein Rev. Proc. 2000–35, 2000–2 C.B. 211,(which permits taxpayers to receive a cer-tificate from the IRS to reduce or eliminatewithholding under section 1445). Othercommentators suggest that Rev. Proc.2000–35 should be modified to accommo-date a new section 1446 certificate regime.

In response to the comments received,Treasury and the IRS are issuing tempo-rary and proposed regulations on this mat-

ter with the final regulations. The tem-porary and proposed regulations addressmany of the concerns regarding the poten-tial for section 1446 to require a partner-ship to pay 1446 tax in excess of a for-eign partner’s actual tax liability. The ef-fective date of the temporary regulationscoincides with the effective date of the fi-nal regulations issued in this publication.The temporary regulations contain rulesthat permit a partnership, in some circum-stances, to consider a foreign partner’s de-ductions and losses that are reasonably ex-pected to be available to reduce the part-ner’s U.S. income tax liability on the part-ner’s allocable share of effectively con-nected income or gain from the partnershipin the taxable year. The temporary regu-lations contain elements of several of thesuggested approaches. Treasury and theIRS believe that the regulations set fortha procedure that will be administrable bypartnerships, partners, and the IRS. Theprovisions of the temporary regulations areoutlined below.

3. General overview of temporaryregulations

In general, under the temporary regu-lations, certain foreign partners may cer-tify deductions and losses to a partnershipto reduce the 1446 tax required to be paidby the partnership with respect to ECTI al-locable to such partners. A foreign part-ner’s certificate may only be consideredfor the partnership taxable year for whichit is submitted. Therefore, a foreign part-ner that wants to certify its deductions andlosses in consecutive years must submita new certificate each partnership taxableyear in accordance with the time require-ments in the regulations (discussed in partG.7. of this preamble) for the certificationprovisions to apply. Before each install-ment date or Form 8804 filing date (with-out regard to extensions), the partnershipwill determine, on a partner-by-partner ba-sis, whether the procedures of the tempo-rary regulations may apply. A partner-ship receiving a valid certificate under thetemporary regulations is not obligated toconsider a partner’s certified available de-ductions and losses (or may consider onlya portion of such deductions and losses)in computing its withholding tax liabil-ity. Further, in some cases, the tempo-rary regulations may prohibit a partnership

from considering all of a partner’s certifiedlosses. For example, the temporary regu-lations provide that a partnership may onlyconsider a foreign partner’s certified netoperating loss (NOL) to offset 90 percentof the partner’s allocable share of ECTI.

Under the temporary regulations, apartnership permitted to consider a foreignpartner’s certificate is generally not re-lieved from liability for the 1446 tax undersection 1461, or for penalties or interest,if the partnership or the IRS, in its solediscretion, determines that the partner’scertificate is defective, or the partner’scertificate is updated and the 1446 taxdue with respect to such partner increases.However, a partnership that reasonablyrelies on a foreign partner’s certificatewill not be subject to the addition to thetax under section 6655 (as applied through§1.1446–3) for failing to make installmentpayments with respect to the foreign part-ner during any period that the partnershipreasonably relied on the partner’s certifi-cate. A partnership that does not haveactual knowledge or reason to know thata foreign partner’s certificate is defectivemay reasonably rely on such certificate.A partnership is not considered to haveactual knowledge or reason to know thata foreign partner’s certificate (first cer-tificate) is defective if the partner submitsan updated certificate that indicates thatthe reasonably expected deductions andlosses are less than the amount set forth onthe first certificate, provided such updatedcertificate cannot be considered for the in-stallment period or unextended Form 8804filing date because such updated certifi-cate was received less than 10 days beforesuch date. The temporary regulations setforth those circumstances under which acertificate will be considered defective,including, but not limited to, where theforeign partner is not eligible to submit thecertificate, or the partnership or the IRSdetermines that the partner’s actual avail-able deductions and losses are less thanthe deductions and losses last certified tothe partnership for the partnership taxableyear.

The regulations also contain rules andexamples regarding the extent of the part-nership’s 1446 tax liability when a certifi-cate is determined to be defective. Theregulations provide that if a certificate isdetermined to be defective for a reasonother than the amount or character of the

2005–23 I.R.B. 1171 June 6, 2005

deductions and losses set forth on such cer-tificate (e.g., partner failed to timely filea U.S. income tax return), then the part-nership shall be liable for the full 1446tax (or any installment of such tax) duewith respect to such partner, without re-gard to the certificate. However, this lia-bility may be eliminated if the partnershipcan demonstrate that it is deemed to havepaid 1446 tax with respect to the partnerunder the regulations. See part C.6. ofthis preamble. If it is determined that acertificate is defective because the actualdeductions and losses available to the for-eign partner are less than the amount cer-tified to the partnership (other than whenit is determined that the partner certifiedthe same deduction or loss to more thanone partnership), or that the character ofthe certified deductions and losses is erro-neous, then the partnership shall be liablefor 1446 tax (or any installment of suchtax) with respect to such partner only to theextent the partnership considered the cer-tified deductions and losses in an amountgreater than the amount determined to beactually available to the partner and per-mitted to be used under §1.1446–1 through§1.1446–6T or to the extent the erroneouscharacterization of the certified deductionsand losses affects the calculation of thepartnership’s 1446 tax liability.

If the IRS notifies the partnership thata foreign partner’s certificate is defective,even if such notice pertains to a certificatesubmitted for a prior partnership taxableyear, the partnership will not be permittedto rely on any current certificate from theforeign partner then in its possession, orany certificate the foreign partner submitsthereafter, until the IRS again notifies thepartnership in writing and revokes or mod-ifies the original notice.

The procedures available under thetemporary regulations are only availableto a foreign partner that has provided ad-equate documentation to a partnershipunder §1.1446–1. Further, the proceduresdo not apply to a publicly traded partner-ship subject to §1.1446–4.

4. Partners permitted to certify deductionsand losses under temporary regulations

Under the temporary regulations, onlycertain foreign partners may submit a cer-tificate to a partnership for purposes of sec-tion 1446. In general, a foreign partner

may submit a certificate only if the part-ner has submitted documentation to thepartnership in compliance with §1.1446–1and, among other requirements, can repre-sent that it timely filed, or will timely file,a U.S. Federal income tax return for eachof the preceding four taxable years andthe partner’s taxable year during which thecertificate is considered. The partner mustalso represent that it timely paid all taxshown on such returns (or will timely payall tax shown on such returns). The fil-ing and payment requirements ensure thatthe foreign partner is in the United Statesincome tax system, has filed returns fora reasonable period of time, and providesome assurance that the partner will fileits U.S. income tax return (and pay all taxshown on such return) for the year the cer-tificate is considered. Although the tem-porary regulations are generally effectivefor partnership taxable years beginning af-ter the date that the regulations are issued,a foreign partner’s prior filing of U.S. Fed-eral income tax returns may contribute tomeet the filing requirement set forth in thetemporary regulations.

Because trusts and estates are not al-ways pure conduits for tax purposes, it isdifficult for a partnership to determine thetaxpayer (i.e., trust/estate or beneficiary)that will pay tax on the ECTI allocated tothe trust or estate. As a result, the tem-porary regulations generally do not permitforeign trusts or estates to submit a certifi-cate to the partnership. However, the reg-ulations provide an exception for a grantortrust under sections 671 through 679 ofthe Code where the grantor or other ownerof such trust meets the documentation re-quirements set forth in §1.1446–1 and therequirements for submitting a certificateunder the temporary regulations.

With respect to tiered partnership struc-tures, the temporary regulations permita lower-tier partnership to consider thecertificate of a foreign partner of an up-per-tier partnership only when the lookthrough provisions of the regulations (sec-tion 1.1446–5) otherwise apply and thelower-tier partnership is treating the for-eign partner of the upper-tier partnershipas if the partner were a direct partner inthe lower-tier partnership for purposes ofcomputing its section 1446 tax obligation.See §1.1446–5(c)(2). In that situation, theforeign partner’s certificate would first beprovided to the upper-tier partnership and

then provided by the upper-tier partner-ship to the lower-tier partnership.

5. Deductions and losses permitted to becertified under temporary regulations

If a foreign partner meets the require-ments of the temporary regulations, theforeign partner may submit a certificateto the partnership for the partnership tax-able year that sets forth the deductions andlosses (other than charitable deductions)the partner reasonably expects to be avail-able to reduce the partner’s U.S. incometax liability on the partner’s allocable shareof effectively connected income or gainfrom the partnership for such partnershiptaxable year. Except as otherwise providedin the regulations, all deductions and lossesset forth in the certificate must generally bereflected on the partner’s timely filed (or tobe timely filed) U.S. income tax return forthe partner’s immediately preceding tax-able year. That is, a foreign partner canonly certify deductions and losses that areor will be reflected on the partner’s U.S.income tax return filed for a taxable yearending prior to the installment due dateor Form 8804 filing date (without regardto extensions) for the partnership taxableyear for which the certificate is considered(and no anticipated deduction or loss withrespect to current operations may be con-sidered). However, a partner that has aloss that is set forth on a Schedule K–1 is-sued by the partnership for a prior year, butis not reflected on a prior year return be-cause the loss was suspended under section704(d) and, therefore, not deductible, maycertify such loss to the partnership that is-sued the Schedule K–1.

Treasury and the IRS believe that lim-iting a partnership’s consideration of de-ductions and losses to those reflected orto be reflected on a prior year return ofthe partner provides a bright line rule thatfacilitates administration, furthers the pur-poses of the statute, and avoids the uncer-tainty associated with fluctuations in esti-mates of current year activities. The ap-proach is consistent with section 1445, an-other chapter 3 withholding regime. SeeRev. Proc. 2000–35, 2000–2 C.B. 211,§4.06. The temporary regulations con-tain additional limitations on the deduc-tions and losses that may be certified.

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6. Requirement under temporaryregulations that partnerships turn overcertificates to IRS

A partnership that considers a foreignpartner’s certificate to any extent whencomputing its 1446 tax (or any install-ment of such tax) must file Form 8813,“Partnership Withholding Tax PaymentVoucher (Section 1446),” or Forms 8804and 8805, whichever is applicable, forthe period the partnership considers suchcertificate, even if there is no 1446 tax duewith respect to such partner. The partner-ship must attach such partner’s certificateto Form 8813 or Form 8805 filed for theperiod. The partnership must also attachits 1446 tax calculation for such foreignpartner and such calculation must clearlydemonstrate the use of the certified deduc-tions and losses, and the effect on the 1446tax owed (or installment of such tax) withrespect to such partner. A Form 8805 mustbe issued to each foreign partner whosecertificate is considered by the partnershipin computing the partnership’s 1446 taxon Form 8804, regardless of whether thepartnership must pay any 1446 tax.

7. Timing requirements for submittingcertificates, updated certificates,and status updates under temporaryregulations

A foreign partner that desires to certifydeductions and losses to a partnership un-der the temporary regulations must submitits first certificate for the partnership tax-able year so that it is received by the part-nership at least 30 days prior to the part-nership installment due date or the Form8804 filing date (without regard to exten-sions) for the partnership taxable year forwhich the partner would like the certificateto be considered in the partnership’s com-putation of the 1446 tax (or any installmentof such tax) due with respect to the part-ner. A partner that has not yet filed a U.S.income tax return required to be timelyfiled under the regulations may generallyrepresent that such return will be timelyfiled. However, the certificate submittedto the partnership must specify any tax-able year for which no return has been filedand the partner must update the certificateno later than 10 days after the date that itfiles a U.S. Federal income tax return forany year specified. If the partner has not

filed a prior year return when submittingits first certificate, and does not file suchreturn and trigger the requirement to pro-vide an updated certificate, then the for-eign partner must provide a status updateto the partnership so that it is received bysuch partnership at least ten days prior tothe partnership’s final installment paymentdate, setting forth such information regard-ing the filing due date of any U.S. incometax returns that have not been filed. If nostatus update is received, the partnershipmust disregard the certificate the partnersubmitted for the fourth installment duedate and when completing its Form 8804for the taxable year. In that case, providedthe other requirements of the regulationswere met, the partnership will still be con-sidered to have reasonably relied on thecertificate for the first three installment pe-riods of the taxable year.

A foreign partner that submits a certifi-cate and later determines that the deduc-tions and losses reasonably expected to beavailable are less than the correspondingamounts previously certified for the tax-able year, or otherwise determines that thecertificate is incorrect (e.g., a certified or-dinary loss is actually capital in charac-ter), is required to provide an updated cer-tificate to the partnership within 10 daysof the date that the foreign partner makessuch determination. A partner submittingan updated certificate must attach a copyof the certificate that is being updated (su-perseded certificate).

Consistent with the voluntary nature ofthe temporary regulations, a partnershipmay consider an updated certificate in itscomputation of 1446 tax (or any install-ment of such tax) due with respect to aforeign partner for any period for whichtax is otherwise due if the partnershipreceives the updated certificate at least10 days prior to the installment paymentor Form 8804 filing date (without regardto extensions) for the partnership taxableyear for which the certificate and updatedcertificate are submitted. An updatedcertificate that may be considered underthe previous sentence supersedes all priorcertificates submitted by the foreign part-ner for the same partnership taxable year,beginning with the installment period orForm 8804 filing date (without regard toextensions) for which the partnership mayconsider the updated certificate.

8. Additional requirements for certificatesunder temporary regulations

The temporary regulations require aforeign partner that submits a certificateto a partnership to provide certain infor-mation and make representations on thecertificate provided. For example, a for-eign partner must provide the partnershipa certificate that includes the partnership’sname, address, and Taxpayer Identifica-tion Number (TIN), the partner’s name,address, and TIN, and the partnershiptaxable year for which the certificate issubmitted. Further, a foreign partner mustrepresent that any certified deductions andlosses set forth on the certificate have beenreflected on a timely filed U.S. income taxreturn, consistent with sections 874 and882 and the regulations thereunder, andthat the certified deductions and losseshave not been certified to another partner-ship for the purpose of reducing the 1446tax of such other partnership for the sametaxable year. Moreover, a foreign partnermust set forth the character of any certifieddeductions and losses (e.g., long-term cap-ital or ordinary) and identify any particu-lar deductions and losses that have specialcharacteristics (e.g., passive activity lossesunder section 469, suspended losses un-der section 704(d)) or that are subject tolimitations that need to be considered bythe partnership. Finally, a foreign partnermust represent that the certified deduc-tions and losses have not been disallowedby the IRS as part of a proposed adjust-ment described in §601.103(b) (relatingto examination and determination of taxliability) or §601.105(b) (relating to ex-amination of returns). A foreign partner’scertificate, and any updated certificate,must be signed by the foreign partner, orits authorized representative, under penal-ties of perjury.

9. Exemption from withholding under thetemporary regulations

In addition to the provisions discussedabove, the temporary regulations permit anonresident alien partner to certify to thepartnership that the partnership investmentis (and will be) the only activity of thepartner for the partner’s taxable year thatgives rise to effectively connected income,gain, deduction, or loss. In such a case,the partnership is not required to pay 1446

2005–23 I.R.B. 1173 June 6, 2005

tax (or any installment of such tax) with re-spect to such partner if the partnership es-timates that the annualized (or, in the caseof a partnership completing its Form 8804,the actual) 1446 tax due with respect tosuch nonresident alien partner is less than$1,000. In determining whether the annu-alized (or actual) 1446 tax due with respectto the partner is less than $1,000, the part-nership shall not take into account any ofthe partner’s certified deductions or lossesunder the provisions of the temporary reg-ulations. The submission of a certificateunder this exception is subject to all thegeneral rules in the temporary regulations(e.g., partner has (or will) timely file itsU.S. income tax return for the precedingfour years (and pay all tax shown on suchreturns), the timing rules for submission ofthe certificate are met) with respect to sub-mitting a certificate. Further, a nonresidentalien partner that submits such a certificateto the partnership must submit a statementin writing to the partnership revoking thecertificate if the partner invests or other-wise engages in another activity during thepartner’s taxable year that may give rise toeffectively connected items. A partnershipreceiving a statement that the partner’s in-vestment in the partnership is (and will be)the partner’s only activity giving rise to ef-fectively connected items may reasonablyrely on such certificate provided it has noactual knowledge or reason to know thatthe certificate is defective. Further, thepartnership remains liable for the 1446 tax,and all additions to the tax (other than theaddition to the tax under section 6655 asapplied through §1.1446–3 for such peri-ods during which the partnership reason-ably relied on the certificate), interest, andpenalties if the IRS, in its sole discretion,determines that such partner’s certificate isdefective.

10. Effective Date of TemporaryRegulations

The temporary regulations are effectivefor partnership taxable years beginning af-ter the date the final regulations are pub-lished in the Federal Register. How-ever, Treasury and the IRS believe thatthe temporary regulations should be imme-diately available for qualifying partners.Therefore, a partnership may elect to applythe temporary regulations to partnershiptaxable years beginning after December

31, 2004, provided such partnership alsoelects to apply the final regulations under§§1.1446–1 through 1.1446–5, which oth-erwise would be effective for taxable yearsbeginning after May 18, 2005, to partner-ship taxable years beginning after Decem-ber 31, 2004.

Effective Dates

These regulations are effective for part-nership taxable years beginning after May18, 2005. However, a partnership mayelect to apply the provisions of the finalregulations to partnership taxable years be-ginning after December 31, 2004. A part-nership may also elect to apply the tempo-rary regulations included in this documentto partnership taxable years beginning af-ter December 31, 2004, provided that thepartnership also elects to apply the finalregulations to partnership taxable years be-ginning after December 31, 2004.

Effect on Other Documents

The following publications will be ob-solete for partnership taxable years begin-ning after May 18, 2005, or for partner-ship taxable years beginning after Decem-ber 31, 2004, if the partnership makes anelection under §1.1446–7:

Rev. Proc. 89–31, 1989–1 C.B. 895Rev. Proc. 92–66, 1992–2 C.B. 428

Special Analyses

It has been determined that the final andtemporary regulations are not a significantregulatory action as defined in ExecutiveOrder 12866. It also has been determinedthat section 553(b) of the AdministrativeProcedures Act (5 U.S.C. chapter 5) doesnot apply to these regulations. With re-spect to the final regulations, it is herebycertified that the collections of informa-tion contained in §1.871–10, §1.1446–1(pertaining to domestic grantor trusts), and§1.1446–3 (pertaining to foreign trusts),will not have a significant economic im-pact on a substantial number of small en-tities. This certification is based upon thefact that only limited small entities are im-pacted by these collections and the bur-den associated with such collections is 0.5hours. With respect to the collections ofinformation in §§1.1446–3 (pertaining toa partnership required to notify its for-eign partners of an installment payment

of 1446 tax paid on behalf of such part-ner) and 1.1446–4, it is hereby certifiedthat these sections will not impose a sig-nificant economic impact on a substan-tial number of small entities. This certi-fication is based upon the fact that whileapproximately 15,000 small entities willbe impacted by these sections, the esti-mated annual burden associated with thesesections is only 0.5 hours per respondent.Moreover, the information collection in§1.1446–4 is voluntary. Therefore, a Reg-ulatory Flexibility Analysis under the Reg-ulatory Flexibility Act (5 U.S.C. chapter6) is not required. For applicability of theRFA to the temporary regulation, pleaserefer to the cross-referenced NPRM pub-lished elsewhere in this issue of the Bul-letin. Pursuant to section 7805(f) of theCode, the Notice of Proposed Rulemak-ing preceding the final regulation was sub-mitted to the Chief Counsel for Advocacyof the Small Business Administration forcomment on its impact on small business.Further, pursuant to section 7805(f) of theCode, the temporary regulation included inthis document has been submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.


The principal author of the final andtemporary regulations is David J. Sotos,formerly of the Office of the AssociateChief Counsel (International). However,other personnel from the Treasury Depart-ment and IRS participated in their devel-opment.

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR parts 1, 301, and602 are amended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *§1.1446–3 also issued under 26 U.S.C.

1446(f).§1.1446–4 also issued under 26 U.S.C.

1446(f).* * *Par. 2. In §1.871–10, paragraph (d)(3)

is amended by adding four sentences at theend of the paragraph, and paragraph (e) is

June 6, 2005 1174 2005–23 I.R.B.

amended by revising the first sentence toread as follows:

§1.871–10 Election to treat real propertyincome as effectively connected with U.S.business.

* * * * *(d) * * *(3) Election by partnership. * * * A

nonresident alien or foreign corporationthat makes an election generally mustprovide the partnership a Form W–8ECI,“Certificate of Foreign Person’s Claim forExemption From Withholding on IncomeEffectively Connected With the Conduct ofa Trade or Business in the United States,”and attach to such form a copy of the elec-tion (or a statement that indicates that thenonresident alien or foreign corporationwill make the election). However, if thenonresident alien or foreign corporationhas already submitted a valid form to thepartnership that establishes such partner’sforeign status, the partner shall furnish thepartnership a copy of the election (or astatement that indicates that the nonresi-dent alien or foreign corporation will makethe election). To the extent the partnershiphas income to which the election pertains,the partnership shall treat such income aseffectively connected income subject towithholding under section 1446. See also§1.1446–2.

(e) Effective dates. This section shallapply for taxable years beginning after De-cember 31, 1966, except the last four sen-tences of paragraph (d)(3) of this sectionshall apply to partnership taxable years be-ginning after May 18, 2005, or such earliertime as the regulations under §§1.1446–1through 1.1446–5 apply by reason of anelection under §1.1446–7.* * *

Par. 3. Section 1.1443–1 is amended byrevising paragraphs (a) and (c)(1) to readas follows:

§1.1443–1 Foreign tax-exemptorganizations.

(a) Income includible in computingunrelated business taxable income. Inthe case of a foreign organization thatis described in section 501(c), amountspaid or effectively connected taxable in-come allocable to the organization thatare includible under section 512 andsection 513 in computing the organi-

zation’s unrelated business taxable in-come are subject to withholding under§§1.1441–1, 1.1441–4, 1.1441–6, and1.1446–1 through 1.1446–6T, in the samemanner as payments or allocations of ef-fectively connected taxable income of thesame amounts made to any foreign per-son that is not a tax-exempt organization.Therefore, a foreign organization receiv-ing amounts includible under section 512and section 513 in computing the organi-zation’s unrelated business taxable incomemay claim an exemption from withhold-ing or a reduced rate of withholding withrespect to that income in the same manneras a foreign person that is not a tax-ex-empt organization. See §1.1441–9(b)(3)for a presumption that amounts are in-cludible under section 512 and section513 in computing the organization’s un-related business taxable income in theabsence of reliable certification. See also§1.1446–3(c)(3), applying this presump-tion in the context of section 1446.

* * * * *(c)* * *(1) In general. This section

applies to payments made after December31, 2000, except that the references inparagraph (a) of this section to effectivelyconnected taxable income and withhold-ing under section 1446 shall apply topartnership taxable years beginning afterMay 18, 2005, or such earlier time asthe regulations under §§1.1446–1 through1.1446–5 apply by reason of an electionunder §1.1446–7.

* * * * *Par. 4. Sections 1.1446–0 through

1.1446–5, 1.1446–6T and 1.1446–7 areadded to read as follows:

§1.1446–0 Table of contents. This sectionlists the captions contained in §§1.1446–1through 1.1446–7.

§1.1446–1 Withholding tax on foreignpartners’ share of effectively connectedtaxable income.

(a) In general.(b) Steps in determining 1446 tax obli-

gation.(c) Determining whether a partnership

has a foreign partner.(1) In general.(2) Submission of Forms W–8BEN,

W–8IMY, W–8ECI, W–8EXP, and W–9.

(i) In general.(ii) Withholding certificate applicable

to each type of partner.(A) U.S. person.(B) Nonresident alien.(C) Foreign partnership.(D) Disregarded entities.(E) Domestic and foreign grantor trusts.(F) Nominees.(G) Foreign governments, foreign

tax-exempt organizations and other for-eign persons.

(H) Foreign corporations, certain for-eign trusts, and foreign estates

(iii) Effect of Forms W–8BEN,W–8IMY, W–8ECI, W–8EXP, W–9, andstatement.

(A) Partnership reliance on withholdingcertificate.

(B) Reason to know.(C) Subsequent knowledge and impact

on penalties.(iv) Requirements for certificates to be

valid.(A) When period of validity expires.(B) Required information for Forms

W–8BEN, W–8IMY, W–8ECI, andW–8EXP.

(v) Partner must provide new withhold-ing certificate when there is a change in cir-cumstances.

(vi) Partnership must retain withhold-ing certificates.

(3) Presumptions in the absence ofvalid Form W–8BEN, Form W–8IMY,Form W–8ECI, Form W–8EXP, FormW–9, or statement.

(4) Consequences when partner-ship knows or has reason to know thatForm W–8BEN, Form W–8IMY, FormW–8ECI, Form W–8EXP, or Form W–9is incorrect or unreliable and does notwithhold.

(5) Acceptable substitute form.

§1.1446–2 Determining a partnership’seffectively connected taxable incomeallocable to foreign partners undersection 704.

(a) In general.(b) Computation.(1) In general.(2) Income and gain rules.(i) Application of the principles of sec-

tion 864.(ii) Income treated as effectively con-

nected.

2005–23 I.R.B. 1175 June 6, 2005

(iii) Exempt income.(3) Deductions and losses.(i) Oil and gas interests.(ii) Charitable contributions.(iii) Net operating losses and other sus-

pended or carried losses.(iv) Interest deductions.(v) Limitation on capital losses.(vi) Other deductions.(vii) Limitations on deductions.(4) Other rules.(i) Exclusion of items allocated to U.S.

partners.(ii) Partnership credits.(5) Examples.

§1.1446–3 Time and manner ofcalculating and paying over the 1446 tax.

(a) In general.(1) Calculating 1446 tax.(2) Applicable percentage.(i) In general.(ii) Special types of income or gain.(b) Installment payments.(1) In general.(2) Calculation.(i) General application of the principles

of section 6655.(ii) Annualization methods.(iii) Partner’s estimated tax payments.(iv) Partner whose interest terminates

during the partnership’s taxable year.(v) Exceptions and modifications to the

application of the principles under section6655.

(A) Inapplicability of special rules forlarge corporations.

(B) Inapplicability of special rules re-garding early refunds.

(C) Period of underpayment.(D) Other taxes.(E) 1446 tax treated as tax under section

11.(F) Application of section 6655(f).(G) Application of section 6655(i).(H) Current year tax safe harbor.(I) Prior year tax safe harbor.(3) 1446 tax safe harbor.(i) In general.(ii) Permission to change to standard

annualization method.(c) Coordination with other withhold-

ing rules.(1) Fixed or determinable, annual or pe-

riodical income.(2) Real property gains.(i) Domestic partnerships.

(ii) Foreign partnerships.(3) Coordination with section 1443.(d) Reporting and crediting the 1446

tax.(1) Reporting 1446 tax.(i) Reporting of installment tax pay-

ments and notification to partners of in-stallment tax payments.

(ii) Payment due dates.(iii) Annual return and notification to

partners.(iv) Information provided to beneficia-

ries of foreign trusts and estates.(v) Attachments required of foreign

trusts and estates.(vi) Attachments required of beneficia-

ries of foreign trusts and estates.(vii) Information provided to beneficia-

ries of foreign trusts and estates that arepartners in certain publicly traded partner-ships.

(2) Crediting 1446 tax against a part-ner’s U.S. tax liability.

(i) In general.(ii) Substantiation for purposes of

claiming the credit under section 33.(iii) Special rules for apportioning the

tax credit under section 33.(A) Foreign trusts and estates.(B) Use of domestic trusts to circum-

vent section 1446.(iv) Refunds to withholding agent.(v) 1446 tax treated as cash distribution

to partners.(vi) Examples.(e) Liability of partnership for failure to

withhold.(1) In general.(2) Proof that tax liability has been sat-

isfied and deemed payment of 1446 tax.(3) Liability for interest, penalties, and

additions to the tax.(i) Partnership.(ii) Foreign partner.(4) Examples.(f) Effect of withholding on partner.

§1.1446–4 Publicly traded partnerships.

(a) In general.(b) Definitions.(1) Publicly traded partnership.(2) Applicable percentage.(3) Nominee.(4) Qualified notice.(c) Paying and reporting 1446 tax.(d) Rules for designation of nominees

to withhold tax under section 1446.

(e) Determining foreign status of part-ners.

(f) Distributions subject to withholding.(1) In general.(2) In-kind distributions.(3) Ordering rule relating to distribu-

tions.(4) Coordination with section

1445(e)(1).

§1.1446–5 Tiered partnership structures.

(a) In general.(b) Reporting requirements.(1) In general.(2) Publicly traded partnerships.(c) Look through rules for foreign up-

per-tier partnerships.(d) Publicly traded partnerships.(1) Upper-tier publicly traded partner-

ship.(2) Lower-tier publicly traded partner-

ship.(e) Election by a domestic upper-tier

partnership to apply look through rules.(1) In general.(2) Information required for valid elec-

tion statement.(3) Consent of lower-tier partnership.(f) Examples.

§1.1446–6T Special rules to reduce apartnership’s 1446 tax with respect toa foreign partner’s allocable share ofeffectively connected taxable income(temporary).

(a) In general.(b) Foreign partner to whom this section

applies.(1) In general.(2) Special rules.(c) Certificate to reduce 1446 tax with

respect to a foreign partner.(1) In general.(i) Deductions and losses from the part-

nership from prior taxable years.(ii) Deductions and losses from sources

other than the partnership from prior tax-able years.

(iii) Limit on the consideration of a part-ner’s net operating loss deduction.

(iv) Certificate of nonresident alienpartner that partnership investment ispartner’s only activity giving rise to effec-tively connected items.

(2) Time and form of certification.(i) Time for certification provided to

partnership.

June 6, 2005 1176 2005–23 I.R.B.

(A) First certificate submitted for a part-nership’s taxable year.

(B) Updated certificates and status up-dates.

(1) Foreign partner’s prior year tax re-turns not yet filed.

(2) Other circumstances requiring a for-eign partner to submit an updated certifi-cate.

(3) Form and content of updated certifi-cate.

(4) When partnership may consider anupdated certificate.

(ii) Form of certification.(3) Notification to partnership when a

partner’s certificate cannot be relied upon.(4) Partner to receive copy of notice.(5) Partner’s certificate valid only for

partnership taxable year for which submit-ted.

(d) Effect of certificate of deductionsand losses on partners and partnership.

(1) Effect on partner.(i) No effect on substantive tax liability

of foreign partner.(ii) No effect on partner’s estimated tax

obligations.(2) Effect on partnership.(i) Reasonable reliance to relieve part-

nership from addition to the tax under sec-tion 6655.

(ii) Filing requirement.(iii) Continuing liability for withhold-

ing tax under section 1461 and for appli-cable interest and penalties.

(iv) Partner’s certified deductions andlosses to offset foreign partner’s annual-ized allocable share of partnership ECTI.

(e) Examples.(f) Effective dates.

§1.1446–7 Effective dates.

§1.1446–1 Withholding tax on foreignpartners’ share of effectively connectedtaxable income.

(a) In general. If a domestic or for-eign partnership has effectively connectedtaxable income (ECTI) as computed un-der §1.1446–2 for any partnership tax year,and any portion of such taxable income isallocable under section 704 to a foreignpartner, then the partnership must pay awithholding tax under section 1446 (1446tax) at the time and in the manner pre-scribed in this section, and §§1.1446–2through 1.1446–6T.

(b) Steps in determining 1446 tax obli-gation. In general, a partnership de-termines its 1446 tax as follows. Thepartnership determines whether it has anyforeign partners in accordance with para-graph (c) of this section. If the partnershipdoes not have any foreign partners (in-cluding any person presumed to be foreignunder paragraph (c) of this section andany domestic trust treated as foreign under§1.1446–3(d)) during its taxable year, itgenerally will not have a 1446 tax obliga-tion. If the partnership has one or moreforeign partners, it then determines under§1.1446–2 whether it has ECTI any por-tion of which is allocable under section704 to one or more of the foreign part-ners. If the partnership has ECTI allocableunder section 704 to one or more of itsforeign partners, the partnership computesits 1446 tax, pays over 1446 tax, and re-ports the amount paid in accordance withthe rules in §1.1446–3. For special rulesapplicable to publicly traded partnerships,see §1.1446–4. For special rules appli-cable to tiered partnership structures, see§1.1446–5. For special rules that mayapply in determining the amount of 1446tax due with respect to a partner, see§1.1446–6T.

(c) Determining whether a partnershiphas a foreign partner—(1) In general. Ex-cept as otherwise provided in this section,§1.1446–3, and §1.1446–5, only a partner-ship that has at least one foreign partnerduring the partnership’s taxable year canhave a 1446 tax liability. Generally, theterm foreign partner means any partner ofthe partnership that is not a U.S. personwithin the meaning of section 7701(a)(30).Thus, a partner of the partnership is gen-erally a foreign partner if the partner is anonresident alien, foreign partnership (see§1.1446–5 for rules that allow a lower-tierpartnership to look through an upper-tierforeign partnership to the partners of suchpartnership for purposes of computing its1446 tax), foreign corporation (which in-cludes a foreign government pursuant tosection 892(a)(3)), foreign estate or trust(see paragraph (c)(2) of this section forrules that instruct a partnership to considerthe grantor or other owner of a trust undersubpart E of subchapter J as the partner forpurposes of computing the partnership’s1446 tax), as those terms are defined un-der section 7701 and the regulations there-under, or a foreign organization described

in section 501(c), or other foreign person.A person also is a foreign partner if theperson is presumed to be a foreign per-son under paragraph (c)(3) of this section.For purposes of this section, a partner thatis treated as a U.S. person for all incometax purposes (by election or otherwise, seee.g., sections 953(d) and 1504(d)) will notbe a foreign partner, provided the partnerhas provided the partnership a valid FormW–9, “Request for Taxpayer IdentificationNumber and Certification,” or the partner-ship uses other means to determine that thepartner is not a foreign partner (see para-graph (c)(3) of this section). A partner thatis treated as a U.S. person only for certainspecified purposes is considered a foreignpartner for purposes of section 1446, and apartnership must pay 1446 tax on the por-tion of ECTI allocable to that partner. Forexample, a partnership must generally pay1446 tax on ECTI allocable to a foreigncorporate partner that has made an electionunder section 897(i).

(2) Submission of Forms W–8BEN,W–8IMY, W–8ECI, W–8EXP, andW–9—(i) In general. Except as other-wise provided in this paragraph (c)(2) orparagraph (c)(3) of this section, a part-nership must generally determine whethera partner is a foreign partner, and thepartner’s tax classification (e.g., corpo-rate or non-corporate), by obtaining awithholding certificate from the partnerthat is a Form W–8BEN, “Certificate ofForeign Status of Beneficial Owner forUnited States Tax Withholding,” FormW–8IMY, “Certificate of Foreign Inter-mediary, Flow-Through Entity, or CertainU.S. Branches for United States Tax With-holding,” Form W–8ECI, “Certificate ofForeign Person’s Claim for ExemptionFrom Withholding on Income EffectivelyConnected With the Conduct of a Tradeor Business in the United States,” FormW–8EXP, “Certificate of Foreign Gov-ernment or Other Foreign Organizationfor United States Tax Withholding,” or aForm W–9, as applicable, or an acceptablesubstitute form permitted under paragraph(c)(5) of this section. Generally, a foreignpartner that is a nonresident alien, a foreignestate or trust (other than a grantor trustdescribed in this paragraph (c)(2)), a for-eign corporation, or a foreign governmentshould provide a valid Form W–8BEN.

(ii) Withholding certificate applicableto each type of partner. A partner that

2005–23 I.R.B. 1177 June 6, 2005

submits a valid Form W–8 (e.g., FormW–8BEN) for purposes of section 1441 or1442 will generally satisfy the documenta-tion requirements of this section providedthat the submission of such form is not in-consistent with the rules of this paragraph(c)(2) or paragraph (c)(3) of this section.The following rules shall apply for pur-poses of this section.

(A) U.S. person. A partner that is a U.S.person (other than a grantor trust describedin this paragraph (c)(2)), including a do-mestic partnership and domestic simple orcomplex trust (including an estate), shallprovide a valid Form W–9.

(B) Nonresident alien. A Form W–8(e.g., Form W–8BEN) submitted by a non-resident alien for purposes of withholdingunder section 1441 will generally be ac-cepted for purposes of section 1446. If nosuch form is submitted for purposes of sec-tion 1441, such nonresident alien shall sub-mit Form W–8BEN for purposes of section1446.

(C) Foreign partnership. A partnerthat is a foreign partnership generallyshall provide a valid Form W–8IMY forpurposes of section 1446. See §1.1446–5(permitting a lower-tier partnership to lookthrough an upper-tier foreign partnershipin certain circumstances when computing1446 tax).

(D) Disregarded entities. An entity thatis disregarded as an entity separate fromits owner under §301.7701–3 of this chap-ter (whether domestic or foreign) shall notsubmit a Form W–8 (e.g., Form W–8BEN)or Form W–9. Instead, the owner of suchentity for Federal tax purposes shall submitappropriate documentation to comply withthis section. See §§301.7701–1 through301.7701–3 of this chapter for determin-ing the U.S. Federal tax classification of apartner.

(E) Domestic and foreign grantortrusts. To the extent that a grantor orother person is treated as the owner of anyportion of a trust under subpart E of sub-chapter J of the Internal Revenue Code,such trust shall provide documentationunder this paragraph (c)(2) to identify thetrust as a grantor trust and provide doc-umentation on behalf of the grantor orother person treated as the owner of allor a portion of such trust as required bythis paragraph (c)(2). If such trust is aforeign trust, the trust shall submit FormW–8IMY to the partnership identifying

itself as a foreign grantor trust and shallprovide such documentation (e.g., FormsW–8BEN, W–8IMY, W–8ECI, W–8EXP,or W–9) and information pertaining toits grantor or other owner to the part-nership that permits the partnership toreliably associate (within the meaning of§1.1441–1(b)(2)(vii)) such portion of thetrust’s allocable share of partnership ECTIwith the grantor or other person that is theowner of such portion of the trust. If suchtrust is a domestic trust, the trust shallfurnish the partnership a statement underpenalty of perjury that the trust is, in wholeor in part, a domestic grantor trust and suchstatement shall identify that portion of thetrust that is treated as owned by a grantoror another person under subpart E of sub-chapter J of the Internal Revenue Code.The trust shall also provide such docu-mentation and information (e.g., FormsW–8BEN, W–8IMY, W–8ECI, W–8EXP,or W–9) pertaining to its grantor or otherowner(s) to the partnership that permits thepartnership to reliably associate (withinthe meaning of §1.1441–1(b)(2)(vii)) suchportion of the trust’s allocable share ofpartnership ECTI with the grantor or otherperson that is the owner of such portion ofthe trust.

(F) Nominees. Where a nominee holdsan interest in a partnership on behalf of an-other person, the beneficial owner of thepartnership interest, not the nominee, shallsubmit a Form W–8 (e.g., Form W–8BEN)or Form W–9 to the partnership or nomi-nee that is the withholding agent.

(G) Foreign governments, foreigntax-exempt organizations and other for-eign persons. A Form W–8 (e.g., FormW–8EXP) submitted by a partner that isa foreign government, foreign tax-exemptorganization, or other foreign person forpurposes of withholding under §§1441through 1443 will also operate to establishthe foreign status of such partner under thissection. However, except as set forth in§1.1446–3(c)(3) (regarding certain tax-ex-empt organizations described in section501(c)), the submission of Form W–8EXPwill have no effect on whether there is a1446 tax due with respect to such partner’sallocable share of partnership ECTI. Forexample, a partnership must still pay 1446tax with respect to a foreign governmentpartner’s allocable share of ECTI becausesuch partner is treated as a foreign cor-poration under section 892(a)(3). If no

Form W–8 is submitted for purposes ofwithholding under sections 1441 through1443, then such government, tax-exemptorganization, or person must generallysubmit Form W–8BEN.

(H) Foreign corporations, certain for-eign trusts, and foreign estates. Consistentwith the rules of this paragraph (c)(2) andparagraph (c)(3) of this section, a for-eign corporation, a foreign trust (otherthan a foreign grantor trust described inparagraph (c)(2)(ii)(E) of this section),or a foreign estate may generally submitany appropriate Form W–8 (e.g., FormW–8BEN) to the partnership to establishits foreign status for purposes of section1446.

(iii) Effect of Forms W–8BEN, W–8IMY,W–8ECI, W–8EXP, W–9, and state-ment—(A) Partnership reliance on with-holding certificate. In general, for pur-poses of this section, a partnership mayrely on a valid Form W–8 (e.g., FormW–8BEN) or Form W–9, or statementdescribed in this paragraph (c)(2) from apartner, beneficial owner, or grantor trustto determine whether that person, ben-eficial owner, or the owner of a grantortrust, is a non-foreign or foreign partnerfor purposes of computing 1446 tax, andif such person is a foreign partner, to de-termine whether or not such person is acorporation for U.S. tax purposes. Therules of paragraph (c)(3) of this sectionshall apply to a partnership that receivesa Form W–8IMY from a foreign grantortrust or a statement described in this para-graph (c)(2) from a domestic grantor trust,but does not receive a Form W–8 (e.g.,Form W–8BEN) or Form W–9 identifyingsuch grantor or other person. Further, apartnership may not rely on a Form W–8or Form W–9, or statement described inthis paragraph (c)(2), and such form orstatement is therefore not valid for any in-stallment period or Form 8804 filing dateduring which the partnership has actualknowledge or has reason to know that anyinformation on the withholding certificateor statement is incorrect or unreliable and,if based on such knowledge or reason toknow, the partnership should pay 1446tax in an amount greater than would bethe case if it relied on the certificate orstatement.

(B) Reason to know. A partnership hasreason to know that information on a with-holding certificate or statement is incorrect

June 6, 2005 1178 2005–23 I.R.B.

or unreliable if its knowledge of relevantfacts or statements contained on the formor other documentation is such that a rea-sonably prudent person in the position ofthe withholding agent would question theclaims made. See §§1.1441–1(e)(4)(viii)and 1.1441–7(b)(1) and (2).

(C) Subsequent knowledge and impacton penalties. If the partnership does nothave actual knowledge or reason to knowthat a Form W–8BEN, Form W–8IMY,Form W–8ECI, Form W–8EXP, FormW–9, or statement received from a partner,beneficial owner, or grantor trust containsincorrect or unreliable information, butit subsequently determines that the cer-tificate or statement contains incorrect orunreliable information, and, based on suchknowledge the partnership should pay1446 tax in an amount greater than wouldbe the case if it relied on the certificate orstatement, then the partnership will not besubject to penalties for its failure to paythe 1446 tax in reliance on such certificateor statement for any installment paymentdate prior to the date that the determina-tion is made. See §§1.1446–1(c)(4) and1.1446–3 concerning penalties for failureto pay the withholding tax when a part-nership knows or has reason to know thata withholding certificate or statement isincorrect or unreliable.

(iv) Requirements for certificates tobe valid. Except as otherwise providedin this paragraph (c), for purposes of thissection, the validity of a Form W–9 shallbe determined under section 3406 and§31.3406(h)–3(e) of this chapter whichestablish when such form may be rea-sonably relied upon. A Form W–8BEN,Form W–8IMY, Form W–8ECI, or FormW–8EXP is only valid for purposes of thissection if its validity period has not ex-pired, the partner submitting the form hassigned it under penalties of perjury, and itcontains all the required information.

(A) When period of validity expires. Forpurposes of this section, a Form W–8BEN,Form W–8IMY, Form W–8ECI, or FormW–8EXP submitted by a partner shallbe valid until the end of the period ofvalidity determined for such form under§1.1441–1(e). With respect to a foreignpartnership submitting Form W–8IMY,the period of validity of such form shallbe determined under §1.1441–1(e) as ifsuch foreign partnership submitted the

form required of a nonwithholding foreignpartnership. See §1.1441–1(e)(4)(ii).

(B) Required information for FormsW–8BEN, W–8IMY, W–8ECI, andW–8EXP. Forms W–8BEN, W–8IMY,W–8ECI, and W–8EXP submitted underthis section must contain the partner’sname, permanent address and TaxpayerIdentification Number (TIN), the countryunder the laws of which the partner isformed, incorporated or governed (if theperson is not an individual), the classifi-cation of the partner for U.S. Federal taxpurposes (e.g., partnership, corporation),and any other information required to besubmitted by the forms or instructions forsuch form, as applicable.

(v) Partner must provide new withhold-ing certificate when there is a changein circumstances. The principles of§1.1441–1(e)(4)(ii)(D) shall apply whena change in circumstances has occurred(including situations where the status ofa U.S. person changes) that requires apartner to provide a new withholding cer-tificate.

(vi) Partnership must retain withhold-ing certificates. A partnership or nomi-nee who has responsibility for paying 1446tax under this section or §1.1446–4 mustretain each withholding certificate, state-ment, and other information received fromits direct and indirect partners for as longas it may be relevant to the determinationof the withholding agent’s 1446 tax liabil-ity under section 1461 and the regulationsthereunder.

(3) Presumptions in the absence ofvalid Form W–8BEN, Form W–8IMY,Form W–8ECI, Form W–8EXP, FormW–9, or statement. Except as other-wise provided in this paragraph (c)(3), apartnership that does not receive a validForm W–8BEN, Form W–8IMY, FormW–8ECI, Form W–8EXP, Form W–9, orstatement required by paragraph (c)(2)of this section from a partner, beneficialowner, or grantor trust, or a partnershipthat receives a withholding certificate orstatement but has actual knowledge orreason to know that the information onthe certificate or statement is incorrect orunreliable, must presume that the partneris a foreign person. Except as providedin §1.1446–3(a)(2) and §1.1446–5(c)(2),a partnership that knows that a partner isan individual shall treat the partner as anonresident alien. Except as provided in

§1.1446–3(a)(2) and §1.1446–5(c)(2), apartnership that knows that a partner isan entity shall treat the partner as a cor-poration if the entity is a corporation asdefined in §301.7701–2(b)(8) of this chap-ter. See §1.1446–3(a)(2) which prohibits apartnership in certain circumstances fromconsidering preferential tax rates in com-puting its 1446 tax when the presumptionand rules of this paragraph (c)(3) apply. Inall other cases, the partnership shall treatthe partner as either a nonresident alien or aforeign corporation, whichever classifica-tion results in a higher 1446 tax being due,and shall pay the 1446 tax in accordancewith this presumption. Except as providedin §1.1446–5(c)(2), the presumption setforth in this paragraph (c)(3) that a partneris a foreign person shall not apply to theextent that the partnership relies on othermeans to ascertain the non-foreign statusof a partner and the partnership is correctin its determination that such partner is aU.S. person. A partnership is in no eventrequired to rely upon other means to de-termine the non-foreign status of a partnerand may demand that a partner furnish anacceptable certificate under this section.If a certificate is not provided in such cir-cumstances, the partnership may presumethat the partner is a foreign partner, and forpurposes of sections 1461 through 1463,will be considered to have been requiredto pay 1446 tax on such partner’s allocableshare of partnership ECTI.

(4) Consequences when partnershipknows or has reason to know that FormW–8BEN, Form W–8IMY, Form W–8ECI,Form W–8EXP, or Form W–9 is incorrector unreliable and does not withhold. If apartnership has actual knowledge or hasreason to know that a Form W–8BEN,Form W–8IMY, Form W–8ECI, FormW–8EXP, Form W–9, or statement re-quired by paragraph (c)(2) of this sectionsubmitted by a partner, beneficial owner,or grantor trust contains incorrect or un-reliable information (either because thecertificate or statement when given tothe partnership contained incorrect in-formation or because there has been achange in facts that makes informationon the certificate or statement incorrect),and the partnership pays less than the fullamount of 1446 tax due on ECTI alloca-ble to that partner, the partnership shallbe fully liable under section 1461 and§1.1461–3 (§1.1461–1 for publicly traded

2005–23 I.R.B. 1179 June 6, 2005

partnerships subject to §1.1446–4) and§1.1446–3, and for all applicable penal-ties and interest, for any failure to paythe 1446 tax for the period during whichthe partnership has such knowledge orreason to know that the certificate con-tained incorrect or unreliable informationand for all subsequent installment periods.If a partner, beneficial owner, or grantortrust submits a new valid Form W–8BEN,Form W–8IMY, Form W–8ECI, FormW–8EXP, Form W–9, or statement, asapplicable, the partnership may rely onthat documentation when paying 1446 tax(or any installment of such tax) for anypayment date that has not passed at thetime such form is received.

(5) Acceptable substitute form. A part-nership or withholding agent responsiblefor paying 1446 tax (or any installmentof such tax) may substitute its own formfor the official version of Form W–8 (e.g.,Form W–8BEN) that is recognized underthis section to ascertain the identity of itspartners, provided such form is consis-tent with §1.1441–1(e)(4)(vi). All refer-ences under this section or §§1.1446–2through 1.1446–6T to a Form W–8 (e.g.,Form W–8BEN, Form W–8IMY, FormW–8ECI, Form W–8EXP) shall includethe acceptable substitute form recognizedunder this paragraph (c)(5).

§1.1446–2 Determining a partnership’seffectively connected taxable incomeallocable to foreign partners undersection 704.

(a) In general. A partnership’s effec-tively connected taxable income (ECTI) isgenerally the partnership’s taxable incomeas computed under section 703, with ad-justments as provided in section 1446(c)and this section, and computed with con-sideration of only those partnership itemswhich are effectively connected (or treatedas effectively connected) with the conductof a trade or business in the United States.For purposes of determining the section1446 withholding tax (1446 tax) or anyinstallment of such tax under §1.1446–3,partnership ECTI allocable under section704 to foreign partners is the sum of the al-locable shares of ECTI of each of the part-nership’s foreign partners as determinedunder paragraph (b) of this section. See§1.1446–6T (special rules permitting thepartnership to consider partner-level de-

ductions and losses to reduce the partner-ship’s 1446 tax). The calculation of part-nership ECTI allocable to foreign partnersas set forth in paragraph (b) of this sec-tion and the partnership’s withholding taxobligation are partnership-level computa-tions solely for purposes of determiningthe 1446 tax. Therefore, any deductionthat is not taken into account in calculat-ing a partner’s allocable share of partner-ship ECTI (e.g., percentage depletion), butwhich is a deduction that under U.S. taxlaw the foreign partner is otherwise enti-tled to claim, can still be claimed by theforeign partner when computing its U.S.tax liability and filing its U.S. income taxreturn, subject to any restriction or limita-tion that otherwise may apply.

(b) Computation—(1) In general. Aforeign partner’s allocable share of part-nership ECTI for the partnership’s taxableyear that is allocable under section 704to a particular foreign partner is equal tothat foreign partner’s distributive share ofpartnership gross income and gain for thepartnership’s taxable year that is effec-tively connected and properly allocable tothe partner under section 704 and the regu-lations thereunder, reduced by the foreignpartner’s distributive share of partnershipdeductions for the partnership taxableyear that are connected with such incomeunder section 873(a) or 882(c) and prop-erly allocable to the partner under section704 and the regulations thereunder, ineach case, after application of the rulesof this section. See §1.1446–6T (specialrules permitting the partnership to con-sider partner-level deductions and lossesto reduce the partnership’s 1446 tax). Forthese purposes, a foreign partner’s dis-tributive share of effectively connectedgross income and gain and the deduc-tions connected with such income shall becomputed by considering allocations thatare respected under the rules of section704 and §1.704–1(b)(1), including specialallocations in the partnership agreement(as defined in §1.704–1(b)(2)(ii)(h)), andadjustments to the basis of partnershipproperty described in section 743 pur-suant to an election by the partnershipunder section 754 (see §1.743–1(j)). Thecharacter of effectively connected part-nership items (capital versus ordinary)shall be separately considered only to theextent set forth in paragraph (b)(3)(v) ofthis section and, when applicable, sec-

tions 1.1446–3(a)(2) (consideration ofpreferential rates when computing 1446tax) and section 1.1446–6T (special rulespermitting the partnership to consider part-ner-level deductions and losses to reducethe partnership’s 1446 tax).

(2) Income and gain rules. For pur-poses of computing a foreign partner’s al-locable share of partnership ECTI underthis paragraph (b), the following rules shallapply with respect to partnership incomeand gain.

(i) Application of the principles of sec-tion 864. The determination of whether apartnership’s items of gross income are ef-fectively connected shall be made by ap-plying the principles of section 864 and theregulations thereunder.

(ii) Income treated as effectively con-nected. A partnership’s items of grossincome that are effectively connectedinclude any income that is treated as ef-fectively connected income, includingpartnership income subject to a partner’selection under section 871(d) or section882(d), any partnership income treatedas effectively connected with the con-duct of a U.S. trade or business pursuantto section 897, and any other items ofpartnership income treated as effectivelyconnected under another provision of theInternal Revenue Code, without regard towhether those amounts are taxable to thepartner. A partner that makes the electionunder section 871(d) or section 882(d)shall furnish to the partnership a statementthat indicates that such election has beenmade. See §1.871–10(d)(3). If a partner-ship receives a valid Form W–8ECI froma partner, the partner is deemed, for pur-poses of section 1446, to have effectivelyconnected income subject to withholdingunder section 1446 to the extent of theitems identified on the form.

(iii) Exempt income. A foreign part-ner’s allocable share of partnership ECTIdoes not include income or gain exemptfrom U.S. tax by reason of a provision ofthe Internal Revenue Code. A foreign part-ner’s allocable share of partnership ECTIalso does not include income or gain ex-empt from U.S. tax by operation of anyU.S. income tax treaty or reciprocal agree-ment. In the case of income excludedby reason of a treaty provision, such in-come must be derived by a resident of anapplicable treaty jurisdiction, the residentmust be the beneficial owner of the item,

June 6, 2005 1180 2005–23 I.R.B.

and all other requirements for benefits un-der the treaty must be satisfied. The part-nership must have received from the part-ner a valid withholding certificate, that is,Form W–8BEN (see §1.1446–1(c)(2)(iii)regarding when a Form W–8BEN is validfor purposes of this section), containing theinformation necessary to support the claimfor treaty benefits required in the formsand instructions. In addition, for purposesof this section, the withholding certificatemust contain the beneficial owner’s tax-payer identification number.

(3) Deductions and losses. For pur-poses of computing a foreign partner’sallocable share of partnership ECTI un-der this paragraph (b), the following rulesshall apply with respect to deductions andlosses.

(i) Oil and gas interests. The deductionfor depletion with respect to oil and gaswells shall be allowed, but the amount ofsuch deduction shall be determined with-out regard to sections 613 and 613A.

(ii) Charitable contributions. The de-duction for charitable contributions pro-vided in section 170 shall not be allowed.

(iii) Net operating losses and othersuspended or carried losses. Except asprovided in §1.1446–6T, the net operat-ing loss deduction of any foreign partnerprovided in section 172 shall not be takeninto account. Further, except as providedin §1.1446–6T, the partnership shall nottake into account any suspended losses(e.g., losses in excess of a partner’s basisin the partnership, see section 704(d)) orany capital loss carrybacks or carryoversavailable to a foreign partner.

(iv) Interest deductions. The rules ofthis paragraph (b)(3)(iv) shall apply forpurposes of determining the amount of in-terest expense that is allocable to incomewhich is (or is treated as) effectively con-nected with the conduct of a trade or busi-ness for purposes of calculating a foreignpartner’s allocable share of partnershipECTI. In the case of a non-corporate for-eign partner, the rules of §1.861–9T(e)(7)shall apply. In the case of a corporateforeign partner, the rules of §1.882–5 shallapply by treating the partnership as a for-eign corporation and using the partner’spro-rata share of the partnership’s assetsand liabilities for these purposes. Forthese purposes, the rules governing elec-tions under §1.882–5(a)(7) shall be madeat the partnership level.

(v) Limitation on capital losses. Lossesfrom the sale or exchange of capital assetsallocable under section 704 to a partnershall be allowed only to the extent of gainsfrom the sale or exchange of capital assetsallocable under section 704 to such partner.

(vi) Other deductions. No deductionshall be allowed for personal exemptionsprovided in section 151 or the additionalitemized deductions for individuals pro-vided in part VII of subchapter B of the In-ternal Revenue Code (section 211 and fol-lowing).

(vii) Limitations on deductions. Exceptas provided in §1.1446–6T and this para-graph (b)(3), any limitations on losses ordeductions that apply at the partner levelwhen determining ECTI allocable to a for-eign partner shall not be taken into ac-count.

(4) Other rules—(i) Exclusion of itemsallocated to U.S. partners. Except asprovided in §1.1446–5(e), in computingpartnership ECTI, the partnership shall nottake into account any item of income, gain,loss, or deduction to the extent allocableto any partner that is not a foreign partner,as that term is defined in §1.1446–1(c).

(ii) Partnership credits. See§1.1446–3(a) providing that the 1446 taxis computed without regard to a partner’sdistributive share of the partnership’s taxcredits.

(5) Examples. The following exam-ples illustrate the application of thissection. In considering the examples,disregard the potential application of§1.1446–3(b)(2)(v)(F) (relating to the deminimis exception to paying 1446 tax).The examples are as follows:

Example 1. Limitation on capital losses. PRSpartnership has two equal partners, A and B. A is anonresident alien and B is a U.S. citizen. A providesPRS with a valid Form W–8BEN, and B providesPRS with a valid Form W–9. PRS has the follow-ing annualized tax items for the relevant installmentperiod, all of which are effectively connected with itsU.S. trade or business and are allocated equally be-tween A and B: $100 of long-term capital gain, $400of long-term capital loss, $300 of ordinary income,and $100 of ordinary deductions. Assume that theseallocations are respected under section 704(b) and theregulations thereunder. Accordingly, A’s allocableshare of PRS’s effectively connected items includes$50 of long-term capital gain, $200 of long-term capi-tal loss, $150 of ordinary income, and $50 of ordinarydeductions. In determining A’s allocable share ofpartnership ECTI, the amount of the long-term capitalloss that may be taken into account pursuant to para-graph (b)(3)(v) of this section is limited to A’s alloca-ble share of gain from the sale or exchange of capital

assets. Accordingly, A’s share of partnership ECTIallocable under section 704 pursuant to §1.1446–2 is$100 ($150 of ordinary income less $50 of ordinarydeductions, plus $50 of capital gain less $50 of capi-tal loss).

Example 2. Limitation on capital losses—specialallocations. PRS partnership has two equal partners,A and B. A and B are both nonresident aliens. A andB each provide PRS with a valid Form W–8BEN.PRS has the following annualized tax items for therelevant installment period, all of which are effec-tively connected with its U.S. trade or business:$200 of long-term capital gain, $200 of long-termcapital loss, and $400 of ordinary income. A andB have equal shares in the ordinary income, how-ever, pursuant to the partnership agreement, capitalgains and losses are subject to special allocations.The long-term capital gain is allocable to A, andthe long-term capital loss is allocable to B. Assumethat these allocations are respected under section704(b) and the regulations thereunder. Pursuant toparagraph (b)(3)(v) of this section, A’s allocableshare of partnership ECTI under §1.1446–2 is $400(consisting of $200 of ordinary income and $200of long-term capital gain), and B’s allocable shareof partnership ECTI is $200 (consisting of $200 ofordinary income).

Example 3. Withholding tax obligation wherepartner has net operating losses. PRS partnershiphas two equal partners, FC, a foreign corporation, andDC, a domestic corporation. FC and DC provide avalid Form W–8BEN and Form W–9, respectively, toPRS. Both FC and PRS are on a calendar taxable year.PRS is engaged in the conduct of a trade or businessin the United States and for its first installment periodduring its taxable year has $100 of annualized ECTIthat is allocable to FC. As of the beginning of the tax-able year, FC had an unused effectively connectednet operating loss carryover in the amount of $300.FC’s net operating loss carryover is not taken into ac-count in determining FC’s allocable share of partner-ship ECTI under §1.1446–2 and, absent the applica-tion of §1.1446–6T (permitting a foreign partner tocertify deductions and losses reasonably expected tobe available to reduce the partner’s U.S. income taxliability on the effectively connected income or gainallocable from the partnership), is not considered incomputing the 1446 tax installment payment due onbehalf of FC. Accordingly, PRS must pay 1446 taxwith respect to the $100 of ECTI allocable to FC.

§1.1446–3 Time and manner ofcalculating and paying over the 1446 tax.

(a) In general—(1) Calculating 1446tax. This section provides rules for calcu-lating, reporting, and paying over the sec-tion 1446 withholding tax (1446 tax). Apartnership’s 1446 tax equals the amountdetermined under this section and shallbe paid in installments during the partner-ship’s taxable year (see paragraph (d)(1)of this section for installment payment duedates), with any remaining tax due paidwith the partnership’s annual return re-quired to be filed pursuant to paragraph (d)

2005–23 I.R.B. 1181 June 6, 2005

of this section. For these purposes, a part-nership shall not take into account eithera partner’s liability for any other tax im-posed under any other provision of the In-ternal Revenue Code (e.g., section 55 or884) or a partner’s distributive share of thepartnership’s tax credits when determiningthe amount of the partnership’s 1446 tax.

(2) Applicable percentage—(i) In gen-eral. Except as provided in this para-graph (a)(2), in the case of a foreign partnerthat is a corporation for U.S. tax purposes,the applicable percentage is the highestrate of tax specified in section 11(b)(1) forsuch taxable year. Except as provided inthis paragraph (a)(2) and §1.1446–5, in thecase of a foreign partner that is not a corpo-ration for U.S. tax purposes (e.g., a partner-ship, individual, trust or estate), the appli-cable percentage is the highest rate of taxspecified in section 1.

(ii) Special types of income or gain. Ex-cept as otherwise provided, a partnershipis permitted to consider as the applicablepercentage under this paragraph (a)(2) thehighest rate of tax applicable to a particulartype of income or gain allocable to a part-ner (e.g., long-term capital gain allocableto a non-corporate partner, unrecapturedsection 1250 gain, collectibles gain undersection 1(h)), to the extent of a partner’s al-locable share of such income or gain. Con-sideration of the highest rate of tax appli-cable to a particular type of income or gainunder the previous sentence shall be madewithout regard to the amount of such part-ner’s income. A partnership is not per-mitted to consider the highest rate of taxapplicable to a particular type of incomeor gain under this paragraph (a)(2)(ii) ifthe application of the preferential rate de-pends upon the corporate or non-corpo-rate status of the person reporting the in-come or gain and, either no documenta-tion has been provided to the partnershipunder §1.1446–1 to establish the corporateor non-corporate status of the partner re-quired to pay tax on the income or gain,or the partnership is otherwise required tocompute and pay 1446 tax on such portionof the income or gain using the highest ap-plicable percentage under section 1446(b).See e.g., §§1.1446–1(c)(3) (presumptionof foreign status in the absence of doc-umentation) and 1.1446–5(c)(2) (require-ment to pay 1446 tax at higher of rates insection 1446(b) where a lower-tier partner-

ship cannot reliably associate income witha partner of the upper-tier partnership).

(b) Installment payments—(1) In gen-eral. Except as provided in §1.1446–4 forcertain publicly traded partnerships, a part-nership must pay its 1446 tax by makinginstallment payments of the 1446 tax basedon the amount of partnership ECTI alloca-ble under section 704 to its foreign part-ners, without regard to whether the part-nership makes any distributions to its part-ners during the partnership’s taxable year.The amount of the installment payments isdetermined in accordance with this para-graph (b), and the tax must be paid at thetimes set forth in paragraph (d) of this sec-tion. Subject to paragraphs (b)(2)(v) and(b)(3)(ii) of this section, in computing itsfirst installment of 1446 tax for a taxableyear, a partnership must decide whether itwill pay its 1446 tax for the entire taxableyear by using the safe harbor set forth inparagraph (b)(3)(i) of this section, or by us-ing one of several annualization methodsavailable under paragraph (b)(2)(ii) of thissection for computing partnership ECTIallocable to foreign partners. In the case ofa partnership’s underpayment of an install-ment of 1446 tax, the partnership shall besubject to an addition to the tax equal to theamount determined under section 6655, asmodified by this section, as if such part-nership were a corporation, as well as anyother applicable interest and penalties. See§1.1446–3(f). Section 6425 (permittingan adjustment for an overpayment of esti-mated tax by a corporation) shall not applyto a partnership’s payment of its 1446 tax.

(2) Calculation—(i) General appli-cation of the principles of section 6655.Installment payments of 1446 tax requiredduring the partnership’s taxable year arebased upon partnership ECTI for the por-tion of the partnership taxable year towhich they relate, and, except as set forthin this paragraph (b)(2) or paragraph (b)(3)of this section, shall be calculated usingthe principles of section 6655. Underthe principles of section 6655, the part-nership’s effectively connected items ofincome, gain, loss and deduction are annu-alized to determine each foreign partner’sallocable share of partnership ECTI un-der §1.1446–2. To the extent applicable,§1.1446–6T may be considered for pur-poses of this section to reduce the amountof the partner’s allocable share of part-nership ECTI to an amount that is subject

to tax under section 1446. Each foreignpartner’s allocable share of partnershipECTI that is subject to tax under section1446, or portion thereof, is then multipliedby the relevant applicable percentage forthe type of income allocable to the for-eign partner under paragraph (a)(2) ofthis section. The respective tax amountsare then added for each foreign partner.This computation will yield an annualized1446 tax with respect to such partner. Theinstallment of 1446 tax due with respectto a foreign partner’s allocable share ofpartnership ECTI subject to tax under sec-tion 1446 equals the excess of the section6655(e)(2)(B)(ii) percentage of the an-nualized 1446 tax for that partner (or, ifapplicable, the adjusted seasonal amount)for the relevant installment period, overthe aggregate of any amounts paid undersection 1446 with respect to that partnerin prior installments during the partner-ship’s taxable year. Therefore, the totalamount of a partnership’s 1446 tax install-ment payment is equal to the sum of theinstallment payments due for such periodon behalf of all the partnership’s foreignpartners.

(ii) Annualization methods. A partner-ship that decides to annualize its incomefor the taxable year shall use one of theannualization methods set forth in section6655(e) and the regulations thereunder,and as described in the forms and in-structions for Form 8804, “Annual Returnfor Partnership Withholding Tax (Section1446),” Form 8805, “Foreign Partner’sInformation Statement of Section 1446Withholding Tax,” and Form 8813, “Part-nership Withholding Tax Payment Voucher(Section 1446).”

(iii) Partner’s estimated tax payments.In computing its installment payments of1446 tax, a partnership may not take intoaccount a partner’s estimated tax pay-ments.

(iv) Partner whose interest terminatesduring the partnership’s taxable year. If apartner’s interest in the partnership termi-nates prior to the end of the partnership’staxable year, the partnership shall take intoaccount the income that is allocable to thepartner for the portion of the partnershiptaxable year that the person was a partner.

(v) Exceptions and modifications to theapplication of the principles under section6655. To the extent not otherwise modifiedin §§1.1446–1 through 1.1446–7 or incon-

June 6, 2005 1182 2005–23 I.R.B.

sistent with those rules, the principles ofsection 6655 apply to the calculation of theinstallment payments of 1446 tax made bya partnership as set forth in this paragraph(b)(2)(v).

(A) Inapplicability of special rules forlarge corporations. The principles of sec-tion 6655(d)(2), concerning large corpo-rations (as defined in section 6655(g)(2)),shall not apply.

(B) Inapplicability of special rules re-garding early refunds. The principles ofsection 6655(h), applicable to amounts ex-cessively credited or refunded under sec-tion 6425, shall not apply. See paragraph(b)(1) of this section providing that sec-tion 6425 shall not apply for purposes ofthe 1446 tax. This paragraph (b)(2)(v)(B)shall apply to 1446 tax paid by a partner-ship or nominee, as well as to amounts thata partner is deemed to have paid for esti-mated tax purposes by reason of the part-nership’s or nominee’s 1446 tax paymentsunder §1.1446–3(d)(1)(i).

(C) Period of underpayment. The pe-riod of the underpayment set forth in sec-tion 6655(b)(2) shall end on the earlier ofthe 15th day of the 4th month following theclose of the partnership’s taxable year (or,in the case of a partnership described in§1.6081–5(a)(1) of this chapter, the 15th

day of the 6th month following the close ofthe partnership’s taxable year), or with re-spect to any portion of the underpayment,the date on which such portion is paid.

(D) Other taxes. Section 6655 shall beapplied without regard to any references toalternative minimum taxable income andmodified alternative minimum taxable in-come.

(E) 1446 tax treated as tax undersection 11. The principles of section6655(g)(1) shall be applied to treat the1446 tax as a tax imposed by section 11,and any partnership required to pay suchtax shall be treated as a corporation.

(F) Application of section 6655(f). Apartnership subject to section 1446 shallapply section 6655(f) after aggregatingthe 1446 tax due (or any installment ofsuch tax) for all its foreign partners. See§1.1446–6T for an exception to this rulewhen a nonresident alien partner certifiesto the partnership that the partnership in-vestment is the nonresident alien partner’sonly activity giving rise to effectively con-nected items.

(G) Application of section 6655(i). Ifa partnership has a taxable year of lessthan 12 months, the partnership is requiredto pay 1446 tax (including installments ofsuch tax) in accordance with this section§1.1446–3, if the partnership has ECTI al-locable under section 704 to foreign part-ners. In such a case, the partnership shalladjust its installment payments of 1446 taxin a reasonable manner (e.g., the annual-ized amounts of ECTI estimated to be al-locable to a foreign partner, and the sec-tion 6655(e)(2)(B)(ii) percentage to be ap-plied to each installment) to account for theshort-taxable year. However, if the part-nership’s taxable year is a period of lessthan 4 months, the partnership shall not berequired to make installment payments of1446 tax, but will only be required to fileForms 8804 and 8805 in accordance withthis section §1.1446–3, and report and paythe appropriate 1446 tax for the short-tax-able year.

(H) Current year tax safe harbor.The safe harbor set forth in section6655(d)(1)(B)(i) shall apply to a part-nership subject to section 1446.

(I) Prior year tax safe harbor.The safe harbor set forth in section6655(d)(1)(B)(ii) shall not apply and in-stead the safe harbor set forth in paragraph(b)(3) of this section applies.

(3) 1446 tax safe harbor—(i) In gen-eral. The addition to tax under section6655 shall not apply to a partnership withrespect to a current installment of 1446 taxif—

(A) The average of the amount of thecurrent installment and prior installmentsduring the taxable year is at least 25 per-cent of the total 1446 tax that would bepayable on the amount of the partner-ship’s ECTI allocable under section 704to foreign partners (without regard to§1.1446–6T) for the prior taxable year;

(B) The prior taxable year consisted oftwelve months;

(C) The partnership timely files (includ-ing extensions) an information return un-der section 6031 for the prior year; and

(D) The amount of ECTI for the priortaxable year is not less than 50 percent ofthe ECTI shown on the annual return ofsection 1446 withholding tax that is (orwill be) timely filed for the current year.

(ii) Permission to change to standardannualization method. Except as other-wise provided in this paragraph (b)(3)(ii),

if a partnership decides to pay its 1446 taxfor the first installment period based uponthe safe harbor method set forth in para-graph (b)(3)(i), the partnership must usethe safe harbor method for each install-ment payment made during the partner-ship’s taxable year. Notwithstanding theprevious sentence, if a partnership payingover 1446 tax during the taxable year pur-suant to this paragraph (b)(3) determinesduring an installment period (based uponthe standard option annualization methodset forth in section 6655(e) and the regula-tions thereunder, as modified by the formsand instructions to Forms 8804, 8805, and8813) that it will not qualify for the safeharbor in this paragraph (b)(3) because theprior year’s ECTI will not meet the 50-per-cent threshold in paragraph (b)(3)(i)(D) ofthis section, then the partnership is permit-ted, without being subject to the additionto the tax under section 6655 (as appliedthrough this section), to pay over its 1446tax for the period in which such determi-nation is made, and all subsequent install-ment periods during the taxable year, usingthe standard option annualization method.A change pursuant to this paragraph shallbe disclosed in a statement attached to theForm 8804 the partnership files for the tax-able year and shall include information toallow the IRS to determine whether thechange was appropriate.

(c) Coordination with other withhold-ing rules—(1) Fixed or determinable, an-nual or periodical income. Fixed or deter-minable, annual or periodical income sub-ject to tax under section 871(a) or section881 is not subject to withholding undersection 1446, and such income is subject tothe withholding requirements of sections1441 and 1442 and the regulations there-under.

(2) Real property gains—(i) Domesticpartnerships. Except as otherwise pro-vided in this paragraph (c)(2), a domes-tic partnership that is otherwise subject tothe withholding requirements of sections1445 and 1446 will be subject to the pay-ment and reporting requirements of sec-tion 1446 only and not section 1445(e)(1)and the regulations thereunder, with re-spect to partnership gain from the dispo-sition of a U.S. real property interest (asdefined in section 897(c)). A partnershipthat has complied with the requirements ofsection 1446 will be deemed to satisfy thewithholding requirements of section 1445

2005–23 I.R.B. 1183 June 6, 2005

and the regulations thereunder. However,a domestic partnership that would other-wise be exempt from section 1445 with-holding by operation of a nonrecognitionprovision must continue to comply withthe requirements of §1.1445–5(b)(2). Inthe event that amounts are withheld un-der section 1445(e) at the time of the dis-position of a U.S. real property interest,such amounts may be credited against thepartnership’s 1446 tax. A partnership thatfails to comply fully with the requirementsof section 1446 pursuant to this paragraph(c)(2) shall be liable for any unpaid 1446tax and subject to any applicable additionto the tax, interest, and penalties under sec-tion 1446. See §1.1446–4(f)(4) for rulescoordinating the withholding liability ofpublicly traded partnerships under sections1445 and 1446.

(ii) Foreign partnerships. A foreignpartnership that is subject to withholdingunder section 1445(a) during its taxableyear may credit the amount withheld un-der section 1445(a) against its section 1446tax liability for that taxable year only to theextent such amount is allocable to foreignpartners.

(3) Coordination with section 1443. Apartnership that has ECTI allocable undersection 704 to a foreign organization de-scribed in section 501(c) shall be requiredto pay 1446 tax on such ECTI only tothe extent such ECTI is includible undersection 512 and section 513 in comput-ing the organization’s unrelated businesstaxable income. The certificate procedureavailable under §1.1441–9(b)(1) by whicha partner may set forth the amounts it be-lieves will and will not be includible in itscomputation of unrelated business taxableincome under section 512 and section 513shall also apply to a partner in a partner-ship subject to section 1446. Such cer-tificate shall be made by a partner in thesame manner as under §1.1441–9(b)(2). Apartnership that determines that the part-ner’s certificate as to certain partnershipitems is unreliable or lacking must pre-sume, consistent with §1.1441–9(b)(3) (re-garding amounts includible under section512 in computing the organization’s unre-lated business taxable income), that suchpartnership items would be includible incomputing the partner’s UBTI.

(d) Reporting and crediting the 1446tax—(1) Reporting 1446 tax. This para-graph (d) sets forth the rules for report-

ing and crediting the 1446 tax paid by apartnership. To the extent that 1446 taxis paid on ECTI allocable to a domestictrust (including a grantor or other persontreated as an owner of a portion of suchtrust) or a grantor or other person treated asthe owner of a portion of a foreign trust, therules of this paragraph (d) applicable to aforeign trust or its beneficiaries shall be ap-plied to such domestic or foreign trust andits beneficiaries or owners, as applicable,so that appropriate credit for the 1446 taxmay be claimed by the trust, beneficiary,grantor, or other person.

(i) Reporting of installment tax pay-ments and notification to partners of in-stallment tax payments. Each partnershiprequired to make an installment paymentof 1446 tax must file Form 8813, “Part-nership Withholding Tax Payment Voucher(Section 1446),” in accordance with theinstructions to that form. Form 8813 isgenerally used to transmit an installmentpayment of 1446 tax to the IRS with re-spect to partnership ECTI estimated to beallocated to foreign partners. However,see §1.1446–6T (relating to circumstanceswhere a partnership must file Form 8813when no payment is required under sec-tion 1446). Except as provided in thissection, a partnership must notify eachforeign partner of the 1446 tax paid onthe partner’s behalf when the partnershipmakes an installment payment of 1446 tax.The notice required to be given to a for-eign partner under the previous sentencemust be provided within 10 days of theinstallment payment due date, or, if paidlater, the date such installment paymentis made. A foreign partner generally maycredit an installment of 1446 tax paid bythe partnership on the partner’s behalfagainst the partner’s estimated tax that thepartner must pay during the partner’s owntaxable year. See §1.1446–5(b) (relating totiered partnership structures). However, aforeign partner may not obtain an early re-fund of such amounts under the estimatedtax rules. See §1.1446–3(b)(2)(v)(B). Seeparagraph (d)(2) of this section for theamount of 1446 tax a partner may creditagainst its U.S. income tax liability. Noparticular form is required for a partner-ship’s notification to a foreign partner,but each notification must include thepartnership’s name, the partnership’s Tax-payer Identification Number (TIN), thepartnership’s address, the partner’s name,

the partner’s TIN, the partner’s address,the annualized ECTI estimated to be al-located to the foreign partner (or prioryear’s safe harbor amount, if applicable),and the amount of tax paid on behalf ofthe partner for both the current and anyprior installment periods during the part-nership’s taxable year. Notwithstandingany other provision of this paragraph (d), awithholding agent is not required to notifya partner of an installment of 1446 tax paidon the partner’s behalf, unless requestedby the partner, if—

(A) The partnership’s agent responsiblefor providing notice pursuant to this para-graph is the same person that acts as anagent of the foreign partner for purposesof filing the partner’s U.S. Federal incometax return for the partner’s taxable year thatincludes the installment payment date; or

(B) The partnership has at least 500 for-eign partners and the total 1446 tax that thepartnership determines will be required tobe paid for the partnership taxable year onbehalf of such partner (based on paragraph(b)(2)(ii) or (3) of this section) with respectto the partner’s allocable share of ECTI isless than $1,000.

(ii) Payment due dates. The 1446 tax iscalculated based on partnership ECTI al-locable under section 704 to foreign part-ners during the partnership’s taxable year,as determined under section 706. Install-ment payments of the 1446 tax generallymust be made during the partnership’s tax-able year in which such income is derived.A partnership must pay to the Internal Rev-enue Service a portion of its estimated an-nual 1446 tax in installments on or beforethe 15th day of the fourth, sixth, ninth, andtwelfth months of the partnership’s taxableyear as provided in section 6655. Any ad-ditional amount determined to be due is tobe paid with the filing of the annual returnof tax required under paragraph (d)(1)(iii)of this section and clearly designated as forthe prior taxable year. Form 8813 shouldnot be submitted for a payment made un-der the preceding sentence.

(iii) Annual return and notificationto partners. Every partnership (excepta publicly traded partnership subject to§1.1446–4) that has effectively connectedgross income for the partnership’s tax-able year allocable under section 704 toone or more of its foreign partners (oris treated as having paid 1446 tax under§1.1446–5(b)), must file Form 8804, “An-

June 6, 2005 1184 2005–23 I.R.B.

nual Return for Partnership WithholdingTax (Section 1446).” Additionally, everypartnership that is required to file Form8804 also must file Form 8805, “ForeignPartner’s Information Statement of Sec-tion 1446 Withholding Tax,” for each ofits foreign partners on whose behalf itpaid 1446 tax, and furnish Form 8804 andthe Forms 8805 to the Internal RevenueService and the respective Form 8805 toeach of its partners. Notwithstanding theprevious sentence, a partnership that con-siders a foreign partner’s certificate under§1.1446–6T when computing its 1446 taxon Form 8804 is required to furnish suchpartner and the Internal Revenue Service aForm 8805, even if the form submitted tothe partner shows no payment of 1446 taxon behalf of the partner. Forms 8804 and8805 are separate from Form 1065, “U.S.Return of Partnership Income,” and theattachments thereto, and are not to be filedas part of the partnership’s Form 1065.A partnership must generally file Forms8804 and 8805 on or before the due datefor filing the partnership’s Form 1065.See §1.6031(a)–1(c) for rules concerningthe due date of a partnership’s Form 1065.However, with respect to partnerships de-scribed in §1.6081–5(a)(1), Forms 8804and 8805 are not due until the 15th day ofthe sixth month following the close of thepartnership’s taxable year.

(iv) Information provided to beneficia-ries of foreign trusts and estates. A for-eign trust or estate that is a partner in apartnership subject to withholding undersection 1446 shall be provided Form 8805by the partnership. The foreign trust orestate must provide to each of its benefi-ciaries a copy of the Form 8805 furnishedby the partnership. In addition, the for-eign trust or estate must provide a state-ment for each of its beneficiaries to in-form each beneficiary of the amount of thecredit that may be claimed under section33 (as determined under this section) forthe 1446 tax paid by the partnership. Untilan official Internal Revenue Service formis available, the statement from a foreigntrust or estate that is described in this para-graph (d)(1)(iv) shall contain the followinginformation—

(A) Name, address, and TIN of the for-eign trust or estate;

(B) Name, address, and TIN of the part-nership;

(C) The amount of the partnership’sECTI allocated to the foreign trust or estatefor the partnership taxable year (as shownon the Form 8805 provided to the trust orestate);

(D) The amount of 1446 tax paid by thepartnership on behalf of the foreign trust orestate (as shown on Form 8805 to the trustor estate);

(E) Name, address, and TIN of the ben-eficiary of the foreign trust or estate;

(F) The amount of the partnership’sECTI allocated to the trust or estate forpurposes of section 1446 that is to be in-cluded in the beneficiary’s gross income;and

(G) The amount of 1446 tax paid by thepartnership on behalf of the foreign trustor estate that the beneficiary is entitled toclaim on its return as a credit under section33.

(v) Attachments required of foreigntrusts and estates. The statement fur-nished to each foreign beneficiary underthis paragraph (d)(1) must also be attachedto the foreign trust or estate’s U.S. Federalincome tax return filed for the taxable yearthat includes the installment periods towhich the statement relates.

(vi) Attachments required of benefi-ciaries of foreign trusts and estates. Thebeneficiary of the foreign trust or estatemust attach the statement provided bythe trust or estate pursuant to paragraph(d)(1)(iv) of this section, along with a copyof the Form 8805 furnished by the part-nership to such trust or estate, to its U.S.income tax return for the year in whichit claims a credit for the 1446 tax. See§1.1446–3(d)(2)(ii) for additional rulesregarding a partner or beneficial ownerclaiming a credit for the 1446 tax.

(vii) Information provided to beneficia-ries of foreign trusts and estates that arepartners in certain publicly traded part-nerships. A statement similar to the state-ment required by paragraph (d)(1)(iv) ofthis section shall be provided by trusts orestates that hold interests in publicly tradedpartnerships subject to §1.1446–4.

(2) Crediting 1446 tax against a part-ner’s U.S. tax liability—(i) In general. Apartnership’s payment of 1446 tax on theportion of ECTI allocable to a foreign part-ner generally relates to the partner’s U.S.income tax liability for the partner’s tax-able year in which the partner is subjectto U.S. tax on that income. Subject to

paragraphs (d)(2)(ii) and (iii) of this sec-tion, a partner may claim as a credit undersection 33 the 1446 tax paid by the part-nership with respect to ECTI allocable tothat partner. The partner may not claim anearly refund of these amounts under the es-timated tax rules. See paragraph (d)(1)(i)of this section regarding a partner’s abilityto credit an installment of 1446 tax paid onthe partner’s behalf against the partner’sestimated tax payments due for the taxableyear. See also §1.1446–5(b) (relating totiered partnership structures).

(ii) Substantiation for purposes ofclaiming the credit under section 33. Apartner may credit the amount paid undersection 1446 with respect to such partneragainst its U.S. income tax liability onlyif it attaches proof of payment to its U.S.income tax return for the partner’s taxableyear in which the items comprising suchpartner’s allocable share of partnershipECTI are included in the partner’s income.Except as provided in the next sentence,proof of payment consists of a copy ofthe Form 8805 the partnership provides tothe partner (or in the case of a beneficiaryof a foreign trust or estate, the statementrequired under paragraph (d)(1)(iv) or(vii) of this section to be provided by suchtrust or estate and a copy of the relatedForm 8805 furnished to such trust or es-tate), but only if the name and TIN on theForm 8805 (or the statement provided bya foreign trust or estate) match the nameand TIN on the partner’s U.S. tax return,and such form (or statement) identifiesthe partner (or beneficiary) as the personentitled to the credit under section 33. Inthe case of a partner of a publicly tradedpartnership that is subject to withholdingon distributions under §1.1446–4, proofof payment consists of a copy of the Form1042–S, “Foreign Person’s U.S. SourceIncome Subject to Withholding,” providedto the partner by the partnership.

(iii) Special rules for apportioning thetax credit under section 33—(A) Foreigntrusts and estates. Section 1446 tax paidon the portion of ECTI allocable under sec-tion 704 to a foreign trust or estate that theforeign trust or estate may claim as a creditunder section 33 shall bear the same ratioto the total 1446 tax paid on behalf of thetrust or estate as the total ECTI allocable tosuch trust or estate and not distributed (ortreated as distributed) to the beneficiariesof such trust or estate, and, accordingly not

2005–23 I.R.B. 1185 June 6, 2005

deducted under section 651 or section 661in calculating the trust or estate’s taxableincome, bears to the total ECTI allocable tosuch trust or estate. The 1446 tax that a for-eign trust or estate is not entitled to claimas a credit under this paragraph (d)(2) maybe claimed as a credit by the beneficiary ofsuch trust or estate that includes the part-nership ECTI allocated to the trust or estatein gross income under section 652 or sec-tion 662 (whether distributed or deemed tobe distributed and with the same characteras effectively connected income as in thehands of the trust or estate). In the case of aforeign trust or estate with multiple benefi-ciaries, each beneficiary may claim a por-tion of the 1446 tax that may be claimedby all beneficiaries under the previous sen-tence as a credit in the same proportion asthe amount of ECTI included in such ben-eficiary’s gross income bears to the totalamount of ECTI included by all beneficia-ries. The trust or estate must provide eachbeneficiary with a copy of the Form 8805provided to it by the partnership and pre-pare the statement required by paragraph(d)(1)(iv) of this section.

(B) Use of domestic trusts to circumventsection 1446. This paragraph (d)(2)(iii)(B)shall apply if a partnership knows or hasreason to know that a foreign person holdsits interest in the partnership through a do-mestic trust, and such domestic trust wasformed or availed of with a principal pur-pose of avoiding the 1446 tax. The useof a domestic trust may have a princi-pal purpose of avoiding the 1446 tax eventhough the tax avoidance purpose is out-weighed by other purposes when taken to-gether. In such case, a partnership is re-quired to pay 1446 tax under this para-graph as if the domestic trust was a for-eign trust for purposes of section 1446 andthe regulations thereunder. Accordingly,all applicable additions to the tax, interest,and penalties shall apply to the partnershipfor its failure to pay 1446 tax under thisparagraph (d)(2)(iii)(B), commencing withthe installment period during which thepartnership knows or has reason to knowthat this paragraph (d)(2)(iii)(B) applies.A publicly traded partnership within themeaning of §1.1446–4 (or a nominee re-quired to pay 1446 tax under §1.1446–4)will not be considered to know or have rea-son to know a domestic trust is being usedto avoid the 1446 tax under this paragraph(d)(2)(iii)(B), provided the interest held in

such entity by the domestic trust is publiclytraded.

(iv) Refunds to withholding agent. Awithholding agent (i.e., the partnership)may obtain a refund of the 1446 tax paid(or deemed paid under §1.1446–5(b)) tothe extent of the excess of the amountpaid to the Internal Revenue Service bythe partnership, over the partnership’s sec-tion 1446 tax liability as determined by thesum of the total tax creditable to each part-ner indicated on all Forms 8805 for thetaxable year. If a partnership issues Form8805 to a partner, then the partnership maynot claim a refund for any amount of taxshown on that form as paid on behalf of thepartner. If a partnership incorrectly with-holds upon a United States person undersection 1446 of the Internal Revenue Codeand issues a Form 8805 to that person, thepartnership may not file for a refund ofthe amount incorrectly withheld. Instead,the United States person may file for a re-fund of that amount on its annual return.For rules concerning refunds to withhold-ing agents who pay 1446 tax on distribu-tions of effectively connected income orgain under §1.1446–4 (i.e., publicly tradedpartnerships or nominees), see §1.1464–1.

(v) 1446 tax treated as cash distribu-tion to partners. Except as otherwise pro-vided in this paragraph (d)(2)(v), a part-nership’s payment of 1446 tax on behalfof a foreign partner is treated under sec-tion 1446(d) and this section as a deemeddistribution of money to the partner on theearliest of the day on which the partnershippaid the tax, the last day of the partner-ship’s taxable year for which the amountwas paid, or the last day on which the part-ner owned an interest in the partnershipduring the taxable year for which the taxwas paid. However, a deemed distributionof money under section 1446(d) resultingfrom a partnership’s installment paymentof 1446 tax on behalf of a partner is treatedas an advance or drawing of money under§1.731–1(a)(1)(ii) to the extent of the part-ner’s distributive share of income for thepartnership taxable year. The rule treat-ing a deemed distribution as an advanceor drawing of money under this paragraph(d)(2)(v) applies only for purposes of de-termining the tax results of the deemed dis-tribution to the partner under sections 705,731, and 733, and does not affect the datethat the partnership is considered to havepaid any installment of 1446 tax for pur-

poses of section 6655 (as applied throughthis section) or the date a foreign partner isdeemed to have paid estimated tax by rea-son of such installment payment. See para-graph (d)(1)(i) of this section (permitting apartner to credit 1446 tax paid on the part-ner’s behalf against the partner’s estimatedtax obligation). An amount treated as anadvance or drawing of money is taken intoaccount at the end of the partnership tax-able year or the last day during the part-nership’s taxable year on which the partnerowned an interest in the partnership. Any1446 tax paid after the close of the part-nership’s taxable year, including amountspaid with the filing of Form 8804, that areon account of partnership ECTI allocatedto partners for the prior taxable year shallbe treated under section 1446(d) and thissection as a distribution from the partner-ship on the earlier of the last day of thepartnership’s prior taxable year for whichthe tax is paid, or the last day in such priortaxable year on which such foreign partnerheld an interest in the partnership.

(vi) Examples. The following exam-ples illustrate the application of this sec-tion. In considering the examples, disre-gard the potential application of paragraph(b)(2)(v)(F) of this section (relating to thede minimis exception to paying 1446 tax).The examples are as follows:

Example 1. Simple trust that reports entireamount of ECTI. PRS is a partnership that has twopartners, FT, a foreign trust, and A, a U.S. person.FT is a simple trust under section 651. FT and Aeach provide PRS with a valid Form W–8BEN andForm W–9, respectively. FT has one beneficiary,NRA, a nonresident alien. PRS and FT each main-tain a calendar taxable year. PRS estimated for eachinstallment period during the partnership’s taxableyear that FT would be allocated $100 of ECTI for thetaxable year, and that all such ECTI would be ordi-nary in character. Assume that the allocation of the$100 would be respected under section 704(b) andthe regulations thereunder. PRS pays installments of1446 tax based upon its estimates and timely pays atotal of $35 of 1446 tax over the course of the part-nership’s taxable year ($100 ECTI x .35). Assumethat PRS’ estimates of ECTI allocable to FT duringthe taxable year equal the actual amount of ECTIallocable to FT for the taxable year. Assume also thatFT’s only income for the taxable year is the $100 ofincome from PRS, and that, pursuant to the terms ofthe trust’s governing instrument and local law, the$100 of ECTI is not included in FT’s fiduciary ac-counting income and the deemed distribution of the$35 withholding tax paid under paragraph (d)(2)(v)of this section is not included in FT’s fiduciary ac-counting income. Accordingly, the $100 of ECTIis not income required to be distributed by FT, andFT may not claim a deduction under section 651 forthis amount. FT must report the $100 of ECTI in its

June 6, 2005 1186 2005–23 I.R.B.

gross income and may claim a credit under section33 as determined under paragraph (d)(2)(iii) of thissection of $35 for the 1446 tax paid by PRS. NRAis not required to include any of the ECTI in grossincome and accordingly may not claim a credit forany amount of the $35 of 1446 tax PRS paid.

Example 2. Simple trust that distributes a portionof ECTI to the beneficiary. Assume the same facts asin Example 1, except that PRS distributes $60 to FT,which FT includes in its fiduciary accounting incomeunder local law. FT will report the $100 of ECTI inits gross income and may claim a deduction for the$60 required to be distributed under section 651(a)to NRA. Pursuant to paragraph (d)(2)(iii) of this sec-tion, FT may claim a $14 credit under section 33 forthe 1446 tax PRS paid ($40/$100 multiplied by $35).NRA is required to include the $60 of the ECTI ingross income under section 652 (as ECTI) and mayclaim a $21 credit under section 33 for the 1446 taxPRS paid ($35 less $14 or $60/$100 multiplied by$35).

Example 3. Complex trust that distributes entireECTI to the beneficiary. Assume the same facts asin Example 1, except that FT is a complex trust un-der section 661. PRS distributes $60 to FT, whichFT includes in its fiduciary accounting income. FTdistributes the $60 of fiduciary accounting incometo NRA and also properly distributes an additional$40 to NRA from FT’s principal. FT will report the$100 of ECTI in its gross income and may deductthe $60 required to be distributed to NRA under sec-tion 661(a)(1) and may deduct the $40 distributed toNRA under section 661(a)(2). Pursuant to paragraph(d)(2)(iii) of this section, FT may not claim a creditunder section 33 for any of the $35 of 1446 tax paidby PRS. NRA is required to include $100 of the ECTIin gross income under section 662 (as ECTI) and mayclaim a $35 credit under section 33 for the 1446 taxpaid by PRS ($35 less $0).

(e) Liability of partnership for failureto withhold—(1) In general. Every part-nership required to pay 1446 tax is madeliable for that tax by section 1461. There-fore, a partnership that is required to pay1446 tax but fails to do so, or pays less thanthe amount required under this section, isliable under section 1461 for the paymentof the tax required to be withheld underchapter 3 of the Internal Revenue Codeand the regulations thereunder unless, andto the extent, the partnership can demon-strate pursuant to paragraph (e)(2) of thissection, to the satisfaction of the Commis-sioner or his delegate, that a foreign partnerhas paid the full amount of tax required tobe paid by such partner to the Internal Rev-enue Service. See paragraph (e)(3) of thissection and section 1463 regarding a part-nership’s liability for penalties and inter-est even though a foreign partner has sat-isfied the underlying tax liability. See also§1.1461–3 for applicable penalties when apartnership fails to pay 1446 tax. See para-graph (b) of this section for an addition to

the tax under section 6655 when there is anunderpayment of 1446 tax.

(2) Proof that tax liability has been sat-isfied and deemed payment of 1446 tax.Proof of payment of tax may be establishedfor purposes of paragraph (e)(1) of thissection consistent with §1.1445–1(e)(3).Under that standard, a partnership mustprovide sufficient information to the IRSto determine that the partner’s tax liabilitywas satisfied or established to be zero inaccordance with the rules of this section.Under this section, a partnership’s liabil-ity for 1446 tax shall be deemed to havebeen satisfied (deemed payment), to theextent of the 1446 tax due with respect tothe ECTI allocable to a foreign partner, onthe later of the date that such partner is con-sidered to have paid all tax that is requiredto be shown on such partner’s U.S. incometax return under section 6513(a) and (b)(2)(prescribing the date tax is considered paidfor purposes of sections 6511(b)(2), (c),and 6512), or the last date for payment ofthe 1446 tax without extensions (the un-extended due date for Form 8804). Thedeemed payment rule of this paragraph(e)(2) shall apply for purposes sections of1446, 1461, and 1463, and any additionsto the tax, interest, or penalties potentiallyapplicable to such partnership under sec-tion 1446, including sections 6601, 6651,and 6655. Any deemed payment of 1446tax under this paragraph (e)(2) shall not betreated as a deemed distribution under sec-tion 1446(d) and this section.

(3) Liability for interest, penalties, andadditions to the tax—(i) Partnership. Not-withstanding paragraph (e)(2) of this sec-tion, a partnership that fails to pay 1446tax is not relieved from liability under sec-tion 6655 (as applied through this section)or for interest under section 6601, whenapplicable. See §1.1463–1. Such liabil-ity may exist even if there is no underly-ing tax liability due from a foreign part-ner on its allocable share of partnershipECTI. The addition to the tax under sec-tion 6655 or the interest charge under sec-tion 6601 that is required by those sectionsshall be imposed as set forth in those sec-tions, as modified by this section. The sec-tion 6601 interest charge shall accrue be-ginning on the last date prescribed for pay-ment of the 1446 tax due under section1461 (which is the due date, without ex-tensions, for filing Form 8804). The sec-tion 6601 interest charge shall stop accru-

ing on the 1446 tax liability on the date,and to the extent, that the unpaid tax li-ability under section 1446 is satisfied (oris deemed satisfied under this paragraph(e)). Further, a partnership’s liability un-der section 6655 (as applied through thissection) for any underpaid installment pay-ment shall accrue beginning on the rele-vant installment payment date, and shallstop accruing on the earlier of the date (andto the extent) that the 1446 tax liability isactually satisfied or the date prescribed inparagraph (b)(2)(v)(C) of this section. Seeparagraph (e)(4) of this section for exam-ples illustrating that a partner’s payment ofestimated tax has no effect on the partner-ship’s calculation of its addition to the taxunder section 6655 and this section. See§1.1461–3 for a list of the additions to tax,interest, and penalties that may apply to apartnership that fails to comply with sec-tion 1446. See §1.1446–6T for exceptionsto the application of the addition to the taxunder section 6655 (as applied through thissection) when a partnership reasonably re-lies on a foreign partner’s certificate to re-duce 1446 tax.

(ii) Foreign partner. A foreign partneris permitted to reduce any addition to thetax under section 6654 or section 6655 bythe amount of any section 6655 addition tothe tax paid by the partnership with respectto the partnership’s failure to pay adequateinstallment payments of the 1446 tax onECTI allocable to the foreign partner.

(4) Examples. The following exam-ples illustrate the application of this sec-tion. In considering the examples, disre-gard the potential application of paragraph(b)(2)(v)(F) of this section (relating to thede minimis exception to paying 1446 tax).Further, in each of the examples where apartnership is deemed to have paid 1446tax with respect to ECTI allocable to apartner, it is assumed that the partnershiphas presented to the IRS the appropriateinformation under paragraph (e)(2) of thissection for the IRS to conclude that thedeemed payment is appropriate. The ex-amples are as follows:

Example 1. Foreign partnership fails to pay 1446tax and sole foreign partner fails to pay all tax re-quired to be shown on partner’s U.S. income tax re-turn.

(i) PRS is a foreign partnership engaged in atrade or business in the United States and has twoequal partners, A, a U.S. person, and B, a nonresidentalien. PRS is described in §1.6081–5(a) (PRS keepsits books and records outside the United States and

2005–23 I.R.B. 1187 June 6, 2005

Puerto Rico) and, therefore, is required to file Form8804 by the 15th day of the 6th month following theclose of its taxable year. Both partners and PRS arecalendar year taxpayers. PRS has received a validForm W–9 and W–8BEN from A and B, respec-tively, but has not received any other documentsor certificates. B is engaged in multiple trades orbusinesses (including the PRS partnership) that giverise to effectively connected income. PRS will use anacceptable annualization method under this sectionfor computing its 1446 tax.

(ii) In PRS’s first year of operations (Year 1),PRS estimates for each installment period describedin §1.1446–3 that B will be allocated $100 of ordi-nary ECTI for the taxable year. Therefore, for eachinstallment period PRS is required to pay one fourthof the tax on the annualized ECTI allocable to B, or$8.75 (.25 x ($100 x .35)). PRS fails to make any in-stallment payments. PRS’s operations actually resultin $100 of ECTI allocated to B. Therefore, PRS wasrequired to have paid 1446 tax of $35 on or before thedue date, without extensions, for filing its Form 8804which is June 15, Year 2 (the last date prescribed forpayment of the 1446 tax). PRS does not file Forms8804 or 8805.

(iii) B pays estimated taxes and makes the follow-ing payments on the following dates: June 15, Year1 - $20, September 15, Year 1 - $15, and January 15,Year 2 - $10. B’s total estimated tax payments equal$45. B files its U.S. Federal income tax return timelyon June 15, Year 2, and reports all effectively con-nected income required to be shown on its return. As-sume that B’s total correct tax liability as shown onthe return is $50. B does not make a payment with itsreturn and so B still owes $5 to the Internal RevenueService (excluding any interest, penalties, and addi-tions to the tax that may apply). Assume that B is notsubject to an addition to the tax under section 6654.

(iv) Under the rules of paragraph (e)(2) of thissection, for purposes of sections 1446, 1461, and1463, PRS is not considered to have paid any 1446tax because B has not paid all of B’s U.S. income taxliability.

(v) Further, under the principles of section 6655and the rules of §1.1446–3(e), a partner’s estimatedtax payments will not affect the calculation of a part-nership’s addition to the tax. Accordingly, PRS willbe liable under the principles of section 6655 and§1.1446–3 for failing to withhold for each installmentpayment. The addition to the tax will accrue begin-ning with the due date of each installment payment onthe $8.75 underpayment for each respective install-ment period and will continue to accrue until June 15,Year 2 (the date prescribed in paragraph (b)(2)(v)(C)of this section).

(vi) Further, beginning on June 15, Year 2 (thelast date prescribed for payment of 1446 tax withoutextensions), PRS will be liable for interest under sec-tion 6601 with respect to the unpaid 1446 tax, $35.This interest will stop accruing on the earlier of thedate that the 1446 tax is paid by PRS or is deemedpaid under paragraph (e)(2) of this section by reasonof B’s payment of its full tax liability.

(vii) Further, beginning on June 15, Year 2 (thedue date for filing Form 8804), PRS will be liable forthe addition to the tax under section 6651(a)(1) forfailing to file Form 8804. This addition to the taxaccrues on the amount required to be shown as the1446 tax liability on Form 8804, $35. This addition

to the tax will accrue at the rate of 5 percent per monthuntil the date that PRS files Form 8804 for Year 1, orthe maximum accrual of the penalty (25 percent ofthe tax required to be shown on the return) under thatsection has been reached.

(viii) PRS may be liable for other penalties andadditions to the tax for its failure to withhold orto furnish statements to its foreign partner B. See§1.1461–3 for a list of the penalties that may apply.

Example 2. Foreign partnership fails to pay 1446tax but sole foreign partner pays all tax required to beshown on the partner’s U.S. income tax return. Thefacts are the same as Example 1, except that B pays$5 with the filing of B’s return and has therefore paidall tax required to be shown on B’s return within themeaning of paragraph (e)(2) of this section.

(i) For purposes of sections 1446, 1461, and 1463,PRS is deemed to have paid its 1446 tax liability un-der paragraph (e)(2) of this section as of the later ofthe date that B is considered to have paid its tax un-der section 6513(a) and (b)(2) (June 15, Year 2) andthe last date for PRS to pay its 1446 tax without ex-tensions (also June 15, Year 2). Therefore, PRS isdeemed to have paid all of its 1446 tax liability as ofJune 15, Year 2. PRS has no continuing liability for1446 tax under section 1461, however, additions tothe tax, interest, and penalties may apply.

(ii) For purposes of section 6655 and §1.1446–3,under paragraph (e)(2) PRS is deemed to have paidits 1446 tax on June 15, Year 2. Even if B had fullypaid its tax liability as of March 15, Year 2, the rulein paragraph (e)(2) of this section would not deemPRS to have paid its 1446 tax until June 15, Year 2.As a result, B’s estimated tax payments will have noeffect on PRS’s calculation of its addition to the tax.The addition to the tax under 6655 and §1.1446–3shall begin to accrue on each installment date withrespect to the underpaid installment ($8.75), and willstop accruing on June 15, Year 2, the date prescribedin paragraph (b)(2)(v)(C) of this section.

(iii) Because PRS is deemed to have paid its full1446 tax liability as of June 15, Year 2 (the last dateprescribed for payment of 1446 tax without exten-sions), PRS is not subject to an interest charge undersection 6601, or a failure to file penalty under section6651 (see section 6651(b)(1)).

(iv) PRS may be liable for other penalties andadditions to the tax for its failure to withhold orto furnish statements to its foreign partner B. See§1.1461–3 for a list of the penalties that may apply.

(v) If PRS had several foreign partners, PRSwould conduct the same analysis as set forth abovewith respect to each partner. That is, under paragraph(e) of this section, PRS may be deemed to have paid1446 tax with respect to the ECTI allocable to somebut not all of its foreign partners.

Example 3. Domestic partnership fails to pay1446 tax but sole foreign partner fully pays all taxrequired to be shown on partner’s U.S. income tax re-turn. The facts are the same as Example 2, except thatPRS is a domestic partnership whose last date pre-scribed for paying 1446 tax without extensions (i.e.,generally the unextended due date for Form 8804) isApril 15, Year 2.

(i) For purposes of sections 1446, 1461, and 1463,PRS is deemed to have paid its 1446 tax liability onthe later of the date that B is considered to have paidtax under section 6513(a) and (b)(2) (June 15, Year 2)and the last date for paying 1446 tax without exten-

sions (i.e., the unextended due date for Form 8804,April 15, Year 2). Accordingly, PRS is not consid-ered to have fully paid its 1446 tax liability until June15, Year 2. PRS has no continuing liability for 1446tax under section 1461, however, additions to the tax,interest, and penalties may apply.

(ii) For purposes of section 6655 and §1.1446–3,PRS is subject to an underpayment addition to thetax that accrues on the same amount as in Exam-ple 1 and Example 2 because PRS is not deemed tohave paid 1446 tax under paragraph (e)(2) of this sec-tion until June 15, Year 2. The addition to the taxwill stop accruing on the date prescribed in paragraph(b)(2)(v)(C) of this section (i.e., April 15, Year 2, thedue date, without extensions, for filing Form 8804).

(iii) For purposes of section 6601, as of the lastdate prescribed for paying 1446 tax without exten-sions (April 15, Year 2), PRS has not paid or beendeemed to have paid any 1446 tax. Accordingly, theinterest charge under section 6601 shall begin to ac-crue on April 15, Year 2, and shall accrue until the1446 liability is paid or deemed to have been paid. Inthis case, the interest charge will accrue until June 15,Year 2, the date that PRS is deemed to have paid its1446 tax under paragraph (e)(2) of this section.

(iv) For purposes of section 6651(a)(1), as ofApril 15, Year 2, PRS’s amount required to be shownas tax on its Form 8804 is $35. This amount cannotbe reduced under section 6651(b)(1) because PRS isnot deemed to have paid 1446 tax under paragraph(e)(2) of this section until June 15, Year 2, a datefalling after the last date for PRS to pay its 1446tax, April 15, Year 2. Accordingly, the failure to filepenalty will begin to accrue on April 15, Year 2 (fil-ing due date for Form 8804), and shall stop accruingon the earlier of the date that PRS files Form 8804 orthe maximum accrual of the penalty (25 percent ofthe amount required to be shown as tax on the return)is reached.

(v) PRS may be liable for other penalties andadditions to the tax for its failure to withhold orto furnish statements to its foreign partner B. See§1.1461–3 for a list of the penalties that may apply.

(f) Effect of withholding on partner.The payment of the 1446 tax by a part-nership does not excuse a foreign partnerto which a portion of ECTI is allocablefrom filing a U.S. tax or informationalreturn, as appropriate, with respect to thatincome. Information concerning install-ment payments of 1446 tax paid duringthe partnership’s taxable year on behalfof a foreign partner shall be provided tosuch foreign partner in accordance withparagraph (d) of this section and such in-formation may be taken into account bythe foreign partner when computing thepartner’s estimated tax liability duringthe taxable year. Form 1040NR, “U.S.Nonresident Alien Income Tax Return,”Form 1065, “U.S. Return of PartnershipIncome,” Form 1120F, “U.S. Income TaxReturn of a Foreign Corporation,” or suchother return as appropriate, must be filedby the partner, and any tax due must be

June 6, 2005 1188 2005–23 I.R.B.

paid, by the filing deadline (includingextensions) generally applicable to suchperson. Pursuant to paragraph (d) of thissection, a partner may generally claim acredit under section 33 for its share of any1446 tax paid by the partnership againstthe amount of income tax (or 1446 taxin the case of tiers of partnerships) ascomputed in such partner’s return. See§1.1446–3(e)(3)(ii) for rules permitting apartner to reduce its addition to tax undersection 6654 or section 6655.

§1.1446–4 Publicly traded partnerships.

(a) In general. This section sets forthrules for applying the section 1446 with-holding tax (1446 tax) to publicly tradedpartnerships. A publicly traded partner-ship (as defined in paragraph (b) of thissection) that has effectively connectedgross income, gain or loss must pay 1446tax by withholding from distributions to aforeign partner. Publicly traded partner-ships that withhold on distributions mustpay over and report any 1446 tax as pro-vided in paragraph (c) of this section, andgenerally are not to pay over and report the1446 tax under the rules in §1.1446–3. Theamount of the withholding tax on distri-butions, other than distributions excludedunder paragraph (f) of this section, that aremade during any partnership taxable year,equals the applicable percentage (definedin paragraph (b)(2) of this section) of suchdistributions. For penalties and additionsto the tax for failure to comply with thissection, see §§1.1461–1 and 1.1461–3.

(b) Definitions—(1) Publicly tradedpartnership. For purposes of this section,the term publicly traded partnership hasthe same meaning as in section 7704 (in-cluding the regulations thereunder), butdoes not include a publicly traded part-nership treated as a corporation under thatsection.

(2) Applicable percentage. For pur-poses of this section, applicable percent-age shall have the meaning as set forthin §1.1446–3(a)(2), except that the part-nership or nominee required to pay 1446tax may not consider a preferential rate incomputing the 1446 tax due with respect toa partner.

(3) Nominee. For purposes of this sec-tion, the term nominee means a domesticperson that holds an interest in a publicly

traded partnership on behalf of a foreignperson.

(4) Qualified notice. For purposes ofthis section, a qualified notice is a noticegiven by a publicly traded partnershipregarding a distribution that is attribut-able to effectively connected income, gainor loss of the partnership, and in accor-dance with the notice requirements withrespect to dividends described in 17 CFR240.10b–17(b)(1) or (3) issued pursuantto the Securities Exchange Act of 1934(15 U.S.C. 78a). See paragraph (d) of thissection regarding when a nominee is con-sidered to have received a qualified notice.

(c) Paying and reporting 1446 tax. Thewithholding tax required under this sec-tion is to be paid pursuant to the rules andprocedures of section 1461, §§1.1461–1,1.1461–2, and 1.6302–2, as supplementedby the rules of this section. However,the reimbursement and set-off proceduresset forth in §1.1461–2 shall not apply. Awithholding agent under this section mustuse Form 1042, “Annual Withholding TaxReturn for U.S. Source Income of ForeignPersons,” and Form 1042–S, “ForeignPerson’s U.S. Source Income Subjectto Withholding,” to report withholdingfrom distributions under this section. See§1.1461–1(b). Further, a withholdingagent under this section may obtain a re-fund for 1446 tax paid in accordance withsection 1464 and the regulations there-under. See §1.1446–3(d)(1)(iv) and (vii)(relating to a foreign trust or estate thatholds an interest in a publicly traded part-nership) and §1.1446–5(d) (relating to apublicly traded partnership that is part of atiered partnership structure) for additionalguidance.

(d) Rules for designation of nomineesto withhold tax under section 1446. Anominee that receives a distribution from apublicly traded partnership subject to with-holding under this section, and which isto be paid to (or for the account of) anyforeign person, may be treated as a with-holding agent under this section. A nom-inee is treated as a withholding agent un-der this section only to the extent of theamount specified in the qualified notice (asdefined in paragraph (b)(4) of this section)received by the nominee. A nominee istreated as receiving a qualified notice atthe time such notice is published in accor-dance with 17 CFR 240.10b–17(b)(1) or(3). Where a nominee is designated as a

withholding agent with respect to a foreignpartner of the partnership, the obligationto withhold on distributions to such for-eign partner in accordance with the rules ofthis section shall be imposed solely on thenominee. A nominee responsible for with-holding under the rules of this section shallbe subject to liability under sections 1461and 6655, as well as all applicable penal-ties and interest, as if such nominee wasa partnership responsible for withholdingunder this section.

(e) Determining foreign status of part-ners. The rules of §1.1446–1 shall ap-ply in determining whether a partner ofa publicly traded partnership is a foreignpartner for purposes of the 1446 tax. Apartnership or nominee obligated to with-hold under this section shall be entitled torely on any of the forms acceptable un-der §1.1446–1 received from persons onwhose behalf it holds interests in the part-nership to the same extent a partnership isentitled to rely on such forms under thoserules.

(f) Distributions subject to withhold-ing—(1) In general. Except as providedin this paragraph (f)(1), a publicly tradedpartnership must withhold at the applica-ble percentage with respect to any actualdistribution made to a foreign partner. Theamount of a distribution subject to 1446tax includes the amount of any 1446 taxrequired to be withheld on the distribu-tion. In the case of a partnership (upper-tier partnership) that receives a partner-ship distribution from another partnershipin which it is a partner (lower-tier part-nership)(i.e., a tiered structure describedin §1.1446–5), any 1446 tax that was paidby the lower-tier partnership may be cred-ited by the upper-tier partnership and shallbe treated as a distribution under section1446. For example, a foreign publiclytraded partnership, UTP, owns an inter-est in domestic publicly traded partnership,LTP. LTP makes a distribution subject tosection 1446 of $100 to UTP during itstaxable year beginning January 1, 2005,and withholds 35 percent (the highest ratein section 1) ($35) of that distribution un-der section 1446. UTP receives a net dis-tribution of $65 which it immediately re-distributes to its partners. UTP has a li-ability to pay 35 percent of the total ac-tual and deemed distribution it makes toits foreign partners as a section 1446 with-holding tax. UTP may credit the $35 with-

2005–23 I.R.B. 1189 June 6, 2005

held by LTP against this liability as if itwere paid by UTP. See §1.1462–1(b) and§1.1446–5(b)(1). When UTP distributesthe $65 it actually receives from LTP toits partners, UTP is treated for purposes ofsection 1446 as if it made a distribution of$100 to its partners ($65 actual distributionand $35 deemed distribution). UTP’s part-ners (U.S. and foreign) may claim a creditagainst their U.S. income tax liability fortheir allocable share of the $35 of 1446 taxpaid on their behalf.

(2) In-kind distributions. If a publiclytraded partnership distributes propertyother than money, the partnership shallnot release the property until it has fundssufficient to enable the partnership to payover in money the required 1446 tax.

(3) Ordering rule relating to distribu-tions. Distributions from publicly tradedpartnerships are deemed to be paid out ofthe following types of income in the orderindicated—

(i) Amounts attributable to income de-scribed in section 1441 or 1442 that are noteffectively connected, without regard towhether such amounts are subject to with-holding because of a treaty or statutory ex-emption;

(ii) Amounts effectively connected witha U.S. trade or business, but not subjectto withholding under section 1446 (e.g.,amounts exempt by treaty);

(iii) Amounts subject to withholdingunder section 1446; and

(iv) Amounts not listed in paragraphs(f)(3)(i) through (iii) of this section.

(4) Coordination with section1445(e)(1). Except as otherwise pro-vided in this section, a publicly tradedpartnership that complies with the re-quirements of withholding under section1446 and this section will be deemed tohave satisfied the requirements of section1445(e)(1) and the regulations thereunder.Notwithstanding the excluded amounts setforth in paragraph (f)(3) of this section,distributions subject to withholding at theapplicable percentage shall include thefollowing—

(i) Amounts subject to withholdingunder section 1445(e)(1) upon distri-bution pursuant to an election under§1.1445–5(c)(3) of the regulations; and

(ii) Amounts not subject to withholdingunder section 1445 because the distributeeis a partnership or is a foreign corporation

that has made an election under section897(i).

§1.1446–5 Tiered partnership structures.

(a) In general. The rules of this sectionshall apply in cases where a partnership(lower-tier partnership) that has effec-tively connected taxable income (ECTI),has a partner that is a partnership (up-per-tier partnership). Except as providedin paragraph (e) of this section, if anupper-tier domestic partnership directlyowns an interest in a lower-tier partner-ship, the lower-tier partnership is notrequired to pay the section 1446 with-holding tax (1446 tax) with respect to theupper-tier partnership’s allocable shareof net income, regardless of whether theupper-tier domestic partnership’s partnersare foreign. Paragraph (b) of this sec-tion prescribes the reporting requirementsfor upper-tier and lower-tier partnershipssubject to section 1446. Paragraph (c) ofthis section prescribes rules requiring alower-tier partnership to look through anupper-tier foreign partnership to a part-ner of such upper-tier partnership to theextent it has sufficient documentation todetermine the status of such partner anddetermine such partner’s indirect shareof the lower-tier partnership’s effectivelyconnected taxable income (ECTI). Para-graph (d) of this section prescribes rulesapplicable to a publicly traded partnershipin a tiered partnership structure. Paragraph(e) of this section prescribes rules permit-ting a domestic upper-tier partnership toelect to apply the look through rules ofparagraph (c) of this section. Paragraph(f) of this section sets forth examples il-lustrating the rules of this section.

(b) Reporting requirements—(1) Ingeneral. Notwithstanding paragraph (c) ofthis section, to the extent that an upper-tierpartnership that is a foreign partnershipis a partner in a lower-tier partnership,and the lower-tier partnership has paid1446 tax (including installment paymentsof such tax) with respect to ECTI allo-cable to the upper-tier partnership, thelower-tier partnership shall comply with§§1.1446–1 through 1.1446–3 and pro-vide the upper-tier partnership notice ofsuch payments and a copy of the state-ments and forms filed with respect to theupper-tier partnership’s interest in thelower-tier partnership (e.g., Form 8805,

“Foreign Partner’s Information Statementof Section 1446 Withholding Tax”). Theupper-tier partnership may treat the 1446tax (or any installment of such tax) paid bythe lower-tier partnership on its behalf asa credit against its liability to pay 1446 tax(or any installment of such tax), as if theupper-tier partnership actually paid overthe amounts at the time that the amountswere paid by the lower-tier partnership.See §1.1462–1(b) and §1.1446–3(d). Tothe extent required in §1.1446–3(d)(1)(iii),the upper-tier partnership will file Form8804, “Annual Return for PartnershipWithholding Tax (Section 1446),” andForm 8805, “Foreign Partner’s Informa-tion Statement of Section 1446 Withhold-ing Tax,” for each of its foreign partnerswith respect to its 1446 tax obligation.To the extent the upper-tier partnershipdoes not claim a refund of the 1446 tax itpaid (or is considered to have paid), theupper-tier partnership will pass the creditfor the 1446 tax paid to its partners on theForms 8805 it issues. See §1.1446–3(d).The rules of this paragraph (b) shall applyto an upper-tier and lower-tier partnershipto the extent that an election has beenmade and consented to under paragraph(e) of this section.

(2) Publicly traded partnerships. In thecase of an upper-tier foreign partnershipthat is a publicly traded partnership, therules of §1.1446–4(c) shall apply. See alsoparagraph (d) of this section.

(c) Look through rules for foreign up-per-tier partnerships. For purposes ofcomputing the 1446 tax obligation of alower-tier partnership, if an upper-tier for-eign partnership owns an interest in thelower-tier partnership, the upper-tier part-nership’s allocable share of ECTI fromthe lower-tier partnership shall be treatedas allocable to a partner of the upper-tierpartnership, to the extent of such part-ner’s indirect share of such ECTI (as ifsuch partner were a direct partner in thelower-tier partnership), if—

(1) The upper-tier foreign partnershipfurnishes the lower-tier partnership a validForm W–8IMY, “Certificate of Foreign In-termediary, Flow Through Entity, or Cer-tain U.S. Branches for United States TaxWithholding,” indicating that it is a look-through foreign partnership for purposesof section 1446; and

(2) The lower-tier partnership can re-liably associate (within the meaning of

June 6, 2005 1190 2005–23 I.R.B.

§1.1441–1(b)(2)(vii)) effectively con-nected partnership items allocable to theupper-tier partnership (and indirectly tosuch partner) with a Form W–8 (e.g.,Form W–8BEN), Form W–9, “Requestfor Taxpayer Identification Number andCertification,” or other form acceptableunder §1.1446–1, establishing the sta-tus of such partner provided by the up-per-tier partnership. The principles of§1.1441–1(b)(2)(vii) shall apply to de-termine whether a lower-tier partnershipcan reliably associate effectively con-nected partnership items allocable to theupper-tier partnership with a partner ofthe upper-tier partnership. To the ex-tent the lower-tier partnership receivesa valid Form W–8IMY from the up-per-tier partnership but cannot reliablyassociate a portion of the upper-tier part-nership’s allocable share of effectivelyconnected partnership items with a part-ner of such upper-tier partnership, thenthe lower-tier partnership shall pay 1446tax on such portion at the higher of theapplicable percentages in section 1446(b).See §1.1446–3(a)(2) for the treatment ofany income or gain potentially subject toa preferential rate. If a lower-tier part-nership has not received a valid FormW–8IMY from the upper-tier partnership,the lower-tier partnership shall withholdon the upper-tier partnership’s entire allo-cable share of ECTI at the higher of theapplicable percentages in section 1446(b).The look through regime set forth in thisparagraph (c) is for purposes of computingthe lower-tier partnership’s 1446 tax obli-gation only and does not alter the personsconsidered to be partners in the lower-tierpartnership for partnership reporting pur-poses (e.g., issuing Form 8805, ScheduleK–1).

(d) Publicly traded partnerships—(1)Upper-tier publicly traded partnership.The rules set forth in paragraph (c) shallnot apply to look through an upper-tierpartnership whose interests are publiclytraded (as defined in §1.1446–4(b)(1)).

(2) Lower-tier publicly traded partner-ship. The look through rules of paragraph(c) of this section shall apply, if the re-quirements of that paragraph are met, toa lower-tier partnership that is a publiclytraded partnership within the meaning of§1.1446–4(b)(1) only if the upper-tier part-nership is not described in paragraph (d)(1)of this section. For example, a lower-tier

publicly traded partnership (or nominee)shall look through an upper-tier foreignpartnership (or domestic partnership to theextent an election is made and consented tounder paragraph (e) of this section) whencomputing its 1446 tax liability, providedthe upper-tier partnership is not a publiclytraded partnership and the appropriate doc-umentation needed to satisfy the standardsset forth in §1.1441–1(b)(2)(vii) and para-graph (c) of this section have been fur-nished.

(e) Election by a domestic upper-tierpartnership to apply look throughrules—(1) In general. Subject to therules of this paragraph (e), a domesticpartnership that is a partner in a lower-tierpartnership may elect to apply the rulesof this section 1.1446–5 and have thelower-tier partnership look through suchupper-tier partnership to the partners ofsuch domestic partnership for purposesof computing the lower-tier partnership’s1446 tax liability. A domestic partnershipshall make this election by attaching tothe Form W–9 submitted to the lower-tierpartnership, a written statement and infor-mation (described in paragraph (e)(2) ofthis section) that identifies the upper-tierpartnership as a domestic partnership andthat states that such partnership is mak-ing the election under this paragraph (e).This paragraph (e)(1) shall not apply to apublicly traded partnership described in§1.1446–4(b)(1). See paragraph (d)(1) ofthis section.

(2) Information required for valid elec-tion statement. In addition to the require-ments of paragraphs (e)(1) and (3) of thissection, the election statement submittedunder this paragraph (e)(2) is not validand cannot be accepted by the lower-tierpartnership pursuant to paragraph (e)(3)of this section unless the upper-tier part-nership attaches valid documentation pur-suant to §1.1446–1 (e.g., Form W–8BEN)with respect to one or more of its foreignpartners. The information and documen-tation submitted with the election mustcomply with the rules of this section topermit the lower-tier partnership to re-liably associate (within the meaning of§1.1441–1(b)(2)(vii)) at least a portionof the upper-tier partnership’s allocableshare of ECTI with one or more foreignpartners of the upper-tier partnership.The election statement must identify theupper-tier partnership by name, address,

and TIN, and specify the percentage in-terest the domestic partnership holds inthe lower-tier partnership. The statementmay also include such information theupper-tier partnership deems necessary toenable the lower-tier partnership to applythe provisions of this section. If at anytime the upper-tier partnership determinesthat the information or documentationpreviously provided to the lower- tier part-nership is no longer correct, the upper-tierpartnership shall update such informationand documentation. Except as provided inparagraph (e)(3) of this section, an electionthat is effective under this paragraph (e)shall apply for subsequent taxable yearsuntil such upper-tier partnership revokesthe election in writing. A revocation un-der this section shall be effective for anyinstallment due date arising more than15 days subsequent to the date that thelower-tier partnership receives such revo-cation.

(3) Consent of lower-tier partnership.An election made under this paragraph (e)is not effective until the lower-tier part-nership consents in writing to the upper-tier partnership that it agrees to apply theprovisions of this section. A lower-tierpartnership may not consent to an elec-tion submitted under this paragraph (e) forany installment date or Form 8804 filingdate arising within 15 days of the lower-tier partnership’s receipt of such election.The lower-tier partnership’s written con-sent must specify the extent to which itwill look through the upper-tier partner-ship in computing its 1446 tax (or any in-stallment of such tax). To the extent thatthe lower-tier partnership does not consentto an election to apply the look throughprovisions of paragraph (c) of this sec-tion, the lower-tier partnership shall con-sider such portion of the upper-tier partner-ship’s allocable share of ECTI as allocableto a domestic person for purposes of com-puting its 1446 tax obligation. A lower-tierpartnership that has consented to an elec-tion under this paragraph (e) may revoke ormodify its consent, in writing, at any time.

(f) Examples. The following ex-amples illustrate the provisions of thissection. In considering the examples,disregard the potential application of§1.l446–3(b)(2)(v)(F) (relating to the deminimis exception to paying 1446 tax).The examples are as follows:

2005–23 I.R.B. 1191 June 6, 2005

Example 1. Sufficient documentation—tieredpartnership structure. (i) Nonresident alien (NRA)and foreign corporation (FC) are partners in PRS, aforeign partnership, and share profits and losses inPRS 70 and 30 percent, respectively. All of PRS’spartnership items are allocated based upon each part-ner’s respective ownership interest and it is assumedthat these allocations are respected under section704(b) and the regulations thereunder. NRA andFC each furnish PRS with a valid Form W–8BENestablishing themselves as a foreign individual andforeign corporation, respectively. PRS holds a 40percent interest in the profits, losses and capital ofLTP, a lower-tier partnership. NRA holds the remain-ing 60 percent interest in profits, losses and capitalof LTP. All of LTP’s partnership items are allocatedbased upon each partner’s respective ownershipinterest and it is assumed that these allocations arerespected under section 704(b) and the regulationsthereunder. LTP has $100 of annualized ECTI forthe relevant installment period. All of this income isordinary income and there is no potential applicationof a preferential rate applicable percentage un-der §1.1446–3(a)(2). Further, §1.1446–6T does notapply. PRS has no income other than the income allo-cated from LTP. PRS provides LTP with a valid FormW–8IMY indicating that it is a foreign partnershipand attaches the valid Form W–8BENs executed byNRA and FC, as well as a statement describing the al-location of PRS’s effectively connected items amongits partners. The information that PRS submits toLTP is sufficient to permit LTP to reliably associate(within the meaning of §1.1441–1(b)(2)(vii)) PRS’sallocable share of effectively connected items withNRA and FC pursuant to this section. Further, NRAprovides a valid Form W–8BEN to LTP.

(ii) LTP must pay 1446 tax on the $60 allocable toits direct partner NRA using the applicable percent-age for non-corporate partners (the highest rate in sec-tion 1).

(iii) With respect to the effectively connectedpartnership items that LTP can reliably associatewith NRA through PRS (70 percent of PRS’s 40percent allocable share ($40), or $28), LTP will pay1446 tax on NRA’s allocable share of LTP’s ECTI(as determined by looking through PRS) using theapplicable percentage for non-corporate partners (thehighest rate in section 1).

(iv) With respect to the effectively connectedpartnership items that LTP can reliably associatewith FC through PRS (30 percent of PRS’s 40 per-cent allocable share ($40), or $12), LTP will pay1446 tax on FC’s allocable share of LTP’s ECTI(as determined by looking through PRS) using theapplicable percentage for corporate partners (thehighest rate in section 11).

(v) LTP’s payment of the 1446 tax is treated as adistribution to NRA and PRS, its direct partners, thatthose partners may credit against their respective taxobligations. PRS will report its 1446 tax obligationwith respect to its direct foreign partners, NRA andFC, on the Form 8804 and Forms 8805 that it fileswith the Internal Revenue Service pursuant to para-graph (b) of this section and will credit the amountwithheld by LTP on its Form 8804. This credit willsatisfy PRS’s 1446 tax liability as reported on theForm 8804 it files because PRS’s only income is fromLTP, and LTP paid 1446 tax with respect to all ofPRS’s allocable share in LTP by looking through to

PRS’s partners NRA and FC. Further, PRS will passalong the credit for the 1446 tax withheld by LTP toits partners, NRA and FC on the Form 8805 issuedto each partner. The credit passed to each partner onForm 8805 will be treated as a distribution to the re-spective partners under section 1446(d).

Example 2. Insufficient documentation—tieredpartnership structure. (i) LTP is a domestic part-nership that has two equal partners A and PRS. Ais a nonresident alien and PRS is a foreign partner-ship that has two equal foreign partners, C and D.Neither A nor PRS provides LTP with a valid FormW–8 or Form W–9. Neither C nor D provides PRSwith a valid Form W–8 or Form W–9. Pursuant to§1.1446–1(c)(3), LTP must presume that PRS is aforeign person subject to withholding under section1446 at the higher of the highest rate under section1 or section 11(b)(1). LTP has also not received anydocumentation with respect to A. LTP must presumethat A is a foreign person, and, if LTP knows that Ais an individual, compute and pay 1446 tax, subjectto §1.1446–3(a)(2), based on that knowledge.

(ii) Assume a change of facts where C provides aform W–8 (e.g., Form W–8BEN) to PRS, and PRSin turn, furnishes that form to LTP along with itsForm W–8IMY, and information regarding how ef-fectively connected items are allocated to C and D.Based upon the additional facts, LTP can reliably as-sociate one-half of PRS’s allocable share of ECTIwith documentation related with C. Therefore, un-der paragraph (c)(2) of this section, LTP will lookthrough PRS to C when computing its 1446 tax to theextent of C’s indirect share and will not look throughwith respect to the remainder of PRS’s allocable share(D’s indirect share).

§1.1446–6T Special rules to reduce apartnership’s 1446 tax with respect toa foreign partner’s allocable share ofeffectively connected taxable income(Temporary).

(a) In general. The rules of this sec-tion describe when a partnership requiredto pay withholding tax under section 1446(1446 tax), or any installment of such tax,may consider certain partner-level deduc-tions and losses in computing its 1446 taxobligation under §1.1446–3, or otherwisemay not be required to pay a de-minimisamount of 1446 tax with respect to a non-resident alien partner. A partnership de-termines the applicability of this sectionon a partner-by-partner basis for each in-stallment period and when completing itsForm 8804, “Annual Return for Partner-ship Withholding Tax (Section 1446),” andpaying 1446 tax for the partnership taxableyear. When applicable, the rules of thissection permit a foreign partner to whomthis section applies (within the meaning ofparagraph (b) of this section) to furnish acertificate to the partnership that sets forththe deductions and losses that are con-

nected with, or properly allocated and ap-portioned to, as the case may be, gross in-come that is effectively connected with thepartner’s U.S. trade or business and thatsuch foreign partner reasonably expects tobe available for the partner’s taxable yearto reduce the partner’s U.S. income tax li-ability on the partner’s allocable share ofeffectively connected income or gain fromthe partnership. The rules of this sectionalso permit a partner to represent that thepartner’s investment in the partnership is(and will be) the partner’s only investmentor activity that will give rise to effectivelyconnected items for the partner’s taxableyear. To apply the rules of this section, apartner must submit a new certificate foreach partnership taxable year. Paragraph(c) of this section sets forth the deductionsand losses that a partner may certify as rea-sonably expected to be available to suchpartner for the partner’s taxable year, andsets forth rules regarding the partner’s rep-resentation that the partnership investmentis the partner’s only activity giving riseto effectively connected items. Paragraph(c) of this section also sets forth require-ments for a foreign partner’s certificate tobe valid. Paragraph (d) of this section pro-vides rules regarding when a partnershipmay rely on and consider a foreign part-ner’s certificate in computing its 1446 tax,and the effect of relying on such a cer-tificate. Paragraph (d) of this section alsoprovides rules regarding how a partnershipmust handle any certificate or updated cer-tificate received pursuant to this section.Paragraph (e) of this section sets forth ex-amples that illustrate the rules of this sec-tion.

(b) Foreign partner to whom this sec-tion applies—(1) In general. Subject toparagraph (b)(2) of this section, a foreignpartner to whom this section applies isa foreign partner that has provided validdocumentation to the partnership to whoma certificate is submitted under this sectionin accordance with §1.1446–1, has timelyfiled or will timely file a Federal incometax return in the United States in each ofthe partner’s preceding four taxable yearsand the partner’s taxable year(s) duringwhich the certificate under this section isconsidered, and has timely paid (or willtimely pay) all tax shown on such returns.This section shall not apply to a partnerin a publicly traded partnership subject to§1.1446–4.

June 6, 2005 1192 2005–23 I.R.B.

(2) Special rules. Notwithstandingparagraph (b)(1) of this section:

(i) In the case of a domestic or foreignpartnership (upper-tier partnership) that isa partner in another partnership (lower-tierpartnership), this section may apply to re-duce or eliminate the 1446 tax (or anyinstallment of such tax) of the lower-tierpartnership with respect to a foreign part-ner of the upper-tier partnership only to theextent the provisions of §1.1446–5 applyto look-through the upper-tier partnershipto the foreign partner of such upper-tierpartnership and the certificate described inparagraph (c) of this section is provided bysuch foreign partner to the upper-tier part-nership and, in turn, provided to the lower-tier partnership with other appropriate doc-umentation. See §1.1446–5(c) and (e).Absent the application of §1.1446–5(c),the upper-tier partnership may not submita certificate of deductions and losses to thelower-tier partnership.

(ii) This section shall not apply to a part-ner that is a foreign estate.

(iii) This section shall not apply to apartner that is a domestic or foreign trust,except to the extent that such trust is ownedby a grantor or other person under subpartE of subchapter J of the Internal RevenueCode, the documentation requirements of§1.1446–1 have been met by the grantoror other owner of such trust, and the cer-tificate described in paragraph (c) of thissection is provided by the grantor or otherowner of such trust to the partnership.

(c) Certificate to reduce 1446 tax withrespect to a foreign partner—(1) In gen-eral. Subject to the rules of this section,a foreign partner may certify under para-graph (c)(1)(i) or (ii) of this section to apartnership for a partnership taxable yearof such partnership that it has deductionsand losses that the partner reasonably ex-pects to be available to reduce the partner’sU.S. income tax liability on the partner’sallocable share of effectively connected in-come or gain from the partnership. Amongother requirements, exceptions, and lim-itations set forth in paragraphs (c)(1)(i),(ii), and (iii) of this section, the foreignpartner must generally represent that suchdeductions and losses have been (or willbe) reflected on a timely filed U.S. incometax return of the partner for a taxable yearthat ends prior to the installment due dateor Form 8804 filing date (without regardto extensions) for the partnership taxable

year for which the certificate is consid-ered (i.e., no anticipated deduction or losswith respect to the partner’s current yearoperations may be considered). A part-ner may also certify pursuant to paragraph(c)(1)(iv) of this section that the partner’sonly investment or activity giving rise toeffectively connected items for the part-ner’s taxable year is (and will be) the part-ner’s investment in the partnership. A for-eign partner’s certificate to a partnershipunder this section must be in accordancewith the form and requirements set forthin paragraph (c)(2)(ii) of this section.

(i) Deductions and losses from the part-nership from prior taxable years. Underthis section, a partner may certify that it hasdeductions and losses (certified deductionsand losses), other than charitable deduc-tions, from the partnership that the partnerreasonably expects to be available to re-duce the partner’s U.S. income tax liabilityon the partner’s allocable share of effec-tively connected income or gain from thepartnership for the partner’s taxable year.The certified deductions and losses mustbe reflected on a Schedule K–1 issued (orto be issued) to the partner by the partner-ship for a prior partnership taxable year.A partner that has a loss that is set forthon a Schedule K–1 the partnership issuedfor a prior year, but is not reflected on anyof the partner’s prior year returns becausethe loss is suspended under section 704(d)and, therefore, not deductible, may cer-tify such loss to the partnership. Further,the foreign partner must certify that thedeductions and losses are connected with(or, in the case of a corporate partner, al-located and apportioned to) gross incomewhich is effectively connected (or treatedas effectively connected) with the conductof the partner’s trade or business in theUnited States. In addition, the certificatemust contain the information and represen-tations set forth in paragraph (c)(2)(ii) ofthis section.

(ii) Deductions and losses from sourcesother than the partnership from prior tax-able years. Under this section, a foreignpartner may certify that it has deductionsand losses, other than charitable deduc-tions, from sources other than the partner-ship that the partner reasonably expects tobe available to reduce the partner’s U.S. in-come tax liability on the partner’s alloca-ble share of effectively connected incomeor gain from the partnership for the taxable

year. The foreign partner must certify thatthe deductions and losses are connectedwith (or, in the case of a corporate partner,allocated and apportioned to) gross incomewhich is effectively connected (or treatedas effectively connected) with the conductof the partner’s trade or business in theUnited States. To the extent the deduc-tions and losses certified under this para-graph (c)(1)(ii) arise from the partner’s in-vestment in another partnership, such de-ductions and losses must be reflected ona Schedule K–1 issued (or to be issued)to the partner by such other partnershipfor a prior taxable year of such other part-nership that ends prior to the installmentdue date or Form 8804 filing date (with-out regard to extensions) of the partner-ship for the partnership taxable year forwhich the certificate is considered. Fur-ther, the partner may not certify to thepartnership a loss suspended under section704(d) from such other partnership. In ad-dition, the certificate must contain the in-formation and representations set forth inparagraph (c)(2)(ii) of this section.

(iii) Limit on the consideration of apartner’s net operating loss deduction. Apartnership may not consider a partner’snet operating loss deduction certified un-der this section in an amount greater than90 percent of the partner’s allocable shareof ECTI.

(iv) Certificate of nonresident alienpartner that partnership investment ispartner’s only activity giving rise to effec-tively connected items. Under this section,a nonresident alien partner whose only ac-tivity giving rise to effectively connectedincome, gain, deduction, or loss for thepartner’s taxable year is (and will be) thepartner’s investment in the partnership,may certify this fact to the partnership.Except as otherwise provided in this para-graph (c)(1)(iv), a certificate submittedunder this paragraph is generally subjectto all of the applicable requirements andrules of this section (e.g., the partner’s pre-ceding four years U.S. income tax returnsare (or will be) timely filed, a new cer-tificate is submitted for each partnershipyear, the time requirements for submittingthe certificate are met, the certificate issigned under penalties of perjury). A part-nership that receives a certificate from anonresident alien partner under this para-graph (c)(1)(iv) is not required to pay1446 tax (or any installment of such tax)

2005–23 I.R.B. 1193 June 6, 2005

with respect to such partner if the part-nership estimates that the annualized (or,in the case of a partnership completingits Form 8804, the actual) 1446 tax duewith respect to such partner is less than$1,000. For purposes of computing theannualized or actual 1446 tax due withrespect to such partner under the previoussentence, the partnership may not con-sider any of the partner’s deductions andlosses certified under paragraph (c)(1)(i)or (ii) of this section. In addition to therequirements of paragraph (c)(2) of thissection, a nonresident alien partner mustnotify the partnership in writing and re-voke its certificate submitted under thisparagraph (c)(1)(iv) within 10 days of thedate that the partner invests, or otherwiseengages in, an activity that may give riseto effectively connected income, gain, de-duction, or loss for the partner’s taxableyear. A partnership may reasonably relyon a partner’s statement under the rules ofparagraph (d) of this section and generallywill be relieved of an addition to the taxunder section 6655 as applied through thissection, however, the partnership shallremain liable for the 1446 tax (or any in-stallment of such tax), and any applicableadditions to the tax (other than the additionto the tax under section 6655 as appliedthrough this section), interest, and penal-ties under such paragraph, if the partner’scertificate is later determined to be defec-tive. The IRS may determine under therules of this section, in its sole discretion,that the partner’s certificate is defectivewithin the meaning of paragraph (c)(3) ofthis section and notify the partnership inaccordance with the rules of this section.

(2) Time and form of certification—(i)Time for certification provided to partner-ship—(A) First certificate submitted for apartnership’s taxable year. Provided theother requirements of this section are met,the first certificate a foreign partner fur-nishes with respect to a partnership’s tax-able year shall not be relied upon for anyinstallment due date, or Form 8804 filingdue date (without regard to extensions),arising within 30 days of the date that thepartnership receives such certificate. Forexample, a calendar year domestic part-nership must generally receive a certifi-cate under this section from a foreign part-ner on or before March 16th for the part-nership to consider it for its first install-ment due date of 1446 tax on April 15th.

If the foreign partner’s first certificate forthe partnership’s current taxable year is re-ceived on April 10th, the partnership maynot consider such certificate until the part-nership’s second installment due date ofJune 15th. See §1.1446–3 for 1446 tax in-stallment due dates. See also paragraph (e)of this section for examples illustrating therules of this paragraph (c)(2).

(B) Updated certificates and status up-dates—(1) Foreign partner’s prior yeartax returns not yet filed. If a foreign part-ner’s U.S. Federal income tax return for apreceding taxable year has not been filedat the time that the partner submits its firstcertificate under this paragraph (c) to thepartnership for a partnership taxable year,the partner shall specify this fact, set forththe filing due date for such return to thepartnership in accordance with paragraph(c)(2)(ii) of this section, and submit an up-dated certificate in accordance with thisparagraph (c) no later than 10 days af-ter the date that the partner timely filesits U.S. Federal income tax return for anysuch taxable year. If a prior year returnhas not been filed under the previous sen-tence, the partner shall provide the partner-ship a status update with respect to any un-filed prior year return, which must be re-ceived by the partnership at least 10 daysprior to the partnership’s final installmentdue date. The status update must be sub-mitted under penalties of perjury and shallset forth the filing due date for any un-filed return identified in the first certificateand indicate whether the partner’s first cer-tificate submitted for the taxable year maycontinue to be considered. A status updateshall apply only with respect to the timelyfiling of a partner’s prior year tax returns.If the partnership does not receive an up-dated certificate (that includes the infor-mation required by this paragraph (c) fora status update) or a status update from thepartner at least 10 days prior to the partner-ship’s final installment due date, the part-nership shall disregard the partner’s cer-tificate for the fourth installment periodand when completing its Form 8804 for thetaxable year and no additional certificatemay be submitted or substituted for suchdisregarded certificate. Notwithstandingthe previous sentence, if the partner canmeet the requirements of this section forthe next year, the partner may submit a cer-tificate under this section.

(2) Other circumstances requiring aforeign partner to submit an updatedcertificate. Notwithstanding paragraph(c)(2)(i)(B)(1) of this section, if at anytime the partner estimates that it reason-ably expects to have available deductionsand losses in an amount less than the cor-responding amounts set forth on the mostrecent certificate furnished to the partner-ship for the partnership taxable year, then,within 10 days of such determination, theforeign partner shall submit an updatedcertificate under this paragraph (c) to thepartnership. Similarly, if at any time thepartner determines that its certificate isincorrect, other than by reason of the pre-ceding sentence (e.g., the character of acertified loss is capital rather than ordi-nary), then such partner shall update itscertificate within 10 days of such determi-nation.

(3) Form and content of updated certifi-cate. The updated certificate required bythis paragraph (c)(2)(i) must be submittedin the same form as the original certificate(described in paragraph (c)(2)(ii) of thissection), and must include a caption at thetop of the certificate, in lieu of the captionrequired by paragraph (c)(2)(ii), that states“UPDATED CERTIFICATE OF PART-NER-LEVEL ITEMS UNDER TEMP.REG. §1.1446–6T TO REDUCE SEC-TION 1446 WITHHOLDING.” Further,the partner must attach a copy of the cer-tificate that is being updated (supersededcertificate) that was previously submittedfor the same partnership taxable year.

(4) When a partnership may consideran updated certificate. A partnership mayonly consider an updated certificate thatmeets all the requirements of this para-graph (c) that it receives at least 10 daysprior to an installment due date in the samepartnership taxable year for which the su-perseded certificate was provided, or atleast 10 days prior to the due date of itsForm 8804 (without regard to extensions)to be filed for the year the superseded cer-tificate was provided. An updated certifi-cate that may be considered under the pre-vious sentence supersedes all prior certifi-cates submitted by the foreign partner forthe same partnership taxable year, begin-ning with the installment period or Form8804 filing date for which the partnershipmay consider the updated certificate. See§1.1446–6T(e) Example 2.

June 6, 2005 1194 2005–23 I.R.B.

(ii) Form of certification. No partic-ular form is required for the partner’scertificate of deductions and losses to thepartnership, but the partner’s certificatemust have a caption at the top of the pagethat reads: “CERTIFICATE OF PART-NER-LEVEL ITEMS UNDER TEMP.REG. §1.1446–6T TO REDUCE SEC-TION 1446 WITHHOLDING.” Further,the certificate must include:

(A) The partner’s name, address, Tax-payer Identification Number (TIN), andthe date of the certification;

(B) The partnership’s name, address,and TIN;

(C) The partnership taxable year forwhich the certificate is submitted;

(D) A representation that the partner isdescribed in paragraph (b) of this section,and that the deductions and losses set forthin the certificate are described in paragraph(c)(1) of this section;

(E) The amount of the deductions andlosses described in paragraph (c)(1) and,if applicable, the character of such de-ductions and losses (e.g., capital or ordi-nary), as well as any particular deductionsand losses that are subject to limitationor otherwise warrant special consideration(e.g., suspended passive activity losses un-der section 469, suspended losses undersection 704(d)), that the partner reasonablyexpects to be available to reduce the part-ner’s U.S. income tax liability on the part-ner’s allocable share of effectively con-nected income or gain from the partnershipfor the partner’s taxable year in which suchincome or gain is includible in gross in-come;

(F) A representation that the deductionsand losses described in paragraph (c)(1)and set forth in the certificate have beenreflected on a timely filed U.S. incometax return, consistent with sections 874and 882 of the Internal Revenue Code andthe regulations thereunder (and such otherprovisions that impose requirements forthe use of such deductions and losses);

(G) A representation that the deductionsand losses described in paragraph (c)(1)and set forth in the certificate have notbeen set forth in a certificate provided toanother partnership for the same taxableyear for the purpose of reducing withhold-ing under this section;

(H) A representation that the partner hastimely filed, or will timely file its U.S. Fed-eral income tax return for each of the pre-

ceding four taxable years and the partner’staxable year during which the certificateis considered, and has timely paid (or willtimely pay) all tax shown on such returnsas required under paragraph (b) of this sec-tion. The partner shall specify any taxableyear for which a U.S. income tax return hasnot been filed as of the time of submissionof the certificate, set forth the filing duedate for such return, and represent that thepartner will comply with the provisions ofthis paragraph (c) for providing an updatedcertificate or status update with respect tothe filing of any such return;

(I) A representation that all of the de-ductions and losses described in paragraph(c)(1) (other than losses suspended undersection 704(d)) and set forth in the certifi-cate are (or will be) reflected on an incometax return of the partner that is filed (or willbe filed) with respect to a taxable year ofthe partner that ends prior to the install-ment due date or Form 8804 filing due date(without regard to extensions) for the part-nership taxable year for which such certifi-cate will be considered;

(J) A representation that such deduc-tions and losses described in paragraph(c)(1) and set forth in such certificatehave not been disallowed by the IRS aspart of a proposed adjustment describedin §601.103(b) of this chapter (relatingto examination and determination of taxliability) or §601.105(b) of this chapter(relating to examination of returns);

(K) A representation, when applicable(see paragraph (c)(1)(iv) of this section),that the partner’s only activity that givesrise to effectively connected income, gain,deduction, or loss is (and will be) duringthe partner’s taxable year the partner’s in-vestment in the partnership;

(L) The following statement: “Consentis hereby given to disclosures of return andreturn information by the Internal RevenueService pertaining to the validity of thiscertificate to the partnership or other with-holding agent to which this certificate issubmitted for the purpose of administer-ing section 1446.” If a representative of thepartner signs and dates the certificate un-der paragraph (c)(2)(ii)(M) of this section,a power of attorney specifically authoriz-ing the agent to make the representationcontained in this paragraph (c)(2)(ii)(L)must be attached to the certificate; and

(M) The signature of the partner, or itsauthorized representative, under penalties

of perjury, and the date that the certificatewas signed.

(3) Notification to partnership when apartner’s certificate cannot be relied upon.Subject to paragraphs (c)(2), (c)(5), and(d)(2) of this section, a partnership maygenerally rely on a partner’s certificate ofavailable deductions and losses providedthat the partnership does not have actualknowledge or reason to know that the cer-tificate is defective within the meaning ofthis paragraph (c)(3). However, a partner-ship may not rely on a partner’s certificateif the IRS determines, in its sole discre-tion, whether upon audit or otherwise, thata certificate submitted by a partner is de-fective, or that it lacks sufficient informa-tion to determine if the certificate is defec-tive after written request to the partner forverification of the statements on the cer-tificate. For example, a foreign partner’scertificate is defective and, therefore, in-valid if the IRS determines that the foreignpartner has not timely filed a U.S. incometax return for a taxable year that the partnerrepresented was or would be timely filed.See paragraph (e) Example 3 of this sec-tion. If the IRS determines under this para-graph (c) that a certificate is defective (orlacks information sufficient to make thisdetermination) and notifies the partnershipin writing, the partnership may not rely onany certificate submitted by the partner forthe partnership taxable year to which thedefective certificate relates (or any subse-quent partnership taxable year), until theIRS notifies the partnership again in writ-ing and revokes or modifies the originalnotice. A partner’s certificate of availabledeductions and losses is defective if—

(i) The partner is not described in para-graph (b) of this section;

(ii) The deductions and losses set forthin such certificate are not described inparagraph (c)(1) of this section;

(iii) The timing requirements for sub-mitting certificates (including updated cer-tificates and status updates) under para-graph (c)(2) of this section, or the require-ments for submitting such updated certifi-cates or status updates under such para-graph, are not observed;

(iv) The certificate does not include allof the information required by paragraph(c)(2)(ii) (e.g., the partner’s TIN is not setforth on such certificate);

(v) Any representation set forth in suchcertificate is incorrect (e.g., a partner’s

2005–23 I.R.B. 1195 June 6, 2005

prior year return certified to have beentimely filed was not timely filed, or, whereapplicable, that the partner is invested inor otherwise engaged in an activity (otherthan its investment in the partnership) thatmay give rise to effectively connecteditems); or

(vi) The actual deductions and lossesavailable to the partner are less than thedeductions and losses last certified to thepartnership for the partnership taxable yearand considered by the partnership.

(4) Partner to receive copy of notice. Ifthe IRS notifies a partnership or withhold-ing agent under this section that a certifi-cate of a foreign partner is defective, theIRS shall also send a copy of such noticeto the partner’s address as shown on thecertificate. The partnership shall promptlyfurnish the foreign partner whose certifi-cate is the subject of the notice the copy ofthe notice received from the IRS.

(5) Partner’s certificate valid only forpartnership taxable year for which submit-ted. A partnership may only consider a cer-tificate submitted under this paragraph (c)for the partnership taxable year for whichthe certificate is submitted, as set forth onthe certificate. Therefore, for each year apartner wants the provisions of this sectionto apply, the partner must submit a newfirst certificate (as described in this para-graph (c)) for that year.

(d) Effect of certificate of deductionsand losses on partners and partner-ship—(1) Effect on partner—(i) No effecton substantive tax liability of foreign part-ner. A foreign partner’s submission of acertificate under this section to reduce oreliminate the partnership’s 1446 tax (orany installment of such tax) with respectto ECTI allocable to such partner has noeffect on the partner’s substantive tax li-ability on the partner’s allocable share ofeffectively connected income or gain fromthe partnership. Further, the submissionof a certificate under this section does notconstitute an acceptance by the IRS of theamount or character of the deductions orlosses certified.

(ii) No effect on partner’s estimated taxobligations. A foreign partner that certi-fies deductions and losses to a partnershipunder this section is not relieved of any es-timated tax obligation otherwise applica-ble to such partner with respect to incomeor gain allocated from the partnership.

(2) Effect on Partnership—(i) Reason-able reliance to relieve partnership fromaddition to the tax under section 6655.Subject to §1.1446–2 and the rules ofthis section (e.g., paragraph (c)(1)(iii) ofthis section), a partnership receiving acertificate (including an updated certifi-cate or status update) of deductions andlosses from a partner under this sectionmay reasonably rely on such certificate (tothe extent of the certified deductions andlosses or other representations set forthin the certificate) for such time duringwhich it has no actual knowledge or rea-son to know that the certificate is defective(within the meaning of paragraph (c)(3)of this section). To the extent a partner-ship has reasonably relied on a certificateunder the preceding sentence, the partner-ship shall not be liable for any additionto the tax under section 6655 (as appliedthrough §1.1446–3) for any period duringwhich the partnership reasonably reliedon such certificate, even if either it is laterdetermined that the partner’s certificateis defective or the partner submits an up-dated certificate under paragraph (c)(2) ofthis section that increases the 1446 tax duewith respect to such partner. A partner-ship will not be considered to have actualknowledge or reason to know that a certifi-cate is defective if the partnership receivesan updated certificate that, pursuant toparagraph (c)(2)(i)(B)(4) of this section,the partnership cannot reasonably relyupon for an installment due date or Form8804 filing date because it was receivedless than 10 days before such date. Seeparagraph (e) Example 2 of this section.

(ii) Filing requirement. A partnershipthat relies in whole or in part on a part-ner’s certificate pursuant to this sectionmust file Form 8813, “Partnership With-holding Tax Payment Voucher (Section1446)” or Forms 8804, “Annual Returnfor Partnership Withholding Tax (Sec-tion 1446)” and 8805, “Foreign Partner’sInformation Statement of Section 1446Withholding Tax,” whichever is applica-ble, for the period for which the certificateis considered, even if no 1446 tax (or aninstallment of such tax) is due with respectto such foreign partner. The partnershipmust also attach a copy of such certificate,and the partnership’s computation of 1446tax due with respect to such partner, toboth the Form 8813 and Form 8805, filedwith the IRS for any period for which such

certificate is considered in computing thepartnership’s 1446 tax (or any installmentof such tax). See §1.1446–3(d)(1)(iii) re-quiring the partnership to provide Form8805 to such foreign partner even if no1446 tax is paid on behalf of the partner.

(iii) Continuing liability for withhold-ing tax under section 1461 and for applica-ble interest and penalties. Except as pro-vided in paragraph (d)(2)(i) of this sectionand this paragraph (d)(2)(iii), a partnershipis not relieved from liability for the 1446tax under section 1461 or for any applica-ble addition to the tax, interest, or penal-ties if the partnership or the IRS, in itssole discretion, determines that a partner’scertificate is defective (within the mean-ing of paragraph (c)(3) of this section), orthe partner submits an updated certificateunder paragraph (c)(2) of this section thatincreases the 1446 tax due with respectto such partner. If a certificate is deter-mined to be defective for a reason otherthan the amount or character of the deduc-tions and losses set forth on such certificate(e.g., partner failed to timely file a U.S.income tax return), then the partnershipshall be liable for the full 1446 tax undersection 1461 (or any installment of suchtax) due with respect to such partner, with-out regard to the certificate. However, see§1.1446–3(e) which deems a partnershipto have paid 1446 tax with respect to ECTIallocable to a partner in certain circum-stances. Further, if the partnership or theIRS, in its sole discretion, determines thata certificate is defective because the actualdeductions and losses available to the part-ner are less than the amount certified tothe partnership (other than when it is de-termined that the partner certified the samededuction or loss to more than one part-nership), or that the character of the cer-tified deductions and losses is erroneous,then the partnership shall be liable for 1446tax under section 1461 (or any installmentof such tax) with respect to such partneronly to the extent it considers the certi-fied deductions and losses in an amountgreater than the amount determined to beactually available to the partner and per-mitted to be used under §1.1446–1 through§1.1446–6T, or to the extent that a mis-take in the character of the deductions andlosses results in an increase in the 1446 taxdue with respect to such partner. See para-graph (e) Example 4 of this section. Al-though a partnership is generally liable for

June 6, 2005 1196 2005–23 I.R.B.

the 1446 tax, any addition to the tax, in-terest, and penalties under this paragraph(d)(2), the partnership may be relieved ofsome penalties in certain circumstances.See §§301.6651–(1)(c) and 301.6724–1 ofthis chapter. See also paragraph (e) Exam-ple 3 of this section.

(iv) Partner’s certified deductions andlosses to offset foreign partner’s annual-ized allocable share of partnership ECTI.For purposes of section 1446, when con-sidering a foreign partner’s certificatesubmitted under this section in comput-ing the 1446 tax due (or any installmentof such tax) with respect to the foreignpartner, a partnership shall first annualizethe partner’s allocable share of the part-nership’s effectively connected items ofincome, gain, deduction, and loss beforeconsidering the partner’s certified deduc-tions and losses.

(e) Examples. The following exam-ples illustrate the application of thissection. In considering the examples,disregard the potential application of§1.1446–3(b)(2)(v)(F) (relating to the deminimis exception to paying 1446 tax) andparagraph (c)(1)(iv) of this section (re-lating to a foreign partner whose sole in-vestment generating effectively connectedincome or gain is the partnership), and as-sume, where necessary, that the election toapply the temporary regulations is made.The examples are as follows:

Example 1. General application of the rules of§1.1446–6T. NRA, a nonresident alien, and B, a U.S.person form a partnership, PRS, to conduct a tradeor business in the United States. NRA and B areequal partners under the partnership agreement andthe partnership, NRA, and B all maintain a calendartaxable year. NRA and B provide PRS with a validForm W–8BEN and Form W–9, respectively. Priorto the formation of PRS, NRA had neither investedin, nor been considered to be engaged in a U.S. tradeor business. In each of years 1, 2, and 3, PRS incursa $1,000 net loss from operations which is allocatedequally to NRA and B. Assume the net loss is nota passive activity loss within the meaning of section469, is comprised entirely of ordinary items and, withrespect to NRA, is an effectively connected net loss.Further, assume that NRA has timely filed U.S. Fed-eral income tax returns for each of the first three yearsreflecting the losses allocated from PRS, as reflectedon the Schedule K–1 issued to NRA for each of thoseyears.

(i) With respect to Year 4, NRA may not submit acertificate under paragraph (c) of this section to PRSbecause NRA has not and will not have timely fileda U.S. Federal income tax return for the precedingfour years. That is, during Year 4, NRA can only cer-tify that it has or will timely file its U.S. Federal in-come tax returns for the preceding three years (Years

1 through 3) and the current year, Year 4. Therefore,with respect to Year 4, PRS may not use the proce-dures in this section to reduce its withholding tax.

(ii) Assume that in Year 4, PRS has net incomeof $1,000 from its U.S. business operations and thatall of such income is comprised of ordinary items.NRA’s allocable share of this income is $500 andsuch income is effectively connected income. PRSsatisfies its 1446 tax obligations for Year 4.

(iii) During Year 5, PRS uses an acceptable annu-alization method under §1.1446–3 and estimates forits first installment period that it will earn $4,000 oftaxable income for the taxable year. Assume that allof this income is ordinary in character and is alloca-ble to NRA and B equally. NRA’s allocable shareof $2,000 is NRA’s share of partnership ECTI. NRAhas not yet filed its income tax return for Year 4, al-though NRA has received the Schedule K–1 issued byPRS pertaining to Year 4. On or before March 16th (atleast 30 days prior to the first installment date) of Year5, PRS receives a certificate described in this sec-tion from NRA which certifies that NRA reasonablyexpects to have available ordinary losses of $1,000($500 loss in each of Years 1, 2, and 3 less $500 ofincome in Year 4). Further, NRA makes all of thestatements and representations required for the cer-tificate to be valid.

(iv) With respect to Year 5, and based upon para-graph (b)(1) of this section, NRA can include Year 4(NRA’s preceding taxable year) as one of the preced-ing four years that it has timely filed or will timely fileits U.S. Federal income tax return (and timely paid orwill timely pay all tax shown on such returns). There-fore, provided PRS has no actual knowledge or rea-son to know the certificate is defective, PRS may rea-sonably rely on NRA’s certificate. Accordingly, PRSmay consider NRA’s certificate to reduce the amountthat would otherwise be required to be paid on NRA’sbehalf under section 1446. Specifically, the $1,000 ofnet losses that have been reflected on Schedule K–1sissued to NRA that are available to reduce NRA’sU.S. income tax on NRA’s allocable share of effec-tively connected income or gain allocable from PRSmay be used to reduce the $2,000 of ECTI estimatedto be allocable to NRA. As a result, PRS must pay1446 tax on only $1,000 of NRA’s allocable shareof partnership ECTI for the first installment periodin Year 5. PRS must pay 1446 tax of $87.50 forits first installment period with respect to the ECTIallocable to NRA ($1,000 (net ECTI after consider-ing certified losses) x .35 (withholding tax rate) x.25 (§6655(e)(2)(B) percentage for first installment)).Pursuant to paragraph (d)(2) of this section, PRS mustalso attach NRA’s certificate and PRS’s computationof its 1446 tax obligation with respect to NRA to itsForm 8813, “Partnership Withholding Tax PaymentVoucher (Section 1446),” filed for the first install-ment period. Under paragraph (c)(2)(i)(B), NRA isrequired to update its certified available losses on orbefore the 10th day after NRA files its U.S. Federal in-come tax return for Year 4, even if the updated certifi-cate results in no change to the deductions and lossescertified.

(v) The result in this example is the same evenif NRA had not yet received a Schedule K–1 fromPRS for Year 4. In such case, NRA is still permittedto certify the losses that it reasonably expects to beavailable for Year 5, and certify that it will timely file

its U.S. Federal income tax return for Year 4 and Year5 (and timely pay all U.S. income tax due).

Example 2. Updated certificate submitted forlosses. On January 1, 2005, NRA, a foreign indi-vidual, and B, a U.S. individual, form a domesticpartnership, PRS, to conduct a business in the UnitedStates, with NRA and B as equal partners in PRS.NRA and B provide a valid Form W–8BEN andForm W–9, respectively, to PRS. NRA, B, and PRSall maintain a calendar taxable year. For the preced-ing seven calendar taxable years (1998–2004), NRAhas been engaged in a U.S. trade or business throughits investment in another partnership, XYZ, andtimely filed its Form 1040NR U.S. Federal incometax return reporting its share of XYZ’s activity foreach of years 1998–2003 (and timely paid all taxshown on such returns). NRA also timely files itsincome tax return for the 2004 taxable year (andtimely pays all tax shown on such return) on June 8,2005 (due date June 15, 2005). During the taxableyears 1998–2004, NRA’s only activity generatingeffectively connected items was its investment inXYZ. Assume that the losses that XYZ allocated toNRA are not considered passive activity losses toNRA within the meaning of section 469. The XYZpartnership liquidated and ceased doing businesson December 31, 2004. Assume that PRS uses anacceptable annualization method under §1.1446–3for purposes of section 1446.

(i) On or before March 16, 2005, NRA providesand PRS receives a valid certificate under this sec-tion in which NRA certifies that it reasonably expectsto have available effectively connected net operatinglosses in the amount of $5,000. Among other state-ments made in accordance with paragraph (c) of thissection, NRA represents that it has not filed its 2004U.S. income tax return, but will timely file such re-turn (and timely pay all tax shown on such return).PRS reasonably relies on such certificate within themeaning of paragraph (d) of this section. For its firstinstallment period in 2005, PRS estimates that it willearn taxable income of $10,000 for the year whichwill be allocated equally to NRA and B (NRA’s al-locable share of $5,000 is considered NRA’s share ofpartnership ECTI). Assume that all of this income isordinary in character.

(ii) Under these facts, PRS may consider NRA’scertified available losses when computing its 1446tax obligation for the first installment period. PRSis limited under paragraph (c)(1)(iii) of this sectionand may consider only $4,500 of NRA’s certified netoperating loss. After consideration of the certifiedloss, PRS owes 1446 tax in the amount of $43.75 forthe first installment period ($5,000 estimated alloca-ble ECTI less $4,500 (certified loss as limited underparagraph (c)(1)(iii)) x .35 (1446 tax applicable per-centage) x .25 (section 6655(e)(2)(B) percentage forfirst installment period). Pursuant to paragraph (d)(2)of this section, PRS must file Form 8813 with respectto NRA, and attach to the form a copy of NRA’s cer-tificate and PRS’s computation of its 1446 tax obli-gation.

(iii) Assume that PRS’s estimates of its net in-come allocable to NRA for the second and third in-stallment periods are the same as for the first install-ment period (i.e., NRA’s allocable share of annual-ized ECTI is $5,000), and that on June 10, 2005, PRSreceives an updated certificate under this section fromNRA that certifies that NRA reasonably expects to

2005–23 I.R.B. 1197 June 6, 2005

have only $4,000 of losses available to reduce NRA’sincome tax liability on NRA’s allocable share of theeffectively connected income or gain from PRS. NRAprovided this certificate within 10 days of filing itsU.S. Federal income tax return for the 2004 taxableyear, as required by paragraph (c) of this section.However, PRS received the updated certificate lessthan 10 days before its second installment due date(June 15, 2005) and, under paragraph (c)(2)(i)(B) ofthis section, is not permitted to reasonably rely on theupdated certificate for the second installment period.Notwithstanding that the updated certificate indicatesto PRS that NRA’s certified losses are less than the$5,000 set forth on NRA’s first certificate, under para-graph (d)(2) of this section, PRS will not be consid-ered to have actual knowledge or reason to know thatthe first certificate is defective for the second install-ment period. Provided the updated certificate is oth-erwise valid, it may be relied upon for the third in-stallment period (due date September 15, 2005).

(iv) Under paragraph (d) of this section, PRS mayreasonably rely on all or a portion of NRA’s firstcertificate for the second installment period. Thatis, PRS may consider all $4,500 of NRA’s certifiedlosses, as limited by paragraph (c)(1)(iii) of this sec-tion, or some lesser amount (e.g., only $4,000) for thesecond installment period. Further, if PRS considersNRA’s first certificate for the second installment pe-riod, PRS must file Form 8813 and attach the certifi-cate it reasonably relied upon for the second install-ment period. Assume that PRS considers $4,500 ofthe net operating losses for the second installment pe-riod, as limited by paragraph (c)(1)(iii) of this section,and therefore makes a 1446 tax payment of $43.75 onbehalf of NRA.

(v) Under paragraph (d) of this section, PRS isnot relieved from its liability for 1446 tax under sec-tion 1461 when it accepts a certificate of losses froma foreign partner and it is later determined that thecertificate is defective, or the partner updates its cer-tificate and represents losses in an amount less thanpreviously certified. Under the principles of section6655 (as applied through §1.1446–3), PRS is requiredto have paid in 75 percent of the annualized 1446tax on or before the third installment payment date(section 6655(e)(2)(B) percentage for third install-ment period). Under paragraph (c)(2)(i)(B) of thissection, because NRA’s updated certificate is validfor the third installment period, if PRS considers anycertificate for that period it must consider the updatedcertificate. Assuming PRS considers NRA’s updatedcertificate for the third installment period, PRS musthave paid a total of $262.50 with respect to the ECTIestimated to be allocable to NRA as of the third in-stallment due date ($1,000 (ECTI subject to 1446tax after considering the $4,000 of certified losses onthe updated certificate) x .35 (withholding tax rate)x .75 (section 6655(e)(2)(B) percentage for the thirdinstallment period)). After considering PRS’s pay-ments of 1446 tax for the first and second installmentperiods, PRS is required to pay $175 for the third in-stallment period ($262.50 less previous payments to-taling $87.50).

(vi) Under paragraph (d) of this section, PRS isnot liable for the addition to the tax under section6655 (as applied through §1.1446–3) for the first orsecond installment period because PRS reasonablyrelied on NRA’s certificate of losses during those pe-riods.

Example 3. IRS determines in subsequent taxableyear that partner’s certificate is defective becausepartner failed to timely file an income tax return.NRA, a foreign individual, and B, are the onlypartners in PRS, a domestic partnership that con-ducts a trade or business in the United States. Eachpartner provides appropriate documentation under§1.1446–1 (e.g., Form W–8BEN, Form W–9) toestablish the partner’s status for purposes of section1446. Both partners and the partnership maintain acalendar taxable year. NRA timely submits a certifi-cate under this section to PRS to be considered forPRS’s first installment period in the 2005 taxableyear. The certificate sets forth that NRA reasonablyexpects to have $5,000 of an effectively connectednet operating loss available to offset effectively con-nected income or gain allocable from PRS for the2005 taxable year. No part of this loss is a passiveactivity loss within the meaning of section 469. NRAis eligible to submit this certificate under paragraph(b) of this section and the certificate complies with allnecessary requirements set forth in this section. PRSestimates for each installment period that NRA’sallocable share of ECTI will be $5,000. Further,PRS’s actual operating results for the year result in$5,000 of ECTI allocable to NRA.

(i) PRS reasonably relies on (within the meaningof paragraph (d)(2) of this section) NRA’s certificatewhen computing each installment payment during the2005 taxable year and its 1446 tax on Form 8804,and appropriately considers the limitation set forth inparagraph (c)(1)(iii) of this section. As a result, PRSpaid a total of $175 of 1446 tax on behalf of NRAfor the taxable year ($5,000 allocable share of ECTI -$4,500 losses permitted to be considered under para-graph (c)(1)(iii) of this section x .35 applicable per-centage). As required under paragraph (d) of this sec-tion, PRS attached the certificate it relied upon and itscalculation of 1446 tax for each period to the Form8813 or Form 8805 it filed for such period with theIRS.

(ii) Assume that NRA timely submits a certificateunder this section to be considered for PRS’s first in-stallment due date of the 2006 taxable year (due dateApril 17, 2006). The certificate represents that NRAreasonably expects to have $5,000 of an effectivelyconnected net operating loss available to offset effec-tively connected income or gain allocated from PRSfor the 2006 taxable year. No part of this loss is a pas-sive activity loss within the meaning of section 469.Further, the certificate contains all of the necessaryrepresentations required under this section. For thefirst installment period of 2006, PRS estimates thatNRA’s allocable share of partnership ECTI is $5,000.Assume all of the estimated ECTI is ordinary in char-acter and, pursuant to paragraph (d)(2) of this sec-tion, PRS reasonably relies on NRA’s certificate forthe first installment period and appropriately deter-mines that it is required to make an installment pay-ment of 1446 tax on behalf of NRA in the amount of$43.75 ($5,000 estimated allocable ECTI less $4,500(certified loss as limited under paragraph (c)(1)(iii) ofthis section) x .35 (1446 tax applicable percentage) x.25 (section 6655(e)(2)(B) percentage for first install-ment period). PRS makes the $43.75 installment pay-ment of 1446 tax with the Form 8813 it files for thefirst installment period, and complies with paragraph(d)(2) of this section and attaches NRA’s certificateand PRS’s computation of 1446 tax to its Form 8813.

(iii) Assume that the IRS notifies the partnershipon June 1, 2006, pursuant to paragraph (c)(3) of thissection, that NRA’s certificate for PRS’s 2005 taxableyear is defective because NRA failed to timely file itsU.S. Federal income tax return for one of the taxableyears that NRA represented was (or would be) timelyfiled (e.g., 2001, 2002, 2003, or 2004). The IRS no-tice states that PRS is not to rely on any certificatethat NRA has submitted for the 2006 taxable year.

(iv) Under paragraph (d)(2)(iii) of this section,PRS is not relieved from its liability for 1446 tax un-der section 1461 when it accepts a certificate of lossesfrom a foreign partner and it is later determined thatthe certificate is defective. Because NRA’s certifi-cate was determined to be defective for a reason otherthan the amount or character of the certified deduc-tions and losses, PRS is fully liable for the 1446 taxdue with respect to NRA’s allocable share of partner-ship ECTI for the 2005 taxable year without regardto the certificate. The total 1446 tax due for 2005 is$1,750 ($5,000 ECTI x .35) and PRS has paid $175of this liability. Therefore, PRS owes $1,575 of 1446tax. However, PRS may be deemed to have paid theoutstanding 1446 tax due if NRA has paid all of itstax. See §1.1446–3(e).

(v) Because PRS neither had actual knowledgenor reason to know that the certificate submitted byNRA was defective, PRS reasonably relied on NRA’scertificate for the 2005 taxable year under paragraph(d)(2) of this section. Therefore, PRS is not liable foran underpayment addition to the tax under the princi-ples of section 6655 (as applied through §1.l446–3)for any installment period during the 2005 taxableyear.

(vi) However, PRS is generally liable for interestunder section 6601 and for the failure to pay penaltyunder section 6651(a)(2) on the $1,575 of 1446 taxdue for the 2005 taxable year from April 17, 2006(last date prescribed for payment of 1446 tax), tothe date that the partnership pays the 1446 tax or isdeemed to have paid such tax under §1.1446–3(e).

(vii) With respect to the 2006 taxable year, PRSreasonably relied on NRA’s certificate when comput-ing its first installment payment for the 2006 taxableyear (due on April 17, 2006). Therefore, PRS willnot be liable for the underpayment addition to the taxunder section 6655 (as applied through §1.1446–3)for the first installment period in 2006. However,because PRS was notified on June 1, 2006, to disre-gard any certificate received from NRA for the 2006taxable year, PRS may not rely on NRA’s certificate(or any new certificate provided by NRA) when PRScomputes its second installment payment of 1446 taxdue on June 15, 2006. PRS is not permitted to con-sider any certificate submitted by NRA under thissection until the IRS notifies the partnership again inwriting and revokes or modifies the original notice.

Example 4. IRS determines in subsequent taxableyear that partner’s certificate is defective becausepartner’s actual losses are less than amount certifiedand considered by the partnership. Assume the samefacts as in Example 3, except that the IRS does notdetermine that NRA’s certificate for 2005 was defec-tive because NRA failed to timely file a U.S. incometax return for a prior year. Rather, the IRS determinesthat NRA’s certificate was defective for the 2005 tax-able year because NRA’s actual available net oper-ating loss for the taxable year was $1,000, not the$5,000 amount that was certified. In Example 3, pur-

June 6, 2005 1198 2005–23 I.R.B.

suant to paragraph (c)(1)(iii) of this section, PRS con-sidered $4,500 of the certified loss in each installmentperiod and when completing Form 8804.

(i) Under paragraph (d)(2)(iii) of this section,PRS is not relieved from its liability for 1446 taxunder section 1461 when it accepts a certificate oflosses from a foreign partner and it is later deter-mined that the certificate is defective. However,when the IRS determines that a partner’s certificateis defective because of the amount or character ofthe certified deductions and losses set forth on suchcertificate, the partnership is only liable for the 1446tax, interest, and penalties to the extent it consideredthe certified deductions and losses on such certificatewhen computing its 1446 tax (or any installment ofsuch tax) in an amount greater than the partner’sactual available losses. Here, PRS considered thecertified deductions and losses in the amount of$4,500. It was later determined that NRA only had$1,000 of actual losses. Accordingly, PRS is liablefor the 1446 tax due with respect to the portion of theoverstated losses that it considered when computingits 1446 tax. The remaining 1446 tax due for 2005is $1,225 ($3,500 of excess losses considered x .35).However, PRS may be deemed to have paid the$1,225 of 1446 tax under §1.1446–3(e) if NRA haspaid all of NRA’s U.S. income tax.

(ii) If PRS had considered only $1,000 of NRA’scertified net operating loss when computing and pay-ing its 1446 tax during the 2005 taxable year then, un-der paragraph (d)(2)(iii) of this section, PRS wouldnot be liable for 1446 tax because it did not con-sider the certified deductions and losses in an amountgreater than the amount determined to be actuallyavailable to the partner.

Example 5. Partner with different taxable yearthan partnership. PRS partnership has two equalpartners, FC, a foreign corporation, and DC, a domes-tic corporation. PRS conducts a trade or business inthe United States and generates effectively connectedincome. FC maintains a June 30 fiscal taxable yearend, while DC and PRS maintain a calendar taxableyear end. FC and DC provide a valid Form W–8BENand Form W–9, respectively, to PRS. PRS uses anacceptable annualization method under §1.1446–3 incomputing its 1446 tax. FC and DC are the onlypersons that have ever been partners in PRS. For its2000 through 2004 taxable years, PRS issued Sched-ule K–1s to each of its partners. In the aggregate, theSchedule K–1s passed through $100 of net ordinaryloss to each partner. For its 2005 taxable year, PRSissued Schedule K–1s to its partners passing through$150 of ordinary loss to each partner. All of the lossespassed through on the Schedule K–1s are effectivelyconnected to PRS’s and FC’s trade or business in theUnited States.

(i) Assume that all the requirements of this sectionhave been met to permit FC to certify losses to thepartnership for the partnership’s 2006 taxable year.Further, assume that FC’s only source of effectivelyconnected income, gain, deduction, or loss is the ac-tivity of PRS.

(ii) For PRS’s first installment period in 2006, FCmay only certify deductions and losses under this sec-tion in the amount of $100 (the losses as reflected onthe Schedule K–1s issued for PRS’s 2000–2004 tax-able years). Under section 706, the taxable income ofa partner shall include the income, gain, loss, deduc-tion, or credit of the partnership for the partnership

taxable year ending within or with the taxable year ofthe partner. PRS’s 2005 calendar taxable year endsduring FC’s fiscal taxable year ending June 30, 2006.Therefore, under paragraph (c)(1) of this section, asof March 18, 2006 (the last date FC may submit itsfirst certificate under paragraph (c) to have it consid-ered for PRS’s first installment due date of April 17,2006), the losses passed through from PRS for the2000–2004 partnership taxable years will be the onlylosses that FC can represent will be reflected on an FCU.S. income tax return filed for a taxable year endingprior to such installment due date.

(iii) The result in (ii) is the same for the secondinstallment period, the due date of which is June 15,2006.

(iv) FC may submit an updated certificate un-der this section after June 30, 2006, that includes the2005 Schedule K–1 loss in the amount of $150. PRSmay consider such an updated certificate for its thirdinstallment period (due date September 15, 2006),provided the updated certificate is received in accor-dance with paragraph (c) of this section, by Septem-ber 5, 2006.

Example 6. Failure to provide status update withrespect to prior year unfiled returns. PRS partner-ship has two equal partners, FC, a foreign corpora-tion, and DC, a domestic corporation. Both partnersand PRS maintain calendar taxable years. PRS is en-gaged in a trade or business in the United States. FCand DC provide Form W–8BEN and Form W–9, re-spectively, to establish each partner’s status for pur-poses of section 1446. Assume all partnership itemsallocated from the partnership arise from the part-nership’s trade or business in the United States and,therefore, FC’s allocable share of these items is con-sidered effectively connected.

(i) Assume FC is eligible to submit a certificateunder this section and submits a certificate at least30 days prior to PRS’s first installment due date. FCrepresents that it has or will timely file an income taxreturn in the United States in each of the precedingfour taxable years (and has timely paid or will timelypay all tax shown on such returns). FC specifies thatit has not filed its U.S. income tax return for the im-mediately preceding taxable year. FC also representsthat it will timely file its U.S. income tax return forthe partner taxable year during which the certificateis considered (and will timely pay all tax shown onsuch return). All other requirements under paragraph(c) of this section are met for FC’s certificate to bevalid.

(ii) Provided that PRS does not possess actualknowledge or reason to know that FC’s certificate isdefective, and an updated certificate is not providedto PRS, under paragraph (d) of this section, PRS mayreasonably rely on FC’s certificate for its first, sec-ond, and third installment payments.

(iii) If FC does not submit either an updated cer-tificate or a status update as required by paragraph(c) of this section with respect to the filing of the pre-vious year’s income tax return by December 5th ofPRS’s current taxable year, PRS must disregard FC’scertificate when computing its fourth installment pay-ment of 1446 tax and when completing its Form 8804for the taxable year. Further, even if the status up-date with respect to the preceding year’s return is pro-vided, PRS may only rely on the certificate providedthe status update does not contradict the certificate

and such update indicates that the preceding year’sreturn may still be, and will be, timely filed.

(f) Effective dates. The rules of this sec-tion are applicable for partnership taxableyears beginning after May 18, 2005. How-ever, a partnership may elect to apply all ofthe provisions of the temporary regulationsto partnership taxable years beginning af-ter December 31, 2004, provided the part-nership also elects under §1.1446–7 to ap-ply §§1.1446–1 through 1.1446–5 to part-nership taxable years beginning after De-cember 31, 2004. A partnership shall makethe election under this section by comply-ing with the provisions of this section andattaching a statement to the Form 8804 an-nual return filed for the taxable year inwhich the regulation provisions first ap-ply, that indicates that the partnership ismaking the election under this section and§1.1446–7.

§1.1446–7 Effective dates.

Sections 1.1446–1 through 1.1446–5shall apply to partnership taxable yearsbeginning after May 18, 2005. However,a partnership may elect to apply all ofthe provisions of §§1.1446–1 through1.1446–5 to partnership taxable yearsbeginning after December 31, 2004. Apartnership shall make the election underthis section by complying with the provi-sions of §§1.1446–1 through §1.1446–5and attaching a statement to the Form 8804or Form 1042 annual return, filed for thetaxable year in which the regulation pro-visions first apply, that indicates that thepartnership is making the election underthis section.

Par. 5. Section 1.1461–1 is amended asfollows:

1. Paragraph (a)(1) is amended byadding three sentences at the end of theparagraph.

2. The second sentence of paragraph(c)(1)(i) is removed and two sentences areadded in its place.

3. Paragraph (c)(1)(ii)(A)(8) is redes-ignated as paragraph (c)(1)(ii)(A)(9), anda new paragraph (c)(1)(ii)(A)(8) is added.

4. The first sentence of paragraph(c)(2)(i) is removed and two sentences areadded in its place.

5. The first sentence of paragraph (c)(3)is removed and two sentences are added inits place.

6. Paragraph (i) is revised.

2005–23 I.R.B. 1199 June 6, 2005

The additions and revisions read as fol-lows:

§1.1461–1 Payment and returns of taxwithheld.

(a) * * *(1) * * * With respect to withholding

under section 1446, this section shall onlyapply to publicly traded partnerships. See§1.1461–3 for penalties applicable to part-nerships that fail to withhold under sec-tion 1446 on effectively connected tax-able income allocable to foreign partners.The previous two sentences shall applyto partnership taxable years beginning af-ter May 18, 2005, or such earlier time asthe regulations under §§1.1446–1 through1.1446–5 apply by reason of an electionunder §1.1446–7.

* * * * *(c) * * *(1) * * *(i) * * * Notwithstanding the preceding

sentence, any person that withholds or isrequired to withhold an amount under sec-tions 1441, 1442, 1443, or §1.1446–4(a)(applicable to publicly traded partnershipsrequired to pay tax under section 1446 ondistributions) must file a Form 1042-S,“Foreign Person’s U.S. Source IncomeSubject to Withholding,” for the paymentwithheld upon whether or not that person isengaged in a trade or business and whetheror not the payment is an amount subject toreporting. The reference in the previoussentence to withholding under §1.1446–4shall apply to partnership taxable years be-ginning after May 18, 2005, or such earliertime as the regulations under §§1.1446–1through 1.1446–5 apply by reason of anelection under §1.1446–7.* * *

(ii) * * *(A) * * *(8) A partner receiving a distribution

from a publicly traded partnership sub-ject to withholding under section 1446and §1.1446–4 on distributions of effec-tively connected income. This paragraph(c)(1)(ii)(A)(8) shall apply to partnershiptaxable years beginning after May 18,2005, or such earlier time as the regula-tions under §§1.1446–1 through 1.1446–5apply by reason of an election under§1.1446–7.

* * * * *

(2) Amounts subject to reporting—(i)In general. Subject to the exceptionsdescribed in paragraph (c)(2)(ii) of thissection, amounts subject to reportingon Form 1042–S are amounts paid to aforeign payee or partner (including per-sons presumed to be foreign) that areamounts subject to withholding as definedin §1.1441–2(a) or §1.1446–4(a) (address-ing publicly traded partnerships requiredto pay withholding tax under section 1446on distributions of effectively connectedincome). The reference in the previoussentence to withholding under §1.1446–4shall apply to partnership taxable years be-ginning after May 18, 2005, or such earliertime as the regulations under §§1.1446–1through 1.1446–5 apply by reason of anelection under §1.1446–7. * * *

* * * * *(3) Required information. The infor-

mation required to be furnished underthis paragraph (c)(3) shall be based uponthe information provided by or on be-half of the recipient of an amount subjectto reporting (as corrected and supple-mented based on the withholding agent’sactual knowledge) or the presumptionrules of §§1.1441–1(b)(3), 1.1441–4(a);1.1441–5(d) and (e); 1.1441–9(b)(3),1.1446–1(c)(3) (as applied to publiclytraded partnerships required to pay tax un-der section 1446 on distributions of effec-tively connected income) or 1.6049–5(d).The reference in the previous sentenceto presumption rules applicable to with-holding under section 1446 shall apply topartnership taxable years beginning afterMay 18, 2005, or such earlier time asthe regulations under §§1.1446–1 through1.1446–5 apply by reason of an electionunder §1.1446–7. * * *

* * * * *(i) Effective date. Unless otherwise pro-

vided in this section, this section shall ap-ply to returns required for payments madeafter December 31, 2000.

Par. 6. Section 1.1461–2 is amendedby:

1. Removing the first sentence of para-graph (a)(1) and adding two sentences inits place.

2. Revising paragraphs (b) and (d).The revisions and addition read as fol-

lows:

§1.1461–2 Adjustments foroverwithholding or underwithholding oftax.

(a) Adjustments of overwithheldtax—(1) In general. Except for part-nerships or nominees required to with-hold under section 1446, a withholdingagent that has overwithheld under chap-ter 3 of the Internal Revenue Code, andmade a deposit of the tax as provided in§1.6302–2(a) may adjust the overwithheldamount either pursuant to the reimburse-ment procedure described in paragraph(a)(2) of this section or pursuant to theset-off procedure described in paragraph(a)(3) of this section. References in theprevious sentence excepting from thissection certain partnerships withholdingunder section 1446 shall apply to partner-ship taxable years beginning after May 18,2005, or such earlier time as the regula-tions under §§1.1446–1 through 1.1446–5apply by reason of an election under§1.1446–7. * * *

* * * * *(b) Withholding of additional tax when

underwithholding occurs. A withholdingagent may withhold from future payments(or distributions of effectively connectedincome under section 1446) made to a ben-eficial owner the tax that should have beenwithheld from previous payments (or dis-tributions subject to section 1446) to suchbeneficial owner under chapter 3 of theInternal Revenue Code. In the alterna-tive, the withholding agent may satisfythe tax from property that it holds in cus-tody for the beneficial owner or propertyover which it has control. Such addi-tional withholding or satisfaction of thetax owed may only be made before thedate that the Form 1042 is required to befiled (not including extensions) for the cal-endar year in which the underwithhold-ing occurred. See §1.6302–2 for mak-ing deposits of tax or §1.1461–1(a) formaking payment of the balance due fora calendar year. See also §§1.1461–1,1.1461–3, and 1.1446–1 through 1.1446–7for rules relating to withholding under sec-tion 1446. References in this paragraph(b) to withholding under section 1446 shallapply to partnership taxable years begin-ning after May 18, 2005, or such earliertime as the regulations under §§1.1446–1through 1.1446–5 apply by reason of anelection under §1.1446–7.

June 6, 2005 1200 2005–23 I.R.B.

* * * * *(d) Effective date. Unless otherwise

provided in this section, this section ap-plies to payments made after December 31,2000.

Par. 7. Section 1.1461–3 is added toread as follows.

§1.1461–3 Withholding under section1446.

For rules relating to the withholding taxliability of a partnership or nominee un-der section 1446, see §§1.1446–1 through1.1446–7. For interest, penalties, and ad-ditions to the tax for failure to timely paythe tax required to be paid under section1446, see sections 6601, 6651, 6655 (inthe case of publicly traded partnerships,see section 6656), 6672, and 7202 and theregulations under those sections. For ad-ditional penalties and additions to the taxfor failure to comply with the regulationsunder section 1446, see sections 6651,6662, 6663, 6721, 6722, 6723, 6724(c),7201, 7203, and the regulations underthose sections. This section shall applyto partnership taxable years beginning af-ter May 18, 2005, or such earlier time asthe regulations under §§1.1446–1 through1.1446–5 apply by reason of an electionunder §1.1446–7.

Par. 8. Section 1.1462–1 is amendedby revising paragraphs (b) and (c) to readas follows:

§1.1462–1 Withheld tax as credit torecipient of income.

* * * * *(b) Amounts paid to persons who are

not the beneficial owner. Amounts with-held at source under chapter 3 of the Inter-nal Revenue Code on payments to (or ef-fectively connected taxable income alloca-ble to) a fiduciary, partnership, or interme-diary are deemed to have been paid by thetaxpayer ultimately liable for the tax uponsuch income. Thus, for example, if a bene-ficiary of a trust is subject to the taxes im-posed by section 1, 2, 3, or 11 upon anyportion of the income received from a for-eign trust, the part of any amount withheldat source which is properly allocable to theincome so taxed to such beneficiary shallbe credited against the amount of the in-come tax computed upon the beneficiary’sreturn, and any excess shall be refunded.See §1.1446–3 for examples applying this

rule in the context of a partnership inter-est held by a foreign trust or estate. Fur-ther, if a partnership withholds an amountunder chapter 3 of the Internal RevenueCode with respect to the allocable share ofa partner that is a partnership (upper-tierpartnership) or with respect to the alloca-ble share of partners in an upper-tier part-nership, such amount is deemed to havebeen withheld by the upper-tier partner-ship. See §1.1446–5 for rules applicable totiered partnership structures. Referencesin this paragraph (b) to withholding undersection 1446 shall apply to partnership tax-able years beginning after May 18, 2005,or such earlier time as the regulations un-der §§1.1446–1 through 1.1446–5 applyby reason of an election under §1.1446–7.

(c) Effective date. Unless otherwiseprovided in this section, this section ap-plies to payments made after December 31,2000.

Par. 9. Section 1.1463–1 is amendedby:

1. Adding two sentences at the end ofparagraph (a).

2. Revising paragraph (b).The addition and revision read as fol-

lows:

§1.1463–1 Tax paid by recipient ofincome.

(a) * * * See §1.1446–3(e) and (f) forapplication of the rule of this paragraph (a),and for additional rules, where the with-holding tax was required to be paid undersection 1446. The previous sentence shallapply to partnership taxable years begin-ning after May 18, 2005, or such earliertime as the regulations under §§1.1446–1through 1.1446–5 apply by reason of anelection under §1.1446–7.

(b) Effective date. Unless otherwiseprovided in this section, this section ap-plies to failures to withhold occurring afterDecember 31, 2000.

PART 301—PROCEDURE ANDADMINISTRATION

Par. 10. The authority for 26 CFR part301 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *Par. 11. Section 301.6109–1 is

amended as follows:1. In paragraph (b)(2)(vi), remove the

word “and”.

2. In paragraph (b)(2)(vii), remove theperiod at the end of the paragraph and add“; and” in its place.

3. Paragraph (b)(2)(viii) is added.4. In paragraph (c), the first three sen-

tences are revised and a sentence is addedat the end of the paragraph.

The amendments and additions read asfollows:

§301.6109–1 Identifying numbers.

* * * * *(b) * * *(2) * * *(viii) A foreign person that furnishes

a withholding certificate described in§1.1446–1(c)(2) or (3) of this chapter orwhose taxpayer identification number isrequired to be furnished on any return,statement, or other document as requiredby the income tax regulations under sec-tion 1446. This paragraph (b)(2)(viii) shallapply to partnership taxable years begin-ning after May 18, 2005, or such earliertime as the regulations under §§1.1446–1through 1.1446–5 of this chapter apply byreason of an election under §1.1446–7 ofthis chapter.

(c) Requirement to furnish another’snumber. Every person required under thistitle to make a return, statement, or otherdocument must furnish such taxpayeridentifying numbers of other U.S. personsand foreign persons that are described inparagraph (b)(2)(i), (ii), (iii), (vi), (vii),or (viii) of this section as required by theforms and the accompanying instructions.The taxpayer identifying number of anyperson furnishing a withholding certificatereferred to in paragraph (b)(2)(vi) or (viii)of this section shall also be furnished if itis actually known to the person makinga return, statement, or other documentdescribed in this paragraph (c). If the per-son making the return, statement, or otherdocument does not know the taxpayeridentifying number of the other person,and such other person is one that is de-scribed in paragraph (b)(2)(i), (ii), (iii),(vi), (vii), or (viii) of this section, suchperson must request the other person’snumber. * * * References in this para-graph (c) to paragraph (b)(2)(viii) of thissection shall apply to partnership taxableyears beginning after May 18, 2005, orsuch earlier time as the regulations un-der §§1.1446–1 through 1.1446–5 of this

2005–23 I.R.B. 1201 June 6, 2005

chapter apply by reason of an electionunder §1.1446–7 of this chapter.

* * * * *Par. 12. In §301.6721–1, paragraph

(g)(4) is revised to read as follows:

§301.6721–1 Failure to file correctinformation returns.

* * * * *(g) ***(4) Other items. The term information

return also includes any form, statement,or schedule required to be filed with theInternal Revenue Service with respect toany amount from which tax is required tobe deducted and withheld under chapter

3 of the Internal Revenue Code (or fromwhich tax would be required to be so de-ducted and withheld but for an exemptionunder the Internal Revenue Code or anytreaty obligation of the United States), gen-erally Forms 1042–S, “Foreign Person’sU.S. Source Income Subject to Withhold-ing,” and 8805, “Foreign Partner’s Infor-mation Statement of Section 1446 With-holding Tax.” The provisions of this para-graph (g)(4) referring to Form 8805, shallapply to partnership taxable years begin-ning after May 18, 2005, or such earliertime as the regulations under §§1.1446–1through 1.1446–5 of this chapter apply byreason of an election under §1.1446–7 ofthis chapter.

PART 602—OMB CONTROLNUMBERS UNDER PAPERWORKREDUCTION ACT

Par. 13. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805.Par. 14. In §602.101, paragraph (b)

is amended by adding entries in numericalorder to the table to read as follows:

§602.101 OMB Control numbers.

* * * * *(b) * * *

CFR part or section whereidentified and described

Current OMBcontrol No.

* * * * *

1.1446–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–1852

1.1446–3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–1852

1.1446–4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–1852

1.1446–5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–1852

1.1446–6T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–1934

* * * * *

Mark E. Matthews,Deputy Commissioner forServices and Enforcement.

Approved May 3, 2005.

Eric Solomon,Acting Assistant Secretary of the Treasury.


Section 6050L.—ReturnsRelating to Certain DonatedProperty26 CFR 1.6050L–2T: Information returns by doneesrelating to qualified intellectual property contribu-tions (temporary).

How does a donor notify a donee organization thatthe donor intends to treat a contribution as a quali-fied intellectual property contribution, which in turnrequires the donee to make a return under section6050L(b)? See Notice 2005-41, page 1203.

Section 7520.—ValuationTables


Section 7872.—Treatmentof Loans With Below-MarketInterest Rates


June 6, 2005 1202 2005–23 I.R.B.

Part III. Administrative, Procedural, and MiscellaneousGuidance RegardingQualified Intellectual PropertyContributions

Notice 2005–41

PURPOSE

This notice provides guidance regard-ing § 882 of the American Jobs CreationAct of 2004, Pub. L. No. 108–357,118 Stat. 1418 (2004), which adds§§ 170(e)(1)(B)(iii) and 170(m) to the In-ternal Revenue Code and amends § 6050L.Section 170(e)(1)(B)(iii) provides that theamount of a donor’s initial charitable con-tribution deduction allowed under § 170for contributions of qualified intellectualproperty is limited to the lesser of the fairmarket value of, or the donor’s adjustedbasis in, the qualified intellectual property.Section 170(m) allows the donor to deduct,as a charitable contribution, certain addi-tional amounts based on a percentage ofthe qualified donee income received byor accrued to the donee with respect tothe qualified intellectual property. Toqualify for the additional deductions, thedonor must notify the donee at the timeof the contribution of the donor’s inten-tion to take the additional deductions. Asamended, § 6050L(b) requires a doneeto make a return in the form and mannerprescribed by the Secretary with respectto each qualified intellectual property con-tribution. Sections 170(e)(1)(B)(iii) and170(m), and the amendments to § 6050L,are effective for contributions made afterJune 3, 2004.

BACKGROUND

Section 170(a) allows a deduction fora charitable contribution. Generally, ifa donor makes a charitable contributionof property, the amount of the deductionis the fair market value of the propertyat the time of the contribution, reducedas provided in § 170(e) and § 1.170A–4of the Income Tax Regulations. For cer-tain types of property, § 170(e)(1)(B)reduces the amount of the deduction bythe amount of gain that would have beenlong-term capital gain if the donor hadsold the property at its fair market value,

determined as of the time of the contri-bution. Under § 170(e)(1)(B)(iii), thisreduction applies in determining a donor’sinitial deduction for a charitable contri-bution of “any patent, copyright (otherthan a copyright described in section1221(a)(3) or 1231(b)(1)(C)), trademark,trade name, trade secret, know-how, soft-ware (other than software described insection 197(e)(3)(A)(i)), or similar prop-erty, or applications or registrations ofsuch property.”

Subject to the terms and limitations of§ 170, § 170(m) allows a donor of quali-fied intellectual property to deduct, in theyear of contribution or in subsequent tax-able years, additional amounts based on apercentage (specified in § 170(m)(7)) ofthe qualified donee income received by oraccrued to the donee with respect to thequalified intellectual property. For thispurpose, “qualified intellectual property”is property described in § 170(e)(1)(B)(iii)other than property contributed to or forthe use of private foundations as definedin § 509(a) (with certain exceptions asdescribed in § 170(b)(1)(E)). “Qualifieddonee income” is any net income properlyallocable to the qualified intellectual prop-erty (as opposed to the activity in whichthe intellectual property is used) that is re-ceived by or accrued to the donee organ-ization during the year. Qualified doneeincome does not include any income re-ceived by or accrued to the donee organi-zation after the earlier of the tenth anniver-sary of the date of the contribution or theexpiration of the legal life of the quali-fied intellectual property. See § 170(m)(5)and (6). Additional deductions are al-lowed, however, only to the extent that theaggregate of the specified percentages ofqualified donee income exceeds the ini-tial deduction claimed by the donor. See§ 170(m)(2).

To qualify for the additional deduc-tions, the donor must inform the doneeat the time of the contribution that thedonor intends to treat the contribution asa qualified intellectual property contribu-tion (the notification requirement). See§ 170(m)(8).

Section 6050L(b), as amended by theAct, requires a donee (which may not bea private foundation described in section

170(e)(1)(B)(ii)) that receives notificationfrom the donor to make a return with re-spect to a qualified intellectual propertycontribution for each taxable year of thedonee showing the amount of any qualifieddonee income. Section 6050L(c) requiresthe donee to provide a copy of the returnto the donor. See also § 1.6050L–2T ofthe Procedure and Administration Regula-tions (May 23, 2005); Prop. Treas. Reg.§ 1.6050L–2 (May 23, 2005). The amountof net income taken into account by thedonor may not exceed the amount of qual-ified donee income reported by the doneeunder § 6050L.

GUIDANCE ON THE NOTIFICATIONREQUIREMENT

General rule

A donor will satisfy the notification re-quirement under § 170(m)(8) if the donordelivers or mails to the donee, at the time ofthe contribution, a written statement con-taining the following information:

1. The name, address, and taxpayer iden-tification number of the donor;

2. A description of the qualified intel-lectual property in sufficient detailto identify the qualified intellectualproperty received by the donee;

3. The date of the contribution to thedonee; and

4. A statement that the donor intends totreat the contribution as a qualifiedintellectual property contribution forpurposes of §§ 170(m) and 6050L.

Transitional rule for contributions madeafter June 3, 2004, and on or before June20, 2005

Section 170(m) was enacted on Octo-ber 22, 2004, and is effective for contribu-tions made after June 3, 2004. Donors mayhave made contributions of qualified in-tellectual property after June 3, 2004, andmay not have informed the donee at thetime of the contribution that they intendedto treat the contribution as a qualified in-tellectual property contribution.

A donor who contributed qualified in-tellectual property after June 3, 2004, andon or before June 20, 2005, without no-tifying the donee that it intended to treat

2005–23 I.R.B. 1203 June 6, 2005

the contribution as a qualified intellectualproperty contribution will be regarded assatisfying the notification requirement if,on or before July 20, 2005, the donor de-livers or mails to the donee a written state-ment containing the information describedabove.

PAPERWORK REDUCTION ACT

The collection of information in thisnotice has been reviewed and approvedby the Office of Management and Bud-get (OMB) in accordance with the Paper-work Reduction Act (44 U.S.C. 3507) un-der control number 1545–1937.

An agency may not conduct or sponsor,and a person is not required to respondto, a collection of information unless thecollection of information displays a validOMB control number.

The collection of information in this no-tice is in the GUIDANCE ON THE NO-TIFICATION REQUIREMENT section ofthis notice. The collection of informationis required from donors to satisfy the no-tification requirement of § 170(m). Thecollection of information is required fromdonors to obtain a benefit. The likelyrespondents are individuals, partnerships,and corporations.

The estimated total annual reportingburden is 30 hours.

The estimated annual burden per re-spondent varies from 0.5 hours to 1.5hours, depending on individual circum-stances, with an estimated average of 1hour. The estimated number of respon-dents is 30.

Books or records relating to a collectionof information must be retained as longas their contents may become material inthe administration of any internal revenuelaw. Generally, tax returns and return in-formation are confidential, as required by§ 6103.


The principal authors of this notice areCharles V. Dumas and Susan J. Kassellof the Office of Associate Chief Counsel(Income Tax & Accounting). For furtherinformation regarding this notice, contactMs. Kassell at 202–622–5020 (not a toll-free call).

Modification of Applicationof Rule Prohibiting DeferredCompensation Under aCafeteria Plan

Notice 2005–42

PURPOSE

The purpose of this notice is to modifythe application of the rule prohibiting de-ferred compensation under a § 125 cafe-teria plan. This notice permits a grace pe-riod immediately following the end of eachplan year during which unused benefits orcontributions remaining at the end of theplan year may be paid or reimbursed toplan participants for qualified benefit ex-penses incurred during the grace period.

BACKGROUND

In general, no amount is included in thegross income of a participant in a cafeteriaplan solely because, under the plan, theparticipant may choose among the benefitsof the plan. Section 125(a). A cafeteriaplan is defined in § 125(d)(1) as a writtenplan maintained by an employer underwhich all participants are employees, andthe participants may choose among twoor more benefits consisting of cash andqualified benefits. Section 125(f) de-fines a “qualified benefit” as any benefitwhich, with the application of § 125(a),is not includable in the gross income ofthe employee by reason of an expressprovision of Chapter I of the Internal Rev-enue Code (other than §§ 106(b), 117,127 or l32). Qualified benefits includeemployer-provided accident and healthplans excludable from gross income under§§ 106 and 105(b), group-term life in-surance excludable under § 79, dependentcare assistance programs excludable under§ 129 and adoption assistance programsexcludable under § 137. Elections under acafeteria plan, once made, can be changedor revoked only as provided in Treas. Reg.§ 1.125–4. A cafeteria plan must havea plan year specified in the written plandocument. Prop. Treas. Reg. § 1.125–1,Q&A–3.

Section 125(d)(2)(A) states that theterm “cafeteria plan” does not includeany plan which provides for deferredcompensation. The statutory prohibitionon deferred compensation in a cafeteria

plan is addressed in Prop. Treas. Reg.§§ 1.125–1 and 1.125–2. Prop. Treas.Reg. § 1.125–2, Q&A–5 states that:

A cafeteria plan may not include anyplan that offers a benefit that defers thereceipt of compensation. In addition,a cafeteria plan may not operate in amanner that enables employees to defercompensation. For example, a plan thatpermits employees to carry over un-used elective contributions or plan ben-efits (e.g., accident or health plan cov-erage) from one plan year to anotheroperates to defer compensation. Thisis the case regardless of how the con-tributions or benefits are used by theemployee in the subsequent plan year(e.g., whether they are automatically orelectively converted into another tax-able or nontaxable benefit in the subse-quent plan year or used to provide addi-tional benefits of the same type). Sim-ilarly, a cafeteria plan operates to per-mit the deferral of compensation if theplan permits participants to use contri-butions for one plan year to purchase abenefit that will be provided in a subse-quent plan year … .

See also Prop. Treas. Reg. § 1.125–1,Q&A–7.

Thus, a cafeteria plan does not includeany plan that defers the receipt of com-pensation or operates in a manner that en-ables participants to defer compensationby, for example, permitting participants touse contributions for one plan year to pur-chase a benefit that will be provided in asubsequent plan year. This rule is com-monly referred to as the “use-it-or-lose-it”rule, requiring that unused contributions orbenefits remaining at the end of the planyear be “forfeited.”

However, other areas of tax law providethat for a short, limited period, compensa-tion for services paid in the year followingthe year in which the services that arebeing compensated were performed is nottreated as “deferred compensation.” Forexample, Treas. Reg. § 1.404(b)–1T,Q&A–2(a) provides that for purposesof the deduction rules in § 404(a), (b)and (d), a plan, or method or arrange-ment defers the receipt of compensationor benefits to the extent it is one underwhich an employee receives compensa-tion or benefits more than a brief periodof time after the end of the employer’staxable year in which the services cre-

June 6, 2005 1204 2005–23 I.R.B.

ating the right to such compensation orbenefits are performed. Under Treas.Reg. § 1.404(b)–1T, Q&A–2(c), a plan,or method or arrangement shall not beconsidered as deferring the receipt ofcompensation or benefits for more than abrief period of time after the end of theemployer’s taxable year to the extent thatcompensation or benefits are received bythe employee on or before the fifteenth dayof the third calendar month after the end ofthe employer’s taxable year in which theservices are rendered. See also Weaver v.Commissioner, 121 T.C. 273 (2003); Rev.Rul. 88–68, 1988–2 C.B. 117. Cf. H. R.Conf. Rep. No. 755, 108th Cong., 2d Sess.at 735 (2004) (§ 409A “does not apply toannual bonuses or other annual compensa-tion amounts paid within 2 and 1/2 monthsafter the close of the taxable year in whichthe relevant services required for paymenthave been performed”). Consistent withthese other areas of tax law, Treasury andthe IRS believe it is appropriate to mod-ify the current prohibition on deferredcompensation in the proposed regulationsunder § 125 to permit a grace period af-ter the end of the plan year during whichunused benefits or contributions may beused.

MODIFICATION OF APPLICATIONOF RULE PROHIBITING DEFERREDCOMPENSATION UNDER A § 125CAFETERIA PLAN

The rule that a cafeteria plan may notdefer the receipt of compensation as setout in Prop. Treas. Reg. §§ 1.125–1and 1.125–2 is modified as follows: Acafeteria plan document may, at the em-ployer’s option, be amended to provide fora grace period immediately following theend of each plan year. The grace periodmust apply to all participants in the cafe-teria plan. Expenses for qualified benefitsincurred during the grace period may bepaid or reimbursed from benefits or con-tributions remaining unused at the end ofthe immediately preceding plan year. Thegrace period must not extend beyond thefifteenth day of the third calendar monthafter the end of the immediately precedingplan year to which it relates (i.e., “the 2 and1/2 month rule”). If a cafeteria plan doc-ument is amended to include a grace pe-

riod, a participant who has unused bene-fits or contributions relating to a particu-lar qualified benefit from the immediatelypreceding plan year, and who incurs ex-penses for that same qualified benefit dur-ing the grace period, may be paid or re-imbursed for those expenses from the un-used benefits or contributions as if the ex-penses had been incurred in the immedi-ately preceding plan year. The effect ofthe grace period is that the participant mayhave as long as 14 months and 15 days(the 12 months in the current cafeteria planyear plus the grace period) to use the ben-efits or contributions for a plan year be-fore those amounts are “forfeited” underthe “use-it-or-lose-it” rule.

During the grace period, a cafeteria planmay not permit unused benefits or contri-butions to be cashed-out or converted toany other taxable or nontaxable benefit.Unused benefits or contributions relatingto a particular qualified benefit may onlybe used to pay or reimburse expenses in-curred with respect to that particular quali-fied benefit. For example, unused amountselected to pay or reimburse medical ex-penses in a health flexible spending ar-rangement (FSA) may not be used to payor reimburse dependent care or other ex-penses incurred during the grace period.To the extent any unused benefits or con-tributions from the immediately precedingplan year exceed the expenses for the qual-ified benefit incurred during the grace pe-riod, those remaining unused benefits orcontributions may not be carried forwardto any subsequent period (including anysubsequent plan year) and are “forfeited”under the “use-it-or-lose-it” rule. As undercurrent practice, employers may continueto provide a “run-out” period after the endof the grace period, during which expensesfor qualified benefits incurred during thecafeteria plan year and the grace periodmay be paid or reimbursed.

An employer may adopt a grace periodas authorized in this notice for the currentcafeteria plan year (and subsequent cafete-ria plan years) by amending the cafeteriaplan document before the end of the cur-rent plan year.

The rules of this notice are illustrated bythe following examples:

Example (1). Employer with a cafeteria plan yearending on December 31, 2005, amended the plan doc-

ument before the end of the plan year to permit agrace period which allows all participants to applyunused benefits or contributions remaining at the endof the plan year to qualified benefits incurred dur-ing the grace period immediately following that planyear. The grace period adopted by the employer endson the fifteenth day of the third calendar month afterthe end of the plan year (March 15, 2006, for the planyear ending December 31, 2005). Employee X timelyelected salary reduction of $1,000 for a health FSAfor the plan year ending December 31, 2005. As ofDecember 31, 2005, X has $200 remaining unused inhis health FSA. X timely elected salary reduction for ahealth FSA of $1,500 for the plan year ending Decem-ber 31, 2006. During the grace period from January1 through March 15, 2006, X incurs $300 of unre-imbursed medical expenses (as defined in § 213(d)).The unused $200 from the plan year ending Decem-ber 31, 2005, is applied to pay or reimburse $200of X’s $300 of medical expenses incurred during thegrace period. Therefore, as of March 16, 2006, X hasno unused benefits or contributions remaining for theplan year ending December 31, 2005. The remaining$100 of medical expenses incurred between January1 and March 15, 2006, is paid or reimbursed fromX’s health FSA for the plan year ending December31, 2006. As of March 16, 2006, X has $1,400 re-maining in the health FSA for the plan year endingDecember 31, 2006.

Example (2). Same facts as Example (1), exceptthat X incurs $150 of § 213(d) medical expenses dur-ing the grace period (January 1 through March 15,2006). As of March 16, 2006, X has $50 of unusedbenefits or contributions remaining for the plan yearending December 31, 2005. The unused $50 cannotbe cashed-out, converted to any other taxable or non-taxable benefit, or used in any other plan year (includ-ing the plan year ending December 31, 2006). Theunused $50 is subject to the “use-it-or-lose-it” ruleand is “forfeited.” As of March 16, 2006, X has theentire $1,500 elected in the health FSA for the planyear ending December 31, 2006.

EFFECT ON OTHER DOCUMENTS

Future guidance will modify Prop.Treas. Reg. §§ 1.125–1 and 1.125–2 toreflect the provisions in this notice.


The principal author of this notice isElizabeth Purcell of the Office of DivisionCounsel/Associate Chief Counsel (Tax Ex-empt and Government Entities). For fur-ther information regarding this notice, con-tact Ms. Purcell at (202) 622–6080 (not atoll-free call).

2005–23 I.R.B. 1205 June 6, 2005

26 CFR 601.105: Examination of returns and claimsfor refund, credit, or abatement; determination ofcorrect tax liability.(Also Part I, Section 7605; 301.7605–1.)

Rev. Proc. 2005–32

SECTION 1. PURPOSE

The purpose of this revenue procedureis to amplify, update, and restate Rev.Proc. 94–68, 1994–2 C.B. 803, whichprovides Internal Revenue Service pro-cedures with respect to the reopening ofexaminations under section 7605(b) ofthe Internal Revenue Code. This revenueprocedure also describes when a case isdeemed closed after examination by theService, describes, by category, a non-ex-clusive list of contacts with taxpayers andother actions by the Service that are not ex-aminations, inspections, or reopenings ofclosed cases, explains when a closed casemay be reopened to make an adjustmentunfavorable to the taxpayer, and explainswho within the Service must approve areopening.

SECTION 2. SIGNIFICANT CHANGES

.01 Examples in Rev. Proc. 94–68 ofcontacts by the Service with taxpayers orother actions taken with respect to taxpay-ers that are not examinations, inspections,or reopenings have been categorized underfour non-exclusive categories.

.02 A new section 4.01(4) is added todefine a closed case when dealing withclassification or qualification cases subjectto section 7428.

.03 A new section 4.01(5) is added todefine a closed case when dealing withTax Equity and Fiscal Responsibility Act(TEFRA) partnership cases.

.04 A new section 4.02 is added to de-fine a reopening of a closed case.

.05 Section 4.02, Examinations, In-spections, and Reopenings, of Rev. Proc.94–68 has been redesignated and renamedas section 4.03, Taxpayer contacts andother actions that are not examinations,inspections, or reopenings.

.06 Section 4.03(1)(d)(ii)(B) includesnew items that provide that a contact witha taxpayer to request the taxpayer file a re-quired tax return, to explain the criteria forperfecting a filed but imperfect tax return,or to request the taxpayer perfect a filed tax

return, is not an examination, inspection,or reopening.

.07 Section 4.03(2)(d) adds the IndustryIssue Resolution program as a new item tothe examples of voluntary programs for se-lective issue resolution that are not exami-nations, inspections, or reopenings.

.08 Section 4.03(4) includes a new ex-ample providing that a contact with a tax-payer for the purpose of investigating apossible violation of title 31 of the UnitedStates Code is not an examination, inspec-tion, or reopening for any purpose undertitle 26.

.09 New section 4.03(4)(b) is added toprovide that a contact with any person forthe purpose of determining whether thatperson is required to maintain a list undersection 6112, or to inspect the list requiredto be maintained under section 6112, orto verify the accuracy of, or the need for,disclosure of a reportable transaction asrequired by section 6111 (or registration ofa tax shelter as required by former section6111) is not an examination, inspection, orreopening with respect to any other party.

.10 New section 5.02 provides that anexamination of a tax return following aprior examination of the same taxpayer forthe same taxable period that was limited toone or more transactions with significantpotential for abuse satisfies the criteria forreopening of a case closed after examina-tion.

SECTION 3. SCOPE

This revenue procedure applies to allexaminations, inspections of books of ac-count, and reopenings of cases closed af-ter examination, regardless of taxpayer ortype of tax, but does not extend to casesbeyond the jurisdiction of the highest levelfield official with ultimate authority overthe case, presently the Area Director forCompliance or the Industry Director. Itdoes not apply to cases closed after consid-eration by Appeals or any functional com-ponent of the Office of Chief Counsel.

The categories and examples in section4.03 below of contacts with taxpayers andother actions taken by the Service with re-spect to taxpayers that are not examina-tions, inspections, or reopenings are notintended to be, and should not be con-strued as, exhaustive, exclusive, or limita-tive. Thus, a contact with, or other actionin relation to, a taxpayer may be other than

an examination, inspection, or reopeningeven though it may not be listed as an ex-ample or may be outside of a category de-scribed in this revenue procedure.

SECTION 4. DEFINITIONS

.01 Closed case.(1) For purposes of this revenue proce-

dure, an agreed case is closed after exam-ination when the Service notifies the tax-payer in writing after a conference, if any,of adjustments to the taxpayer’s liabilityor acceptance of the taxpayer’s tax returnor exempt status without change. A caseinvolving a refund or credit in excess ofthe statutory sum that is subject to reviewby the Joint Committee on Taxation, pur-suant to section 6405, is not a closed caseuntil Joint Committee review proceduresand any necessary follow-up are complete.Also, in a fully agreed case in which thetaxpayer and the Service have entered intoa closing agreement, as described in sec-tion 7121, following examination, the caseis not a closed case until the closing agree-ment is signed by an appropriate Serviceofficial.

(2) An unagreed income, estate, gift, orchapters 41 through 44 excise tax case, ora worker classification or plan qualifica-tion case subject to section 7436 or section7476, is closed after examination when theperiod for filing a petition with the UnitedStates Tax Court, as specified in the statu-tory notice of deficiency or notice of de-termination issued to the taxpayer, expireswith no petition filed.

(3) An unagreed excise tax case not sub-ject to the deficiency procedures of sec-tions 6211 through 6215 or an employmenttax case not subject to the determinationof employment status procedures of sec-tion 7436 is closed after examination whenthe period specified in the preliminary let-ter for requesting a hearing with Appealsexpires and no request has been made.

(4) An unagreed classification or qual-ification case subject to section 7428 isclosed after examination when the periodexpires for bringing an action in the UnitedStates Tax Court, the United States Courtof Federal Claims, or the United StatesDistrict Court for the District of Columbia,and no action has been filed.

(5) An unagreed TEFRA partnershipcase is closed when the period for bringingan action in the United States Tax Court, a

June 6, 2005 1206 2005–23 I.R.B.

district court, or the United States Court ofFederal Claims with respect to a Notice ofFinal Partnership Administrative Adjust-ment (FPAA) expires and no action hasbeen filed. A TEFRA partnership case isan agreed case and is closed as an agreedcase only if all partners have signed settle-ment agreements or a no-change letter hasbeen issued to the Tax Matters Partner. Ano-change FPAA alone does not signify anagreed case.

.02 Reopening. A reopening of a closedcase involves an examination of a tax-payer’s liability that may result in anadjustment to liability unfavorable to thetaxpayer for the same taxable period asthe closed case, with exceptions, someof which are noted below. The Service’sreview, including an inspection of booksof account, of a taxpayer’s claim for a re-fund on an amended excise or income taxreturn, as well as the Service’s review of aForm 843, Claim for Refund and Requestfor Abatement, claiming a refund for anoverpayment reported on a return, is not areopening.

.03 Taxpayer contacts and other actionsthat are not examinations, inspections, orreopenings. In addition to the exceptionprovided in § 301.7605–1(h) of the Pro-cedural and Administrative Regulations,listed below are four categories of contactsthe Service makes with taxpayers and cer-tain other actions taken by the Service thatare not examinations, inspections, or re-openings.

(1) In the first category are narrow, lim-ited contacts or communications betweenthe Service and a taxpayer that do not in-volve the Service inspecting the taxpayer’sbooks of account:

(a) looking at a tax return;(b) matching information on a tax return

with, or preparing a missing return from,other records or information items that arealready in the Service’s possession; or

(c) considering any records the taxpayervoluntarily provides to the Service to ex-plain an apparent error on a tax return orto explain a discrepancy between either afiled tax return or a substitute for returnand information from third parties that isor may be used for the matching describedin (b).

(d) The following examples, illustrativeof this category 4.03(1), are not examina-tions, inspections, or reopenings:

(i) a contact with a Coordinated Indus-try Case (CIC) taxpayer requesting thewritten statements provided for in Rev.Proc. 94–69, 1994–2 C.B. 804 (or suc-cessor revenue procedure), or notifying ataxpayer that the taxpayer no longer qual-ifies for the CIC program;

(ii) a contact with a taxpayer to:(A) correct mathematical or clerical er-

rors;(B) request the taxpayer file a tax re-

turn, or if a tax return is incomplete, to ex-plain the criteria for perfecting the tax re-turn, or to solicit the taxpayer’s perfectionof the tax return; or

(C) verify a discrepancy between thetaxpayer’s tax return and an informationreturn, or between a tax return and infor-mation otherwise in the Service’s posses-sion; and

(iii) adjustments resulting from:(A) an unallowable item;(B) a discrepancy between a filed tax re-

turn and information received from a thirdparty or a federal or state governmentaldatabank; or

(C) an information-return matchingprogram, or other correction programsoperated by Internal Revenue ServiceCenters or Campuses.

(2) In the second category are Service-administered programs for selective issueresolution that are open to the voluntaryparticipation of taxpayers, and which in-vite the Service’s involvement with re-spect to one or more taxable periods earlierthan otherwise under the Service’s normalaudit procedures. The following are ex-amples of these Service-administered pro-grams:

(a) accelerated issue resolution;(b) the Advance Pricing Agreement

program;(c) the Pre-Filing Agreement program;

and(d) the Industry Issue Resolution pro-

gram.(3) The third category consists of re-

considerations (and resulting adjustmentsto liability) of a taxable period previouslyexamined or adjusted when those recon-siderations arise from and are affected bythe treatment of, or a position taken withrespect to, tax return items or transactionsby the same taxpayer in a different (usuallylater) taxable period, or by a related tax-payer in any taxable period. Cases in this

category 4.03(3) are not reopenings. Ex-amples include adjustments for:

(a) a correction under section 1311;(b) a change to an item carried back that

affects liability for the carryback year; and(c) a gain under section 1033 on the

involuntary conversion of property.(4) A fourth category consists of con-

tacts, compliance checks, examinations, orinvestigations of a taxpayer or a third partyfor one purpose, tax, or period (even if adual purpose is present at the outset) thatresult in the Service obtaining informa-tion relevant or useful for a different pur-pose, tax, or period that may later eitherbe matched with a return under the circum-stances described in section 4.03(1) or maylead the Service to later open an exami-nation or inspection for that different pur-pose, tax, or period. For example, a con-tact with a taxpayer, including an inspec-tion of the taxpayer’s books of account, forthe purpose of investigating a possible vio-lation of title 31 is not an examination, in-spection, or reopening for any purpose un-der title 26. Other examples include:

(a) a contact by a Tax Exempt and Gov-ernment Entities (TE/GE) agent with theemployer sponsor of a deferred compen-sation plan, or with an organization treat-ing itself as tax-exempt, to investigate theplan’s compliance with Code requirementsor the organization’s exempt status underthe Code. This contact, and any follow-upinformation matching, is not an income taxexamination, inspection, or reopening withrespect to the employer, its employees, anyplan beneficiaries, or any other third par-ties that may have a transactional relation-ship to the exempt organization (such asthe organization’s employees, independentcontractors, taxable subsidiaries, or sellersof property to the exempt organization);and

(b) a contact with or action taken withrespect to any person for the purpose of de-termining whether that person is requiredto maintain a list under section 6112(a), orto inspect the list required to be maintainedunder section 6112(a), or to verify the ac-curacy of, or the need for, disclosure of areportable transaction as required by sec-tion 6111 (or registration of a tax shelteras required by former section 6111). Thiscontact or other action is not an examina-tion, inspection, or reopening with respectto any other party.

2005–23 I.R.B. 1207 June 6, 2005

SECTION 5. REOPENING CLOSEDCASES

.01 General circumstances permittingreopening. The Service will not reopen acase closed after examination to make anadjustment to liability unfavorable to thetaxpayer unless:

(1) there is evidence of fraud, malfea-sance, collusion, concealment, or misrep-resentation of material fact;

(2) the closed case involved a clearly-defined, substantial error based on an es-tablished Service position existing at thetime of the examination; or

(3) other circumstances exist indicatingthat a failure to reopen the case would be aserious administrative omission.

.02 Other circumstances permittingreopening. Under section 5.01(3) of thisrevenue procedure, other circumstancesindicating that a failure to reopen a casewould be a serious administrative omis-sion include cases with items or transac-

tions that present significant potential forabuse for which a limited examinationwas performed. If the Service conductedand closed an examination that was lim-ited to one or more tax return items ortransactions with significant potential forabuse, and the Service later determinesthat other tax return items or transactionsfor the same taxpayer and the same tax-able period also merit examination, theexamination may be reopened. Items ortransactions with significant potential forabuse may include reportable transactionswithin the meaning of § 1.6011–4(b). Inthese circumstances, a subsequent exam-ination by the Service of other tax returnitems for the same taxpayer and the sametaxable year is not an unnecessary ex-amination under section 7605(b) and thefailure to reopen such cases would be aserious administrative omission.

.03 Approval. All reopenings must beapproved by, and all notices of an addi-tional inspection of a taxpayer’s books

of account must be signed by, an officiallisted in Commissioner Delegation OrderNumber 57 (or successor order) for casesunder his or her jurisdiction.

SECTION 6. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 94–68 is modified and su-perseded.

SECTION 7. EFFECTIVE DATE

This revenue procedure is effective onMay 20, 2005.


The principal author of this revenueprocedure is Stuart Murray of the Officeof the Associate Chief Counsel (Procedure& Administration). For further informa-tion regarding this revenue procedure,contact Stuart Murray at (202) 622–3630(not a toll-free call).

June 6, 2005 1208 2005–23 I.R.B.

Part IV. Items of General InterestNotice of ProposedRulemaking, Notice ofProposed Rulemaking byCross Reference to TemporaryRegulations and Notice ofPublic Hearing

Section 1446 Regulations;Withholding on EffectivelyConnected Taxable IncomeAllocable to Foreign Partners

REG–108524–00


ACTION: Notice of proposed rulemaking,notice of proposed rulemaking by crossreference to temporary regulations and no-tice of public hearing.

SUMMARY: The IRS is proposing to is-sue temporary regulations under section1446 of the Internal Revenue Code relat-ing to the circumstances under which apartnership may take partner-level deduc-tions and losses into account in computingits withholding tax obligation with respectto a foreign partner’s allocable share of ef-fectively connected taxable income. Thetext of the temporary regulations (T.D.9200) published elsewhere in this issue ofthe Bulletin also serves as the text of theseproposed regulations. In addition, theproposed regulations amend regulationsunder sections 1464, 6071, 6091, 6151,6302, 6402, 6414, and 6722 to implementthe section 1446 regime. This documentalso provides a notice of public hearing onthese proposed regulations.

DATES: Written or electronic commentsand requests to comment at the public hear-ing scheduled for October 3, 2005, must bereceived by August 16, 2005.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–108524–00), room5203, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washing-ton, DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–108524–00),

Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC 20044. Alternatively,taxpayers may submit comments electron-ically via either the IRS internet site atwww.irs.gov/regs or the Federal eRule-making Portal at www.regulations.gov(IRS and REG–108524–00). The publichearing will be held in the Auditorium ofthe Internal Revenue Building, 1111 Con-stitution Avenue, NW, Washington, DC onOctober 3, 2005.

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Ronald M. Gootzeit, at (202)622–3860 or to be placed on the attendancelist for the hearing, Richard A. Hurst at(202) 622–7180 (not toll-free numbers).


Paperwork Reduction Act

The collections of information con-tained in this notice of proposed rulemak-ing have been submitted to the Office ofManagement and Budget for review inaccordance with the Paperwork Reduc-tion Act of 1995 (44 U.S.C. 3507(d)).Comments on the collections of infor-mation should be sent to the Office ofManagement and Budget, Attn: DeskOfficer for the Department of the Trea-sury, Office of Information and Regula-tory Affairs, Washington, DC 20503, withcopies to the Internal Revenue Service,Attn: IRS Reports Clearance Officer,SE:W:CAR:MP:T:T:SP, Washington, DC20224. Comments on the collections ofinformation should be received by July18, 2005. Comments are specifically re-quested concerning:

Whether the proposed collections of in-formation are necessary for the proper per-formance of the functions of the InternalRevenue Service, including whether theinformation will have practical utility;

The accuracy of the estimated burdenassociated with the proposed collections ofinformation (see below);

How the quality, utility, and clarity ofthe information to be collected may be en-hanced;

How the burden of complying with theproposed collections of information may

be minimized, including through the appli-cation of automated collection techniquesor other forms of information technology;and

Estimates of capital or start-up costsand costs of operation, maintenance, andpurchase of services to provide informa-tion.

The collections of information in thisproposed regulation are in §1.1446–6T.This information is required to determinethe extent to which a partnership is re-quired to pay a withholding tax undersection 1446 with respect to its effectivelyconnected taxable income allocable to aforeign partner. The reporting requirementin §1.1446–6T is voluntary. The likely re-spondents include individuals, businessesor other for profit institutions, and smallbusinesses or organizations.

Estimated total annual reporting bur-den: 2,500 hours.

Estimated average annual burden hoursper respondent: .5 hours.

Estimated number of respondents:5,000.

Estimated annual frequency of re-sponses: on occasion and annually.

An agency may not conduct or sponsor,and a person is not required to respond to, acollection of information unless it displaysa valid control number assigned by the Of-fice of Management and Budget.

Books or records relating to a collectionof information must be retained as longas their contents may become material inthe administration of any internal revenuelaw. Generally, tax returns and tax returninformation are confidential, as requiredby 26 U.S.C. 6103.

Background

Temporary regulations published else-where in this issue of the Bulletin amendthe Income Tax Regulations (26 CFR part1) relating to section 1446. The text ofthose regulations also serves as the text ofthe proposed regulations pertaining to sec-tion 1446 that are included in this docu-ment. The preamble to the temporary reg-ulations explains the amendments to sec-tion 1446. The proposed regulations alsoamend the Income Tax and Procedure andAdministration Regulations (26 CFR Parts1 and 301) relating to sections 1464, 6071,

2005–23 I.R.B. 1209 June 6, 2005

6091, 6151, 6302, 6402, 6414, and 6722.The amendments to these sections are nec-essary to coordinate the sections with thefinal section 1446 regulations issued else-where in this issue of the Bulletin.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866. It also has been deter-mined that section 533(b) of the Admin-istrative Procedures Act (5 U.S.C. chapter5) does not apply to these regulations. Itis hereby certified that the collections ofinformation contained in these regulationswill not have a significant economic im-pact on a substantial number of small enti-ties. This certification is based upon thefact that only a limited number of smallentities are impacted by these collectionsand the burden associated with such col-lections is .5 hours. Moreover, the infor-mation collection in §1.1446–6T is volun-tary. Therefore, a Regulatory FlexibilityAnalysis under the Regulatory FlexibilityAct (5 U.S.C. chapter 6) is not required.Pursuant to section 7805(f) of the Code,this notice of proposed rulemaking will besubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on its impact on small busi-ness.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments(a signed original and eight (8) copies)that are submitted timely to the IRS. Allcomments will be available for public in-spection and copying. The Treasury De-partment and IRS request comments onthe clarity of the proposed regulations andhow they may be made easier to under-stand. All comments will be available forpublic inspection and copying.

A public hearing has been scheduledfor October 3, 2005, beginning at 10 a.m.in the Auditorium of the Internal RevenueBuilding, 1111 Constitution Avenue, NW,Washington, DC. All visitors must enterat the Constitution Avenue entrance andpresent photo identification to enter thebuilding. Because of access restrictions,visitors will not be admitted beyond the

immediate entrance area more than 30minutes before the hearing starts. For in-formation about having your name placedon the building access list to attend thehearing, see the “FOR FURTHER IN-FORMATION CONTACT” section of thispreamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit electronic or written comments andan outline of the topics to be discussedand the time to be devoted to each topic(signed original and eight (8) copies) byAugust 16, 2005. A period of 10 minuteswill be allotted to each person for makingcomments. An agenda showing the sched-ule of speakers will be prepared after thedeadline for receiving outlines has passed.Copies of the agenda will be available freeof charge at the hearing.


The principal authors of these proposedregulations are David J. Sotos, formerly ofthe Office of the Associate Chief Counsel(International), and Ronald M. Gootzeitof the Office of Associate Chief Counsel(International). However, other person-nel from the Treasury Department and IRSparticipated in their development.

* * * * *

Proposed Amendments to theRegulations

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

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *§1.1446–6 also issued under 26 U.S.C.

1446(f).* * *Par. 2. Section 1.1446–6 is added to

read as follows:

§1.1446–6 Special rules to reduce apartnership’s 1446 tax with respect toa foreign partner’s allocable share ofeffectively connected taxable income.

[The text of this proposed section is thesame as the text of §1.1446–6T publishedelsewhere in this issue of the Bulletin].

Par. 3. In §1.1464–1, paragraph (a) isamended by adding three sentences at theend of the paragraph to read as follows:

§1.1464–1 Refunds or credits.

(a) * * * With respect to section 1446,this section shall only apply to a publiclytraded partnership described in §1.l446–4.See §1.1446–3(d)(2)(iv) for rules permit-ting a withholding agent to obtain a refundof tax paid under section 1446. The pre-vious two sentences shall apply to part-nership taxable years beginning after thedate these regulations are published as fi-nal regulations in the Federal Register.

* * * * *Par. 4. In §1.6071–1, paragraph (c)(15)

is revised to read as follows:

§1.6071–1 Time for filing returns andother documents.

* * * * *(c) * * *(15) For provisions relating to the time

for filing an annual information return onForm 1042–S or Form 8805 of the taxwithheld under chapter 3 of the InternalRevenue Code (relating to withholding oftax on nonresident aliens and foreign cor-porations and tax-free covenant bonds),see §1.1461–1(c) and §1.1446–3(d). Thereferences in the previous sentence toForm 8805 and §1.1446–3(d) shall applyto partnership taxable years beginning af-ter the date these regulations are publishedas final regulations in the Federal Regis-ter.

* * * * *Par. 5. In §1.6091–1, paragraph (b)(17)

is added to read as follows:

§1.6091–1 Place for filing returns orother documents.

* * * * *(b) * * *(17) For the place for filing informa-

tion returns on Form 8805 with respect tocertain amounts paid on behalf of foreignpartners, see the instructions to the form.

* * * * *Par. 6. In §1.6151–1, paragraph (d)(2)

is revised to read as follows:

June 6, 2005 1210 2005–23 I.R.B.

§1.6151–1 Time and place for paying taxshown on returns.

* * * * *(d) * * *(2) For provisions relating to the use

of such financial institutions for the de-posit of taxes required to be withheld un-der chapter 3 of the Internal Revenue Codeon nonresident aliens and foreign corpo-rations and tax-free covenant bonds, see§1.6302–2. With respect to section 1446,the previous sentence shall apply only toa publicly traded partnership described in§1.1446–4. This paragraph shall apply topublicly traded partnerships described inthe previous sentence only for partnershiptaxable years beginning after the date theseregulations are published as final regula-tions in the Federal Register.

* * * * *Par. 7. In §1.6302–2, paragraphs

(a)(1)(i) and (2) are revised to read as fol-lows:

§1.6302–2 Use of Governmentdepositaries for payment of taxwithheld on nonresident aliens andforeign corporations.

(a) * * *(1) * * *(i) Monthly deposits. Except as pro-

vided in paragraphs (a)(1)(ii) and (iv)of this section, every withholding agentwho, pursuant to chapter 3 of the InternalRevenue Code, has accumulated at theclose of any calendar month beginningon or after January 1, 1973, an aggregateamount of undeposited taxes of $200 ormore shall deposit such aggregate amountwith an authorized financial institution(see paragraph (b)(1)(ii) of this section)within 15 days after the close of suchcalendar month. However, the precedingsentence shall not apply if the withholdingagent has made a deposit of taxes pur-suant to paragraph (a)(1)(ii) of this sectionwith respect to a quarter monthly periodwhich occurred during such month. Withrespect to section 1446, this section shallonly apply to a publicly traded partnershipdescribed in §1.1446–4. The previoussentence shall apply to partnership taxableyears beginning after the date these regu-lations are published as final regulationsin the Federal Register.

* * * * *

(2) Cross reference. For rules relat-ing to the adjustment of deposits, see§1.1461–2(b) and §1.6414–1. For rulesrequiring payment of any undeposited tax,see §1.1461–1.

* * * * *Par. 8. Section 1.6414–1 is amended

by:1. Adding three sentences at the end of

the undesignated text following paragraph(a)(2).

2. Revising the third sentence of para-graph (b).

The addition and revision read as fol-lows:

§1.6414–1 Credit or refund of taxwithheld on nonresident aliens andforeign corporations.

(a) * * * With respect to the paymentof withholding tax under section 1446,this section shall only apply to a publiclytraded partnership described in §1.1446–4.See §1.1446–3(d)(2)(iv) for rules regard-ing refunds to a withholding agent undersection 1446. The previous two sentencesshall apply to partnership taxable yearsbeginning after the date these regulationsare published as final regulations in theFederal Register.

(b) * * * The amount so claimed as acredit may be applied, to the extent it hasnot been applied under paragraph (b) of§1.1461–2, by the withholding agent to re-duce the amount of a payment or deposit oftax required by §1.1461–1 or paragraph (a)of §1.6302–2 for any payment period oc-curring in the calendar year following thecalendar year of overwithholding. * * *

* * * * *

PART 301—PROCEDURE ANDADMINISTRATION

Par. 9. The authority for 26 CFR part301 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *Par. 10. In §301.6302–1, paragraph

(b)(2) is revised to read as follows:

§301.6302–1 Mode or time of collectionof taxes.

* * * * *(b) * * *(2) For provisions relating to the use

of Federal Reserve banks or authorizedcommercial banks in depositing the tax

required to be withheld under chapter 3of the Internal Revenue Code on nonres-ident aliens and foreign corporations andtax-free covenant bonds, see §1.6302–2 ofthis chapter. The previous sentence shallinclude payment of withholding tax undersection 1446 and §1.1446–4. Referencesin this paragraph (b)(2) to payment ofwithholding tax under section 1446, shallapply to partnership taxable years begin-ning after the date these regulations arepublished in the Federal Register.

Par. 11. In §301.6402–3, the secondand third sentences of paragraph (e) arerevised, and a sentence is added at the endof the paragraph to read as follows:

§301.6402–3 Special rules applicable toincome tax.

* * * * *(e) * * * Also, if the overpayment

of tax resulted from the withholdingof tax at source under chapter 3 of theInternal Revenue Code, a copy of theForm 1042–S, Form 8805, or other state-ment (see §1.1446–3(d)(2)) required tobe provided to the beneficial owner orpartner pursuant to §1.1461–1(c)(1)(i)or §1.1446–3(d) of this chapter must beattached to the return. For purposes ofclaiming a refund, the Form 1042–S,Form 8805, or other statement must in-clude the taxpayer identification numberof the beneficial owner or partner even ifnot otherwise required. * * * References inthis paragraph to Form 8805 or other state-ments required under §1.1446–3(d)(2)shall apply to partnership taxable yearsbeginning after the date these regulationsare published as final regulations in theFederal Register.

Par. 12. In §301.6722–1, paragraph(d)(3) is revised to read as follows:

§301.6722–1 Failure to furnish correctpayee statements.

* * * * *(d) * * *(3) Other items. The term payee state-

ment also includes any form, statement, orschedule required to be furnished to therecipient of any amount from which taxis required to be deducted and withheldunder chapter 3 of the Internal RevenueCode (or from which tax would be re-quired to be so deducted and withheldbut for an exemption under the Internal

2005–23 I.R.B. 1211 June 6, 2005

Revenue Code or any treaty obligation ofthe United States), generally the recipientcopy of Form 1042–S or Form 8805. Thereference in the previous sentence to Form8805 shall apply to partnership taxableyears beginning after the date that theseregulations are published as final regula-tions in the Federal Register.

Mark E. Matthews,Deputy Commissioner forServices and Enforcement.


Guidance Under Section355(e); Recognition of Gainon Certain Distributionsof Stock or Securitiesin Connection With anAcquisition; Correction

Announcement 2005–41


ACTION: Correction to final regulationsand removal of temporary regulations.

SUMMARY: This document corrects finalregulations and removal of temporary reg-ulations (T.D. 9198, 2005–18 I.R.B. 972),that were published in the Federal Reg-ister on Tuesday, April 19, 2005 (70 FR20279) that relate to the recognition of gainon certain distributions of stock or securi-ties of a controlled corporation in connec-tion with an acquisition.

DATES: This correction is effective April19, 2005.

FOR FURTHER INFORMATIONCONTACT: Amber R. Cook, (202)622–7530 (not a toll-free number).


Background

The final regulations and removal oftemporary regulations (T.D. 9198), whichis the subject of this correction are un-der section 355(e) of the Internal RevenueCode.

Need for Correction

As published, the final regulations andremoval of temporary regulations (T.D.9198) contain errors that may prove to bemisleading and are in need of clarification.

Correction of Publication

Accordingly, the publication of the finalregulations and removal of temporary reg-ulations (T.D. 9198), which was the sub-ject of FR. Doc. 05–7811, is corrected asfollows:

1. On page 20280, column 2, in the pre-amble, under the paragraph heading “NewSafe Harbor for Acquisitions Before a ProRata Distribution”, line 9, the language“discussions regarding the acquisition” iscorrected to read “discussions with the ac-quirer regarding a distribution”.

2. On page 20280, column 2, in thepreamble, under the paragraph heading“New Safe Harbor for Acquisitions Be-fore a Pro Rata Distribution”, lines 15and 16, the language “prior to discussionsregarding the acquisition and that the ac-quisition was” is corrected to read “priorto discussions regarding a distribution andthat the acquisition was”.

Cynthia E. Grigsby,Acting Chief, Publications

and Regulations Branch,Legal Processing Division,

Associate Chief Counsel(Procedure and Administration).


June 6, 2005 1212 2005–23 I.R.B.

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situationsto show that the previous published rul-ings will not be applied pending somefuture action such as the issuance of newor amended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.

ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.

PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D. —Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z —Corporation.

2005–23 I.R.B. i June 6, 2005

Numerical Finding List1

Bulletins 2005–1 through 2005–23

Announcements:

2005-1, 2005-1 I.R.B. 257

2005-2, 2005-2 I.R.B. 319

2005-3, 2005-2 I.R.B. 270

2005-4, 2005-2 I.R.B. 319

2005-5, 2005-3 I.R.B. 353

2005-6, 2005-4 I.R.B. 377

2005-7, 2005-4 I.R.B. 377

2005-8, 2005-4 I.R.B. 380

2005-9, 2005-4 I.R.B. 380

2005-10, 2005-5 I.R.B. 450

2005-11, 2005-5 I.R.B. 451

2005-12, 2005-7 I.R.B. 555

2005-13, 2005-8 I.R.B. 627

2005-14, 2005-9 I.R.B. 653

2005-15, 2005-9 I.R.B. 654

2005-16, 2005-10 I.R.B. 702

2005-17, 2005-10 I.R.B. 673

2005-18, 2005-9 I.R.B. 660

2005-19, 2005-11 I.R.B. 744

2005-20, 2005-12 I.R.B. 772

2005-21, 2005-12 I.R.B. 776

2005-22, 2005-14 I.R.B. 826

2005-23, 2005-14 I.R.B. 845

2005-24, 2005-15 I.R.B. 889

2005-25, 2005-15 I.R.B. 891

2005-26, 2005-17 I.R.B. 969

2005-27, 2005-16 I.R.B. 918

2005-28, 2005-17 I.R.B. 969

2005-29, 2005-17 I.R.B. 969

2005-30, 2005-18 I.R.B. 988

2005-31, 2005-18 I.R.B. 996

2005-32, 2005-19 I.R.B. 1012

2005-33, 2005-19 I.R.B. 1013

2005-34, 2005-19 I.R.B. 1014

2005-35, 2005-21 I.R.B. 1095

2005-36, 2005-21 I.R.B. 1095

2005-37, 2005-21 I.R.B. 1096

2005-38, 2005-21 I.R.B. 1097

2005-39, 2005-22 I.R.B. 1151

2005-40, 2005-22 I.R.B. 1152

2005-41, 2005-23 I.R.B. 1212

Court Decisions:

2080, 2005-15 I.R.B. 850

Notices:

2005-1, 2005-2 I.R.B. 274

2005-2, 2005-3 I.R.B. 337

2005-3, 2005-5 I.R.B. 447

2005-4, 2005-2 I.R.B. 289

2005-5, 2005-3 I.R.B. 337

Notices— Continued:

2005-6, 2005-5 I.R.B. 448

2005-7, 2005-3 I.R.B. 340

2005-8, 2005-4 I.R.B. 368

2005-9, 2005-4 I.R.B. 369

2005-10, 2005-6 I.R.B. 474

2005-11, 2005-7 I.R.B. 493

2005-12, 2005-7 I.R.B. 494

2005-13, 2005-9 I.R.B. 630

2005-14, 2005-7 I.R.B. 498

2005-15, 2005-7 I.R.B. 527

2005-16, 2005-8 I.R.B. 605

2005-17, 2005-8 I.R.B. 606

2005-18, 2005-9 I.R.B. 634

2005-19, 2005-9 I.R.B. 634

2005-20, 2005-9 I.R.B. 635

2005-21, 2005-11 I.R.B. 727

2005-22, 2005-12 I.R.B. 756

2005-23, 2005-11 I.R.B. 732

2005-24, 2005-12 I.R.B. 757

2005-25, 2005-14 I.R.B. 827

2005-26, 2005-12 I.R.B. 758

2005-27, 2005-13 I.R.B. 795

2005-28, 2005-13 I.R.B. 796

2005-29, 2005-13 I.R.B. 796

2005-30, 2005-14 I.R.B. 827

2005-31, 2005-14 I.R.B. 830

2005-32, 2005-16 I.R.B. 895

2005-33, 2005-17 I.R.B. 960

2005-34, 2005-17 I.R.B. 960

2005-35, 2005-21 I.R.B. 1087

2005-36, 2005-19 I.R.B. 1007

2005-37, 2005-20 I.R.B. 1049

2005-38, 2005-22 I.R.B. 1100

2005-39, 2005-21 I.R.B. 1087

2005-40, 2005-21 I.R.B. 1088

2005-41, 2005-23 I.R.B. 1203

2005-42, 2005-23 I.R.B. 1204

Proposed Regulations:

REG-108524-00, 2005-23 I.R.B. 1209

REG-117969-00, 2005-7 I.R.B. 533

REG-125443-01, 2005-16 I.R.B. 912

REG-125628-01, 2005-7 I.R.B. 536

REG-129709-03, 2005-3 I.R.B. 351

REG-148701-03, 2005-13 I.R.B. 802

REG-148867-03, 2005-9 I.R.B. 646

REG-159243-03, 2005-20 I.R.B. 1075

REG-160315-03, 2005-14 I.R.B. 833

REG-163314-03, 2005-14 I.R.B. 835

REG-122847-04, 2005-13 I.R.B. 804

REG-130370-04, 2005-8 I.R.B. 608

REG-130671-04, 2005-10 I.R.B. 694

REG-131128-04, 2005-11 I.R.B. 733

REG-139683-04, 2005-4 I.R.B. 371

REG-147195-04, 2005-15 I.R.B. 888

Proposed Regulations— Continued:

REG-148521-04, 2005-18 I.R.B. 995

REG-152354-04, 2005-13 I.R.B. 805

REG-152914-04, 2005-9 I.R.B. 650

REG-152945-04, 2005-6 I.R.B. 484

REG-154000-04, 2005-19 I.R.B. 1009

REG-159824-04, 2005-4 I.R.B. 372

REG-162813-04, 2005-19 I.R.B. 1010

Revenue Procedures:

2005-1, 2005-1 I.R.B. 1

2005-2, 2005-1 I.R.B. 86

2005-3, 2005-1 I.R.B. 118

2005-4, 2005-1 I.R.B. 128

2005-5, 2005-1 I.R.B. 170

2005-6, 2005-1 I.R.B. 200

2005-7, 2005-1 I.R.B. 240

2005-8, 2005-1 I.R.B. 243

2005-9, 2005-2 I.R.B. 303

2005-10, 2005-3 I.R.B. 341

2005-11, 2005-2 I.R.B. 307

2005-12, 2005-2 I.R.B. 311

2005-13, 2005-12 I.R.B. 759

2005-14, 2005-7 I.R.B. 528

2005-15, 2005-9 I.R.B. 638

2005-16, 2005-10 I.R.B. 674

2005-17, 2005-13 I.R.B. 797

2005-18, 2005-13 I.R.B. 798

2005-19, 2005-14 I.R.B. 832

2005-20, 2005-18 I.R.B. 990

2005-21, 2005-16 I.R.B. 899

2005-22, 2005-15 I.R.B. 886

2005-23, 2005-18 I.R.B. 991

2005-24, 2005-16 I.R.B. 909

2005-25, 2005-17 I.R.B. 962

2005-26, 2005-17 I.R.B. 965

2005-27, 2005-20 I.R.B. 1050

2005-28, 2005-21 I.R.B. 1093

2005-29, 2005-22 I.R.B. 1118

2005-30, 2005-22 I.R.B. 1148

2005-32, 2005-23 I.R.B. 1206

Revenue Rulings:

2005-1, 2005-2 I.R.B. 258

2005-2, 2005-2 I.R.B. 259

2005-3, 2005-3 I.R.B. 334

2005-4, 2005-4 I.R.B. 366

2005-5, 2005-5 I.R.B. 445

2005-6, 2005-6 I.R.B. 471

2005-7, 2005-6 I.R.B. 464

2005-8, 2005-6 I.R.B. 466

2005-9, 2005-6 I.R.B. 470

2005-10, 2005-7 I.R.B. 492

2005-11, 2005-14 I.R.B. 816

2005-12, 2005-9 I.R.B. 628

2005-13, 2005-10 I.R.B. 664

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin2004–52, dated December 27, 2004.

June 6, 2005 ii 2005–23 I.R.B.

Revenue Rulings— Continued:

2005-14, 2005-12 I.R.B. 749

2005-15, 2005-11 I.R.B. 720

2005-16, 2005-13 I.R.B. 777

2005-17, 2005-14 I.R.B. 823

2005-18, 2005-14 I.R.B. 817

2005-19, 2005-14 I.R.B. 819

2005-20, 2005-14 I.R.B. 821

2005-21, 2005-14 I.R.B. 822

2005-22, 2005-13 I.R.B. 787

2005-23, 2005-15 I.R.B. 864

2005-24, 2005-16 I.R.B. 892

2005-25, 2005-18 I.R.B. 971

2005-26, 2005-17 I.R.B. 957

2005-27, 2005-19 I.R.B. 998

2005-28, 2005-19 I.R.B. 997

2005-29, 2005-21 I.R.B. 1080

2005-30, 2005-20 I.R.B. 1015

2005-31, 2005-21 I.R.B. 1084

2005-32, 2005-23 I.R.B. 1156

2005-33, 2005-23 I.R.B. 1155

2005-34, 2005-22 I.R.B. 1098

Tax Conventions:

2005-3, 2005-2 I.R.B. 270

2005-17, 2005-10 I.R.B. 673

2005-22, 2005-14 I.R.B. 826

2005-30, 2005-18 I.R.B. 988

Treasury Decisions:

9164, 2005-3 I.R.B. 320

9165, 2005-4 I.R.B. 357

9166, 2005-8 I.R.B. 558

9167, 2005-2 I.R.B. 261

9168, 2005-4 I.R.B. 354

9169, 2005-5 I.R.B. 381

9170, 2005-4 I.R.B. 363

9171, 2005-6 I.R.B. 452

9172, 2005-6 I.R.B. 468

9173, 2005-8 I.R.B. 557

9174, 2005-9 I.R.B. 629

9175, 2005-10 I.R.B. 665

9176, 2005-10 I.R.B. 661

9177, 2005-10 I.R.B. 671

9178, 2005-11 I.R.B. 708

9179, 2005-11 I.R.B. 707

9180, 2005-11 I.R.B. 714

9181, 2005-11 I.R.B. 717

9182, 2005-11 I.R.B. 713

9183, 2005-12 I.R.B. 754

9184, 2005-12 I.R.B. 753

9185, 2005-12 I.R.B. 749

9186, 2005-13 I.R.B. 790

9187, 2005-13 I.R.B. 778

9188, 2005-15 I.R.B. 883

9189, 2005-13 I.R.B. 788

9190, 2005-15 I.R.B. 855

9191, 2005-15 I.R.B. 854

Treasury Decisions— Continued:

9192, 2005-15 I.R.B. 866

9193, 2005-15 I.R.B. 862

9194, 2005-20 I.R.B. 1016

9195, 2005-17 I.R.B. 958

9196, 2005-19 I.R.B. 1000

9197, 2005-18 I.R.B. 985

9198, 2005-18 I.R.B. 972

9199, 2005-19 I.R.B. 1003

9200, 2005-23 I.R.B. 1158

9201, 2005-23 I.R.B. 1153

2005–23 I.R.B. iii June 6, 2005

Finding List of Current Actions onPreviously Published Items1

Bulletins 2005–1 through 2005–23

Announcements:

2001-77

Modified by

Rev. Proc. 2005-16, 2005-10 I.R.B. 674

2005-19

Supplemented by

Ann. 2005-39, 2005-22 I.R.B. 1151

Notices:

88-30

Obsoleted by

Notice 2005-4, 2005-2 I.R.B. 289

88-132

Obsoleted by

Notice 2005-4, 2005-2 I.R.B. 289

89-29

Obsoleted by

Notice 2005-4, 2005-2 I.R.B. 289

89-38

Obsoleted by

Notice 2005-4, 2005-2 I.R.B. 289

97-19

Obsoleted in part by

Notice 2005-36, 2005-19 I.R.B. 1007

98-34


Notice 2005-36, 2005-19 I.R.B. 1007

2002-45

Amplified by

Rev. Rul. 2005-24, 2005-16 I.R.B. 892

2004-22

Modified and superseded by

Notice 2005-30, 2005-14 I.R.B. 827

2004-38

Obsoleted by

T.D. 9186, 2005-13 I.R.B. 790

2004-80

Clarified and modified by

Notice 2005-22, 2005-12 I.R.B. 756

Updated by

Notice 2005-17, 2005-8 I.R.B. 606

2005-4

Modified by

Notice 2005-24, 2005-12 I.R.B. 757

2005-10

Modified by

Notice 2005-38, 2005-22 I.R.B. 1100

Notices— Continued:

2005-17

Clarified and modified by

Notice 2005-22, 2005-12 I.R.B. 756

Proposed Regulations:

REG-149519-03

Corrected by

Ann. 2005-11, 2005-5 I.R.B. 451

REG-163314-03

Corrected by

Ann. 2005-32, 2005-19 I.R.B. 1012

REG-114726-04

Corrected by

Ann. 2005-10, 2005-5 I.R.B. 450

REG-152945-04

Corrected by

Ann. 2005-34, 2005-19 I.R.B. 1014

Revenue Procedures:

84-58

Superseded by

Rev. Proc. 2005-18, 2005-13 I.R.B. 798

94-68


Rev. Proc. 2005-32, 2005-23 I.R.B. 1206

98-16


Rev. Proc. 2005-11, 2005-2 I.R.B. 307

2000-20


Rev. Proc. 2005-16, 2005-10 I.R.B. 674

2001-22

Superseded by

Rev. Proc. 2005-12, 2005-2 I.R.B. 311

2002-9

Modified and amplified by

Rev. Proc. 2005-9, 2005-2 I.R.B. 303

2003-32

Amplified and superseded by

Rev. Proc. 2005-20, 2005-18 I.R.B. 990

2004-1

Superseded by

Rev. Proc. 2005-1, 2005-1 I.R.B. 1

2004-2

Superseded by

Rev. Proc. 2005-2, 2005-1 I.R.B. 86

2004-3

Superseded by

Rev. Proc. 2005-3, 2005-1 I.R.B. 118

Revenue Procedures— Continued:

2004-4

Superseded by

Rev. Proc. 2005-4, 2005-1 I.R.B. 128

2004-5

Superseded by

Rev. Proc. 2005-5, 2005-1 I.R.B. 170

2004-6

Superseded by

Rev. Proc. 2005-6, 2005-1 I.R.B. 200

2004-7

Superseded by

Rev. Proc. 2005-7, 2005-1 I.R.B. 240

2004-8

Superseded by

Rev. Proc. 2005-8, 2005-1 I.R.B. 243

2004-13

Superseded by

Rev. Proc. 2005-27, 2005-20 I.R.B. 1050

2004-16


Rev. Proc. 2005-25, 2005-17 I.R.B. 962

2004-18


Rev. Proc. 2005-15, 2005-9 I.R.B. 638

2004-24

Obsoleted by

Rev. Proc. 2005-22, 2005-15 I.R.B. 886

2004-35

Corrected by

Ann. 2005-4, 2005-2 I.R.B. 319

2004-60

Superseded by

Rev. Proc. 2005-10, 2005-3 I.R.B. 341

2005-6

Modified by

Rev. Proc. 2005-16, 2005-10 I.R.B. 674

2005-8

Modified by

Rev. Proc. 2005-16, 2005-10 I.R.B. 674

2005-9

Modified by

Rev. Proc. 2005-17, 2005-13 I.R.B. 797

Revenue Rulings:

69-516

Obsoleted by

T.D. 9182, 2005-11 I.R.B. 713

76-96

Suspended in part by

Rev. Rul. 2005-28, 2005-19 I.R.B. 997

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin 2004–52, dated December 27,2004.

June 6, 2005 iv 2005–23 I.R.B.

Revenue Rulings— Continued:

77-415

Obsoleted by

T.D. 9182, 2005-11 I.R.B. 713

77-479

Obsoleted by

T.D. 9182, 2005-11 I.R.B. 713

79-335


Rev. Rul. 2005-30, 2005-20 I.R.B. 1015

82-34

Obsoleted by

T.D. 9182, 2005-11 I.R.B. 713

92-19

Supplemented in part by

Rev. Rul. 2005-29, 2005-21 I.R.B. 1080

92-63


Rev. Rul. 2005-3, 2005-3 I.R.B. 334

95-63


Rev. Rul. 2005-3, 2005-3 I.R.B. 334

2004-43

Revoked by

Rev. Rul. 2005-10, 2005-7 I.R.B. 492

2004-103

Superseded by

Rev. Rul. 2005-3, 2005-3 I.R.B. 334

Treasury Decisions:

8408

Corrected by

Ann. 2005-28, 2005-17 I.R.B. 969

9130

Corrected by

Ann. 2005-29, 2005-17 I.R.B. 969

9165

Revised by

T.D. 9201, 2005-23 I.R.B. 1153

Corrected by

Ann. 2005-31, 2005-18 I.R.B. 996

9166

Corrected by

Ann. 2005-33, 2005-19 I.R.B. 1013

9170

Corrected by

Ann. 2005-13, 2005-8 I.R.B. 627

Ann. 2005-35, 2005-21 I.R.B. 1095

9187

Corrected by

Ann. 2005-25, 2005-15 I.R.B. 891

9196

Corrected by

Ann. 2005-40, 2005-22 I.R.B. 1152

Treasury Decisions— Continued:

9198

Corrected by

Ann. 2005-41, 2005-23 I.R.B. 1212

2005–23 I.R.B. v June 6, 2005*U.S. Government Printing Office: 2005—314–048/20008

Bulletin No. 2005-23 HIGHLIGHTS OF THIS ISSUE

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Transcript of Bulletin No. 2005-23 HIGHLIGHTS OF THIS ISSUE