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869 C.B. 869; 2003 IRB LEXIS 1659, *;
2003-42 I.R.B. 869
Notice of Proposed Rulemaking
Section 1446 Regulations
869 C.B. 869; 2003 IRB LEXIS 1659; 2003-42 I.R.B. 869
October 20, 2003
[*1]
RELATED-REFS:
REFERENCE: REG-108524-00
TEXT:
AGENCY:
Internal Revenue Service (IRS), Treasury.
ACTION:
Notice of proposed rulemaking.
SUMMARY:
This document contains proposed regulations regarding the obligation of a partnership to pay a
withholding tax on effectively connected taxable income allocable under section 704 to a foreign
partner. The regulations will affect partnerships engaged in a trade or business in the United States
that have one or more foreign partners.
DATES:
Written or electronic comments and requests to speak, with outlines of topics to be discussed at the
public hearing scheduled for December 4, 2003, must be received by November 13, 2003.
ADDRESSES:
Send submissions to: CC:PA:LPD:PR (REG-108524-00), room 5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday
through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-108524-00), Courier's
Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively,
taxpayers may submit comments electronically directly to the IRS Internet site at www.irs.gov/regs.
The public hearing will be held in the IRS Auditorium, Internal Revenue Building, [*2] 1111
Constitution Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations, David J. Sotos, at (202) 622-3860, or to be placed on the

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attendance list for the hearing, LaNita Van Dyke at (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in this notice of proposed rulemaking have been submitted to
the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507 (d)). Comments on the collections of information should be sent to the Office of
Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP, Washington D.C. 20224. Comments
on the collections of information should be received by November 3, 2003. Comments are specifically
requested concerning:

Whether the proposed collections of information are necessary for the proper performance
of the functions of the Internal Revenue Service, including whether the information will
have practical [*3] utility;
The accuracy of the estimated burden associated with the proposed collections of
information (see below);
How the quality, utility, and clarity of the information to be collected may be enhanced;
How the burden of complying with the proposed collections of information may be
minimized, including through the application of automated collection techniques or other
forms of information technology and
Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of
services to provide information.
The collections of information in this proposed regulation are in §§1.871-10, 1.1446-1,
1.1446-3, and 1.1446-4. This information is required to determine whether a partnership is
required to pay a withholding tax with respect to a foreign partner and provide information
concerning the tax paid on such partner's behalf, and to determine the foreign person
required to report the effectively connected taxable income earned by such partnership and
entitled to claim credit for the withholding tax paid by the partnership. This information will
be used in issuing refunds to foreign persons claiming credit for withholding tax paid on
their behalf, as well as for audit and [*4] examination purposes. The reporting
requirements in §§1.871-10 and 1.1446-3 are mandatory. The reporting requirement in
§1.1446-1 and 1.1446-4 are voluntary. The likely respondents include individuals, business
or other for profit institutions, and small businesses or organizations.
Estimated total annual reporting burden: 7,805 hours.
Estimated average annual burden hours per respondent: 0.5 hours.
Estimated number of respondents: 15,775.
Estimated annual frequency of responses: on occasion and quarterly.
An agency may not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a valid control number assigned by the Office of
Management and Budget.
Books or records relating to a collection of information must be retained as long as their

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contents may become material in the administration of any internal revenue law. Generally,
tax returns and tax return information are confidential as required by 26 U.S.C. 6103.

Background
This document contains proposed amendments to 26 CFR part 1 under section 1446 of the Internal
Revenue Code (Code). Section 1446 was added to the Code by section 1246 (a) of the Tax Reform Act
of 1986 (Public Law 99-514, [*5] 100 Stat. 2085, 2582 (1986 Act)), to impose withholding at a rate
of 20 percent on distributions to a foreign partner by a partnership that was engaged in a U.S. trade or
business. Section 1012 (s) (1) (A) of the Technical and Miscellaneous Revenue Act of 1988 (Public Law
100-647, 102 Stat. 3342, 3526 (1988 Act)) revised section 1446 to require that a withholding tax
(1446 tax) be imposed on effectively connected taxable income (ECTI) allocable to a partner that is a
foreign person (foreign partner) at the highest tax rate applicable to such person. Finally, section 7811
(i) (6) of the Omnibus Budget Reconciliation Act of 1989 (Public Law 101-239, 103 Stat. 2106, 2410
(1989 Act)), made certain technical amendments to section 1446.
Treasury and the IRS issued Rev. Proc. 88-21, 1988-1 C.B. 777, to provide guidance on the operation
of the withholding tax imposed under section 1446 as enacted by the 1986 Act. After the 1988 Act,
which revised the withholding approach to apply to a partner's allocable share of ECTI instead of to
distributions, Treasury and the IRS published Rev. Proc. 89-31, 1989-1 C.B. 895, which made Rev.
Proc. 88-21 obsolete. Rev. Proc. 89-31 was modified by Rev. Proc. 92-66, 1992-2 C.B. 428. [*6] Rev.
Proc. 89-31, as modified by Rev. Proc. 92-66, provides current guidance to partnerships for calculating,
paying over, and reporting the 1446 tax.
Explanation of Provisions
A. In General
Prior to the enactment of section 1446, a partnership generally was not required to withhold on income
that was effectively connected with the conduct of a trade or business within the United States (a U.S.
trade or business) and allocated or distributed to its foreign partners. Congress enacted section 1446
because it was concerned that passive foreign investors could escape U.S. tax on their partnership
income. See S. Rep. No. 99-313, 99th Cong., 2d Sess. 414 (1986). As originally enacted, section 1446
generally required both domestic and foreign partnerships with any income, gain, or loss that was
effectively connected with the conduct of a U.S. trade or business to withhold a tax equal to 20 percent
of any amount distributed to a foreign partner. Through a series of modifications and refinements
discussed below, this withholding tax regime evolved from its original structure of withholding on
distributions to foreign partners to its present form of, generally, withholding on an installment basis
[*7] on partnership ECTI (whether distributed or not distributed), apart from special provisions for
publicly traded partnerships.
In response to the enactment of section 1446, Treasury and the IRS issued Rev. Proc. 88-21 to provide
guidance for partnerships to comply with section 1446. After Rev. Proc. 88-21 was issued, the 1988 Act
amended section 1446 retroactively and provided that no withholding was required under section 1446
for partnership taxable years beginning before January 1, 1988.
Section 1446, as revised by the 1988 Act, shifted from imposing a withholding tax on partnership
distributions to imposing a withholding tax on the amount of ECTI allocable to the partnership's foreign
partners. More specifically, section 1446 (a) requires partnerships that have ECTI in any taxable year,
any portion of which is allocable under section 704 to a foreign partner, to pay the 1446 tax at such
time and in such manner as prescribed in regulations. The amount of withholding tax payable by a
partnership under section 1446 is equal to the applicable percentage of the partnership's ECTI allocable
under section 704 to foreign partners. The applicable percentage for ECTI allocable to a foreign [*8]
corporation is the highest rate of tax specified in section 11 (b), and the applicable percentage for ECTI
allocable to a non-corporate foreign partner is the highest rate of tax specified in section 1. Further,

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section 1446 (d), as amended by the 1988 Act, provides that a foreign partner is entitled to a credit
under section 33 for such partner's share of the 1446 tax, and, except as provided in regulations,
such partner's share of the 1446 tax paid by the partnership is treated as distributed to such partner on
the last day of the taxable year for which such tax was paid. The credit under section 33 is applied
against the partner's U.S. tax liability for the taxable year in which the partner includes its allocable
share of the partnership's effectively connected income.
Treasury and the IRS issued Rev. Proc. 89-31 to provide guidance to partnerships under section 1446,
as amended by the 1988 Act. This revenue procedure made Rev. Proc. 88-21 obsolete. In general, Rev.
Proc. 89-31 provides guidance concerning the requirement to pay a withholding tax, the determination
of whether a partner is a foreign person, the calculation of partnership ECTI, the amount of the
withholding tax, and [*9] the procedures for reporting and paying over the 1446 tax. The revenue
procedure generally follows the regime set forth in section 6655 for estimated tax payments by
corporations, and requires a partnership to annualize its ECTI and pay over the 1446 tax in quarterly
installments. Further, the revenue procedure provides special rules for publicly traded partnerships and
tiered partnership structures. A partnership subject to section 1446 must continue to comply with Rev.
Proc. 89-31, as modified by Rev. Proc. 92-66 (discussed below), until the partnership's first taxable
year beginning after the date these regulations are issued in final form.
Section 7811 (i) (6) of the 1989 Act amended section 1446 in three respects. First, the amendment
provides that, except as provided in regulations, a foreign partner's share of the 1446 tax paid by a
partnership is treated as distributed to such partner on the earlier of the day on which such tax is paid
by the partnership or the last day of the partnership's taxable year for which such tax is paid. Second,
the amendment grants Treasury and the IRS regulatory authority to apply the addition to tax under
section 6655 to a partnership as if it were [*10] a corporation. Third, the amendment clarifies that
the applicable percentage for a foreign corporate partner is the highest rate of tax specified in section
11 (b) (1). The changes made by the 1989 Act are effective for partnership taxable years beginning
after December 31, 1987, as if originally included as part of the 1988 Act amendments.
In 1992, Treasury and the IRS issued Rev. Proc. 92-66, which modified Rev. Proc. 89-31 in three
respects. First, Rev. Proc. 92-66 provides that the applicable percentage to be used by publicly traded
partnerships in calculating the 1446 tax is the highest rate of tax imposed under section 1, which at
that time was 31 percent. Second, the revenue procedure allows a partnership to seek a refund from
the IRS in certain circumstances for amounts it has paid under section 1446. Third, the revenue
procedure provides that a foreign partnership subject to withholding under section 1445 (a) during a
taxable year is allowed to credit the amount withheld under section. 1445 (a), to the extent such
amount is allocable to foreign partners, against its liability to pay the 1446 tax for that year.
B. Structure of the Proposed Regulations
In general, the proposed [*11] regulations follow the approach in Rev. Proc. 89-31 for computing,
paying over and reporting the 1446 tax. The proposed regulations are set forth in six sections.
Section 1.1446-1 contains rules regarding a partnership's requirement to pay a withholding tax, and
how a partnership should determine the status of its partners (i.e., domestic or foreign, corporate or
noncorporate). Section 1.1446-2 contains rules for calculating partnership ECTI allocable to each
foreign partner. Section 1.1446-3 contains rules pertaining to a partnership's obligation to pay the
1446 tax on an installment basis, including guidance on calculating the 1446 tax, reporting and paying
over the 1446 tax, and penalties for underpayment of the 1446 tax. Section 1.1446-4 contains special
rules applicable to publicly traded partnerships. These rules generally implement a withholding regime
based upon the distribution of effectively connected income to foreign partners. These regulations
also permit publicly traded partnerships to elect to withhold and pay over the 1446 tax based upon the
general rules set forth in §§1.1446-1 through 1.1446-3 (withholding based upon ECTI allocable under
section 704 to foreign partners). [*12] Section 1.1446-5 contains rules applicable to tiered
partnership structure's, including rules for looking through certain upper-tier foreign partnerships to
determine the 1446 tax obligation of a lower-tier partnership. Finally, §1.1446-6 contains the proposed
effective date of the regulations.
In addition to the proposed regulatory amendments under section 1446 these regulations also include
proposed amendments to §§ 1.871-10, 1.1443-1, 1.1461-1 through 1.1461-3, 1.1462-1, 1.1463-1,
301.6109-1, and 301.6721-1, to coordinate the section 1446 withholding regime with existing

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regulations.
C. Determining the Status and Classification of Partners-§1.1441-1
Section 1446 applies only to partnerships with ECTI allocable under section 704 to one or more foreign
partners. Section 1446 (e) defines a foreign partner as any partner who is not a United States person.
Section 7701 (a) (30) defines a United States person to include a citizen or resident of the United
States, a domestic partnership, a domestic corporation, any estate other than a foreign estate within
the meaning of section 7701 (a) (31), and any trust if a court within the United States is able to
exercise primary supervision over the [*13] administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the trust. Section 1446 and the
legislative history are silent as to how a partnership is to determine the domestic or foreign status of its
partners.
Rev. Proc. 89-31 contains rules for determining whether a partner is a foreign partner for purposes of
section 1446. Under the revenue procedure, a partnership may determine a partner's status by relying
upon a certification of non-foreign status provided by the partner, or by relying on any other means.
See Rev. Proc. 89-31, §5.02 and §5.03.
In order to reduce the paperwork burden imposed on taxpayers and avoid conflicting information, the
proposed regulations reflect an approach different from the approach taken in Rev. Proc. 89-31 for
determining whether a partner is a foreign partner. The proposed regulations generally require a
partnership to comply with the paperwork requirements used under section 1441 to determine the
status (domestic or foreign) and the tax classification (corporate or non-corporate) of its partners.
Under the proposed regulations, a partnership should obtain either a Form W-8BEN, "Certificate
[*14] of Foreign Status of Beneficial Owner for U.S. tax Withholding," Form W-8IMY, "Certificate of
Foreign Intermediary, Flow Through Entity, or Certain U.S. Branches for United States Tax Withholding"
or Form W-9, "Request for Taxpayer Identification Number and Certification," from each of its partners.
Additionally, special rules are provided with respect to domestic and foreign trusts all or a portion of
which are treated as owned by a grantor or another person under subpart E of subchapter J of the
Code. The documentation requirement set forth in the proposed regulations will allow a partnership
required to withhold under both section 1441 and section 1446 to receive one form instead of two from
each of its partners, and thus will reduce the paperwork and recordkeeping burden imposed upon
partners and partnerships. Further, the required documentation will also serve to establish a uniform
basis for determining the foreign or non-foreign status of partners and to reduce the instances where a
partnership receives inconsistent documentation.
In the absence of a valid Form W-8BEN, Form W-8IMY, or Form W-9 from a partner (or upon the
receipt of a form that the partnership has actual knowledge [*15] or reason to know is incorrect or
unreliable), the proposed regulations contain a presumption that the partner is a foreign person and
that the partnership must pay 1446 tax on ECTI allocable to the partner. However, this presumption
does not apply, and the partnership shall not be liable for 1446 tax with respect to a partner, to the
extent the partnership relies on other means to ascertain the non-foreign status of a partner, and the
partnership is correct in its determination that such partner is a U.S. person. This approach is similar to
Rev. Proc. 89-31, which permitted partnerships to rely on other means to ascertain the non-foreign
status of a partner. See Rev. Proc. 89T31, §5.03. Under the proposed regulations, when the
presumption of foreign status applies, the following rules apply for purposes of determining the
applicable rate that will apply in computing the 1446 tax. If the partnership knows that the partner is
an individual and not an entity, the partnership shall compute the 1446 tax with respect to such partner
using the highest rate in section 1. If the partnership knows that the partner is an entity that is a
corporation under §301.7701-2 (b) (8) (included on the [*16] per se list of entities under the entity
classification regulations), the partnership shall treat the partner as a foreign corporation and
compute the 1446 tax with respect to such partner using the highest rate in section 11 (b) (1). In all
other cases, including where the partnership cannot reliably determine the status of the partner, the
proposed regulations presume that the partner is either a corporate or non-corporate partner, based
upon whichever classification results in a higher 1446 tax being due. This presumption is necessary to
prevent a partner from obtaining a more favorable withholding result than would have been achieved if
the partner complied with the documentation requirements. The duration and validity of the forms
required for purposes of section 1446 is intended to be consistent with the standards applicable when

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these forms are submitted in the context of sections 1441, 1442, and 3406. These forms and their
instructions will be modified as necessary to facilitate their use under section 1446.
D. Determining a Foreign Partner's Allocable Share of Partnership ECTI-§1.1446-2
The proposed regulations contain rules for computing partnership ECTI allocable to foreign [*17]
partners. Consistent with Rev. Proc. 89-31, the partnership determines its ECTI allocable to a foreign
partner using an aggregate approach. The partnership first determines the effectively connected
partnership items allocable to each of the partnership's foreign partners. Partnership ECTI allocable to
all foreign partners then is computed by combining all of the foreign partners' allocable shares of
partnership ECTI.
The proposed regulations also provide guidance concerning capital losses, suspended losses, and loss
carryovers and carrybacks when determining a foreign partner's allocable share of partnership ECTI.
The proposed regulations permit capital losses allocable to a foreign partner to offset such partner's
allocable share of capital gains consistent with section 1211 (a). Solely for purposes of section 1446,
the proposed regulations do not permit the partnership to consider section 1211 (b), which permits an
individual to use capital losses in excess of capital gains to the extent of $3,000 per taxable year.
Further, the proposed regulations do not permit the partnership to take into account in determining a
foreign partner's allocable share of partnership ECTI any losses [*18] of a partner that are carried
over or back or are suspended.
A number of issues arise under section 1446 where the partnership has cancellation of indebtedness
income under section 61 (a) (12), including difficulties arising because the exclusion of cancellation of
indebtedness income under section 108 is applied at the partner level rather than at the partnership
level. See section 108 (d) (6). These proposed regulations do not specifically address the treatment of
cancellation of indebtedness income of a partnership under section 1446. Comments are requested
concerning the appropriate treatment under section 1446 of such income allocable to a foreign partner.
E. Calculating, Paying Over, and Reporting the 1446 Tax-§1.1446-3
Section 1446 (f) (2) provides that the Secretary shall prescribe such regulations as may be necessary
to carry out the purposes of section 1446, including regulations providing (1) that, for purposes of
section 6655, the withholding tax imposed under section 1446 be treated as a tax imposed by section
11 and any partnership required to pay such tax be treated as a corporation, and (2) appropriate
adjustments in applying section 6655 with respect to such withholding. [*19] Section 6655 generally
requires a corporation to make estimated tax payments throughout its taxable year, and determines an
addition to tax for any underpayment of the required installments.
Rev. Proc. 89-31 generally requires a partnership, other than a publicly traded partnership, to
determine its ECTI allocable to foreign partners, and, ultimately, its 1446 tax obligation, by annualizing
its effectively connected items under one of the three options generally available to corporations under
section 6655 when paying estimated taxes. As an alternative, Rev. Proc. 89-31 permits a partnership to
determine its 1446 tax obligation based upon a safe harbor. Under both the safe harbor and the
annualization methods, a partnership must pay the 1446 tax on an installment basis.
The proposed regulations adopt, with some modifications, the estimated tax payment rules set forth
in section 6655, including the imposition of an addition to tax for an underpayment of the 1446 tax.
Consistent with Rev. Proc. 89-31, the proposed regulations require a partnership to pay its 1446 tax
obligation on an installment basis, and pay its 1446 tax either based upon annualizing its income or
based upon a safe harbor. [*20] The proposed regulations broaden the approaches available in Rev.
Proc. 89-31 in certain circumstances. Under the proposed regulations, a partnership that chooses to
annualize its income may use certain methods in section 6655 that address the seasonality of income
earned by a partnership. See section 6655 (e). Further, the proposed regulations modify the safe
harbor set forth in Rev. Proc. 89-31 so that a partnership does not need to have filed Form 1065, "U.S.
Return of Partnership Income," and Form 8804, "Annual Return for Partnership Withholding Tax
(Section 1446)," at the time it makes an installment payment. Instead, it is sufficient if the partnership
timely files these forms (taking into account extensions).

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F. Special Rule for Tiered Trust or Estate Structures-§1.1446-3 (d) (2) (iii)
Treasury and the IRS are concerned about the potential abuse of tiered trust structures to claim
inappropriate refunds of the 1446 tax, to avoid reporting by a beneficiary of ECTI earned by a
partnership, or to avoid section 1446 entirely. Existing provisions contemplate that entitlement to a
credit or refund of any section 1446 withholding tax follows the liability for tax. Section 1446 (d)
provides [*21] that each foreign partner of a partnership shall be allowed a credit under section 33
for such partner's share of the 1446 tax paid by the partnership. A foreign partner's share of any 1446
tax paid by the partnership is treated as distributed to the partner by such partnership. Section 1462
provides that income on which any tax is required to be withheld at the source under chapter 3 of the
Code, including section 1446, shall be included in the return of the recipient of such income, and any
amount of tax so withheld may be credited against the amount of income tax as computed in such
return. The regulations under section 1462 explain that an amount withheld on a payment to a
fiduciary, partnership, or intermediary is deemed to have been paid by the taxpayer ultimately liable for
the tax upon such income. See §1.1462-1 (b). Sections 702 (b), 652 (b), and 662 (b) ensure that the
character of income (e.g., income that is effectively connected income) of a partnership allocated to a
trust (whether domestic or foreign) is preserved in the hands of a beneficiary (see Rev. Rul. 85-60,
1985-1 C.B. 187).
The proposed regulations include clarification of the regulations under section 1462 to [*22]
coordinate with section 1446 (d) to provide that a foreign trust's or estate's allocable share of ECTI is
deemed to have been paid by the taxpayer ultimately liable for tax upon such income. In the case of a
foreign grantor trust, the taxpayer ultimately liable for the tax upon such income is the grantor of such
trust.
Further, §1.1446-3 of the proposed regulations includes two rules and several examples pertaining to
tiered trust or estate structures. The rules are intended to match the credit claimed under section 33
with the taxpayer that reports and pays tax on the ECTI upon which the credit is based. The first rule
applies where a foreign trust or estate is a partner in a partnership required to pay the 1446 tax and
the beneficiary of the foreign trust or estate is either another foreign trust (with a foreign person as a
beneficiary of such trust) or a foreign person. In such a circumstance, the proposed regulations
provide that the foreign trust or estate is only entitled to claim the portion of the credit under section
33 that corresponds to the portion of the associated effectively connected income on which it bears the
tax liability.
The second rule addresses the use of a domestic [*23] trust. The second rule applies where a
partnership knows or has reason to know that a foreign person that is the ultimate beneficial owner of
the effectively connected income holds its interest in the partnership through a domestic trust, and
such domestic trust was formed or availed of with a principal purpose of avoiding the 1446 tax. The use
of a domestic trust in a tiered trust structure may have a principal purpose of avoiding the 1446 tax
even though the tax avoidance purpose is outweighed by other purposes when taken together. Where
applicable, this rule allows the IRS to impose the 1446 tax obligation on such partnership as if each
domestic trust in the chain is a foreign trust.
G. Publicly Traded Partnerships-§1.1446-4
Section 1446 (f) (1) provides that the Secretary shall prescribe regulations to apply section 1446 in
the case of publicly traded partnerships. In this regard, the legislative history to section 1446
specifically notes that special rules may be necessary in identifying a publicly traded partnership's
partners as U.S. or foreign. See H.R. Rep. No. 100-795, 100th Cong., 2d Sess. 291 (1988); S. Rep. No.
100-445, 100th Cong., 2d Sess. 305 (1988).
Rev. Proc. 89-31 provides [*24] special rules for publicly traded partnerships. Under Rev. Proc. 8931, the term publicly traded partnership means a regularly traded partnership within the meaning of
the regulations under section 1445 (e) (1), but not a publicly traded partnership treated as a
corporation under the general rules of section 7704 (a). Generally, publicly traded partnerships with
effectively connected income, gain or loss are required to withhold based upon distributions made to
foreign partners. Rev. Proc. 92-66 modified the applicable percentage for withholding on distributions

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to the highest rate of tax imposed under section 1, and applied that percentage to both corporate and
non-corporate partners.
Under Rev. Proc. 89-31, a publicly traded partnership generally determines the tax status of its
partners by receiving either a certificate of non-foreign status, a Form W-8, or a Form W-9 from its
partners, or by relying on other means. Further, nominees that hold interests in a publicly traded
partnership on behalf of one or more foreign partners may be responsible for the 1446 tax liability for
foreign partners under certain circumstances. Finally, Rev. Proc. 89-31 permits publicly traded
partnerships [*25] to elect to apply the general rules that determine the 1446 tax based on a foreign
partner's allocable share of partnership ECTI rather than on distributions to foreign partners. Under
Rev. Proc. 89-31, the publicly traded partnership makes this election by complying with the payment
and reporting requirements of the general rules and attaching a statement to its annual return of
withholding tax indicating that the election is being made.
The proposed regulations modify several of the rules for publicly traded partnerships set forth in Rev.
Proc. 89-31. First, the proposed regulations define publicly traded partnership solely by reference to
the definition in section 7704. Second, the proposed regulations provide that the documentation
requirements and presumptions of §1.1446-1 apply to publicly traded partnerships, thereby requiring
such partnerships to obtain a Form W-8BEN, Form W-8IMY, or Form W-9 from each of their partners if
they do not rely on other means to determine the status of their partners. Third, the proposed
regulations provide that the applicable percentage for withholding on distributions is the rate
applicable under section 1446 (b).
Comments are requested as to whether [*26] the special rules applicable to publicly traded
partnerships should be extended to other partnerships. Specifically, Treasury and the IRS are
considering whether these special rules should apply to partnerships that make an election under
section 775 of the Code or partnerships with a specified minimum number of partners.
H. Tiered Partnership Structures-§1.1446-5
Special concerns arise when a foreign partnership (upper-tier partnership) is a partner in a second
partnership (lower-tier partnership) that is subject to section 1446. Section 1446 (f) provides the
Secretary with regulatory authority to prescribe rules necessary to carry out the purposes of the
section.- The legislative history to section 1446 notes that in the context of tiered partnership
structures, "rules may be necessary to prevent the imposition of more tax than will be properly due (for
example, rules to prevent the tax from being imposed on more than one partnership and rules to
determine the applicable percentages)." H.R. Rep. No. 100-795, 100thCong., 2d Sess. 291 (1988); S.
Rep. No. 100-445, 100th Cong., 2d Sess. 305 (1988).
Rev. Proc. 89-31 employs an entity approach in computing the 1446 tax obligation of a partnership
[*27] that has a foreign partnership as one of its partners. Under the entity approach, a lower-tier
partnership must pay a 1446 tax at the highest rate in section 1 on an upper-tier foreign partnership's
allocable share of ECTI, regardless of the composition of the upper-tier partnership. Rev. Proc. 89-31
provides the upper-tier partnership a credit for a portion of the 1446 tax paid by the lower-tier
partnership to avoid multiple application of the 1446 tax. This approach may result in a partnership
paying a 1446 tax that is greater in amount than would have been required if the partners of the
upper-tier partnership had been direct partners of the lower-tier partnership, for example, where some
of the partners of the upper-tier partnership are U.S. persons.
The proposed regulations modify the rules in Rev. Proc. 89-31 with respect to certain tiered
partnership structures to address this situation. The proposed regulations provide that if a partner in a
partnership that is required to pay the 1446 tax is a foreign partnership, it may submit a completed
Form W-8IMY to the lower-tier partnership. If the upper-tier foreign partnership completes and submits
Form W-8IMY to the lower-tier partnership, [*28] and passes along the Form W-8BEN, Form W-8IMY,
or Form W-9 it received for some or all of its partners, as well as information describing how effectively
connected items are allocated among its partners, the lower-tier partnership shall look through the
upper-tier partnership to the partners of the upper-tier partnership (to the extent that it has received
the appropriate documentation and allocation information and can reliably associate the allocation of its
effectively connected items to the partners of the upper-tier partnership) to determine its 1446 tax

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obligation. To the extent the lower-tier partnership receives a valid Form W-8IMY from the upper-tier
partnership but cannot reliably associate the upper-tier partnership's allocable share of effectively
connected partnership items with a withholding certificate for each of the upper-tier partnership's
partners, the lower-tier partnership shall withhold at the higher of the applicable percentages in section
1446 (b).
Therefore, in appropriate circumstances, the lower-tier partnership may determine its 1446 tax
obligation based on the status of its indirect partners. This approach generally is consistent with the
paperwork requirements [*29] under section 1441 applicable to a nonwithholding foreign partnership
and will ensure that the 1446 tax paid by the partnership more closely approximates the actual tax
liability of the beneficial owner of the income in the case of a tiered partnership structure. An upper-tier
foreign partnership with foreign partners remains obligated to file and report with respect to its 1446
tax obligation. Accordingly, the upper-tier partnership must comply with the general rules of section
1446, including requiring payment in installments, and reporting and passing along the credit under
section 33 to its partners, which in these situations will also include the tax paid at the lower-tier
partnership level.
Comments are requested on the general approach taken in these proposed regulations for situations
involving two or more tiers of partnerships. Further, comments are requested as to the desirability and
administrability of an alternative approach that allows a domestic upper-tier partnership with foreign
partners to elect to pass information regarding its partners to the lower-tier partnership and have the
lower-tier partnership pay the 1446 tax based upon the composition of the partners of [*30] the
upper-tier partnership.
I. Withholding in Excess of Partner's Actual Tax Liability
Since the enactment of section 1446, Treasury and the IRS have received and considered several
comments regarding the potential for section 1446 to require a partnership to pay a withholding tax in
an amount that exceeds a foreign partner's actual tax liability for a taxable year. This situation may
occur for several reasons, including that: (1) section 1446 does not take into account a partner's losses
from outside the partnership during the year, or a partner's loss carryovers; and (2) section 1446
requires withholding at the maximum statutory rates generally applicable to a foreign partner with
effectively connected income. Section 1446 does not contain provisions for reducing or eliminating the
general withholding obligation like the provisions contained in section 1445 (which impose a
withholding tax in the case of the disposition of an interest in United States real property). See section
1445 (c). Rev. Proc. 89-31 provides that section 1446 applies instead of section 1445 (e) (1) where the
two sections overlap, and, accordingly, partnerships owning U.S. real property are not permitted to
reduce [*31] withholding on gains from the disposition of such property through the use of the
procedures available under section 1445. See also §8.01 of Rev. Proc. 2000-35, 2000-2 C.B. 211.
Treasury and the IRS considered comments regarding alternative approaches for adjusting the
withholding tax obligation under section 1446 to more closely approximate a foreign partner's actual
U.S. tax liability. These proposed regulations contain, provisions aimed at mitigating the potential for
withholding in excess of the partner's actual tax liability (see e.g., §1.1446-5). These proposed
regulations do not contain other provisions that have been suggested because, among other reasons,
of concerns regarding the administrability of such approaches. Comments are requested with respect to
approaches that would permit an adjustment to the amount of 1446 tax obligation that are consistent
with the statute and legislative history and administrable by partnerships, partners and the IRS. In
particular, comments are requested on whether the rules coordinating sections 1445 and 1446 should
be modified to address these concerns.
J. Effective Date
These regulations are proposed to apply to partnership taxable years beginning [*32] after the date
these regulations are published as final regulations in the Federal Register.
Effect on Other Documents

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

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

Special Analyses
It has been determined that this notice of proposed rulemaking is not a significant regulatory action as
defined in Executive Order 12866. It also has been determined that section 533 (b) of the
Administrative Procedures Act (5 U.S.C. chapter 5) does not apply to these regulations.
With respect to the collections of information contained in §1.871-10, §1.1446-1 (pertaining to
domestic grantor trusts), and §1.1446-3 (pertaining to foreign trusts), it is hereby certified that these
collections of information will not have a significant economic impact on a substantial number of small
entities. This certification is based upon the fact that only limited small entities are impacted by these
collections and the burden associated with such collections is 5 hours. With respect to the collections of
information in §§1.1446-3 [*33] (pertaining to a partnership required to notify its foreign partners of
an installment payment of 1446 tax paid on behalf of such partner) and 1.1446-4, it is hereby certified
that these sections will not impose a significant economic impact on a substantial number of small
entities. This certification is based upon the fact that while approximately 15,000 small entities will be
impacted by these sections, the estimated annual burden associated with these sections is only .5
hours per respondent. Moreover, the information collection in §1.1446-4 is voluntary. Therefore, a
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805 (f) of the Code, this notice of proposed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations, consideration will be given to
any written comments (a signed original and eight (8) copies) that are submitted timely to the IRS.
Alternatively, taxpayers may submit comments electronically directly to the IRS [*34] Internet Site
at www.irs.gov/regs. All comments will be available for public inspection and copying. The Treasury
Department and IRS request comments on the clarity of the proposed regulations and how they may
be made easier to understand.
A public hearing has been scheduled for December 4, 2003, beginning at 10 a.m. in the IRS Auditorium
of the Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. All visitors must
come to the Constitution Avenue entrance and present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more
than 30 minutes before the hearing starts. For information about having your name placed on the
building access list to attend the hearing, see the "FOR FURTHER INFORMATION CONTACT" section of
this preamble.
The rules of 26 CFR 601.601 (a) (3) apply to the hearing. Persons who wish to present oral comments
at the hearing must submit electronic or written comments and an outline of the topics to be discussed
and the time to be devoted to each topic (signed original and eight (8) copies) by November 13, 2003.
A period of 10 minutes will be allotted to each person [*35] for making comments. An agenda
showing the schedule of speakers will be prepared after the deadline for receiving outlines has passed.
Copies of the agenda will be available free of charge at the hearing.
Drafting Information

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

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

PART 1-INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805
§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 a sentence at the end of
that paragraph, and paragraph (e) is amended by revising the first sentence to read as
follows:

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

(d)
(3) Election by partnership.
If the nonresident alien or foreign
corporation makes an election, such person must [*36] provide the
partnership a Form W-8BEN, "Certificate of Foreign Status of Beneficial Owner
for U.S. Withholding," and must indicate that the nonresident alien or foreign
corporation has made the election under this section to treat real property
income as effectively connected income.
(e) Effective date. This section shall apply for taxable years beginning after
December 31, 1966, except the last sentence of paragraph (d) (3) shall apply
to partnership taxable years beginning after the date these regulations are
published as final regulations in the Federal Register.

Par. 3. In §1.1443-1 is amended by:

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1. Revising the first sentence of paragraph (a) and adding a sentence at the end of
the paragraph.
2. Revising paragraph (c) (1).

The revision and additions read as follows:

§1.1443-1 Foreign tax-exempt organizations.
(a) Income includible in computing unrelated business taxable income. In the
case of a foreign organization that is described in section 501 (c), amounts
paid or effectively connected taxable income allocable to the organization that
are includible under section 512 in computing the organization's unrelated
business taxable income are subject to withholding under §§1.1441-1, [*37]
1.1441-4, 1.1441-6, and 1.1446-1 through 1.1446-5, in the same manner as
payments or allocations of effectively connected taxable income of the same
amounts to any foreign person that is not a tax-exempt organization.
See also §1.1446-3 (c) (3).

(c)
(1) In general. This section applies to payments made after December 31,
2000, except that the references in paragraph (a) of this section to effectively
connected taxable income and withholding under section 1446 shall apply to
partnership taxable years beginning after the date these regulations are
published as final regulations in the Federal Register.

Par. 4. Sections 1.1446-0 through 1.1446-6 are added to read as follows.
§1.1446-0 Table of contents This section lists the captions contained in §§1.14461 through 1.1446-6.
§1.1446-1 Withholding tax on foreign partners' share of effectively connected
taxable income.
(a) In general.
(b) Steps in determining 1446 tax obligation.
(c) Determining whether a partnership has a foreign partner.
(1) In general.
(2) Forms W-8BEN, W-8IMY, and W-9. (i) In general.
(ii) Effect of Forms W-8BEN, W-8IMY, W-9, and statement.

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(iii) Requirements for certificates to be valid.
(A) When period of [*38] validity expires.
(B) Required information for Forms W-8BEN and W-8IMY.
(iv) Partner must provide new withholding certificate when there is a change in
circumstances.
(v) Partnership must retain withholding certificates.
(3) Presumption of foreign status in absence of valid Form W-8BEN, Form W-8IMY, Form
W-9, or statement.
(4) Consequences when partnership knows or has reason to know that Form W-8BEN,
Form W-8IMY, or Form W-9 is incorrect or unreliable and does not withhold.
§1.1446-2 Determining a partnership's effectively connected taxable income
allocable to foreign partners under section 704.
(a) In general.
(b) Computation.
(1) In general.
(2) Income and gain rules.
(i) Application of the principles of section 864.
(ii) Income treated as effectively connected. (iii) Exempt income.
(3) Deduction and losses. (i) Oil and gas interests.
(ii) Charitable contributions, (iii) Net operating losses and other suspended or carried
losses. (iv) Interest deductions. (v) Limitation on capital losses. (vi) Other deductions. (vii)
Limitations on deductions.
(4) Other rules.
(i) Exclusion of items allocated to U.S. partners.
(ii) Partnership credits.
(5) Examples.
§1.1446-3 Time and manner of calculating and paying over the 1446 tax.
(a) [*39] In general.
(1) Calculating 1446 tax.
(2) Applicable percentage.
(b) Installment payments.
(1) In general.

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(2) Calculation.
(i) General application of the principles of section 6655.
(ii) Annualization methods. (iii) Partner's estimated tax payments. (iv) Partner whose
interest terminates during the partnership's taxable year. (v) Exceptions and modifications
to the application of the principles under section 6655.
(A) Inapplicability of special rules for large corporations.
(B) Inapplicability of special rules regarding early refunds.
(C) Period of underpayment.
(D) Other taxes.
(E) 1446 tax treated as tax under section 11.
(F) Prior year tax safe harbor.
(3) 1446 tax safe harbor. (i) In general.
(ii) Permission to change to standard annualization method.
(c) Coordination with other withholding rules.
(1) Fixed or determinable, annual or periodical income.
(2) Real property gains. (i) Domestic partnerships. (ii) Foreign partnerships.
(3) Coordination with section 1443.
(d) Reporting and crediting the 1446 tax. (1) Reporting 1446 tax.
(i) Reporting of installment tax payments, installment tax payment due dates, and
notification to partners of installment tax payments.
(ii) Payment due dates. (iii) Annual [*40] return and notification to partners.
(iv) Information provided to beneficiaries of foreign trusts and estates. (v) Attachments
required of foreign trusts and estates.
(vi) Attachments required of beneficiaries of foreign trusts and estates. (vii) Information
provided to beneficiaries of foreign trusts and estates that are partners in certain publicly
traded partnerships.
(2) Crediting 1446 tax against a partner's U.S. tax liability. (i) In general.
(ii) Substantiation for purposes of claiming the credit under section 33. (iii) Tiered
structures including trusts or estates.
(A) Foreign estates and trusts.
(B) Use of domestic trusts to circumvent section 1446.
(iv) Refunds to withholding agent.
(v) 1446 tax treated as cash distribution to partners.
(vi) Examples.

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(e) Liability of partnership for failure to withhold.
(1) In general.
(2) Proof that tax liability has been satisfied.
(3) Liability for interest and penalties.
(f) Effect of withholding on partner.
§1.1446-4 Publicly traded partnerships.
(a) In general.
(b) Definitions.
(1) Publicly traded partnership.
(2) Applicable percentage.
(3) Nominee.
(4) Qualified notice.
(c) Time and manner of payment.
(d) Rules for designation of nominees to withhold tax [*41] under section 1446.
(e) Determining foreign status of partners.
(1) In general.
(2) Presumptions regarding payee's status in absence of documentation.
(f) Distributions subject to withholding.
(1) In general.
(2) In-kind distributions.
(3) Ordering rule relating to distributions.
(4) Coordination with section 1445.
(g) Election to withhold based upon ECTI allocable to foreign partners instead of
withholding on distributions.
§1.1446-5 Tiered partnership structures.
(a) In general.
(b) Reporting requirements.
(1) In general.
(2) Publicly traded partnerships.
(c) Look through rules for foreign upper-tier partnerships.

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(d) Examples.
§1.1446-6 Effective date.

§1.1446-1 Withholding tax on foreign partners' share of effectively
connected taxable income.
(a) In general. If a domestic or foreign partnership has effectively connected
taxable income as computed under § 1.1446-2 (ECTI), for any partnership tax
year, and any portion of such taxable income is allocable under section 704 to
a foreign partner, then the partnership must pay a withholding tax under
section 1446 (1446 tax) at the time and in the manner set forth in this section
and §§1.1446-2 through 1.1446-5.
(b) Steps in determining 1446 tax obligation. [*42] In general, a partnership
determines its 1446 tax as follows. The partnership determines whether it has
any foreign partners in accordance with paragraph (c) of this section. If the
partnership does not have any foreign partners (including any person
presumed to be foreign under paragraph (c) of this section and any domestic
trust treated as foreign under §1.1446-3 (d)) during its taxable year, it
generally will not have a 1446 tax obligation. If the partnership has one or
more foreign partners, it then determines under § 1.1446-2 whether it has
ECTI any portion of which is allocable to one or more of the foreign partners. If
the partnership has ECTI allocable to one or more of its foreign partners, the
partnership computes its 1446 tax, pays over 1446 tax, and reports the
amount paid in accordance with the rules in §1.1446-3. For special rules
applicable to publicly traded partnerships, see §1.1446-4. For special rules
applicable to tiered partnership structures, see § 1.1446-5.
(c) Determining whether a partnership has a foreign partner-(1) In general.
Except as otherwise provided in §1.1446-3, only a partnership that has at least
one foreign partner during the partnership's taxable [*43] year can have a
1446 tax liability. The term foreign partner means any partner of the
partnership who is not a U.S. person within the meaning of section 7701 (a)
(30). Thus, a partner of the partnership is a foreign partner if the partner is a
nonresident alien individual, foreign partnership, foreign corporation, foreign
estate or trust, as those terms are defined under section 7701 and the
regulations thereunder, or a foreign government within the meaning of
section 892 and the regulations thereunder. For purposes of this section, a
partner that is treated as a U.S. person for all income tax purposes (by election
or otherwise, see e.g., sections 953 (d), 1504 (d)) will not be a foreign
partner, provided the partner has provided the partnership a valid Form W-9,
"Request for Taxpayer Identification Number and Certification," or if the
partnership uses other means to determine that the partner is not a foreign
partner (see paragraph (c) (3) of this section). A partner that is treated as a
U.S. person only for certain specified purposes is considered a foreign partner
for purposes of section 1446, and a partnership must pay a withholding tax on
the portion of ECTI allocable to that [*44] partner. For example, a
partnership must generally pay 1446 tax on ECTI allocable to a foreign
corporate partner that has made an election under section 897 (i).
(2) Forms W-8BEN, W-8IMK and W-9-(i) In general. Except as otherwise
provided in this paragraph (c) (2) or paragraph (c) (3) of this section, a
partnership must determine whether a partner is a foreign partner, and the
partner's tax classification (e.g., corporate or non-corporate), by obtaining
from, the partner a Form W-8BEN, "Certificate of Foreign Status of Beneficial

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Owner for United States Tax Withholding," Form W-8IMY, "Certificate of
Foreign Intermediary, Flow-Through Entity, or Certain U.S. Branches for United
States Tax Withholding," or a Form W-9, as applicable. Specifically, a foreign
partner that is a nonresident alien individual, a foreign estate or trust (other
than a grantor trust described in this paragraph (c) (2)), a foreign corporation,
or a foreign government should provide a valid Form W-8BEN. A partner that is
a foreign partnership should provide a valid Form W-8IMY. A partner that is a
U.S. person (other than a grantor trust described in this paragraph (c) (2)),
including a domestic partnership, should [*45] provide a valid Form W-9. An
entity that is disregarded as an entity separate from its owner under
§301.7701-3 of this chapter may not submit a Form W-8BEN, W-8IMY, or Form
W-9. See §§301.7701-1 through 301.7701-3 of this chapter for determining
the U.S. Federal tax classification of a partner. To the extent that a grantor or
another person is treated as the owner of any portion of a trust under subpart
E of subchapter J of the Internal Revenue Code, such trust shall not provide a
Form W-8BEN or Form W-9 to the partnership, except to the extent that such
trust is providing documentation on behalf of the grantor or other person
treated as the owner of a portion of such trust as required by this paragraph
(c) (2). Instead, if such trust is a foreign trust, the trust shall submit Form W8IMY to the partnership identifying itself as a grantor trust and shall provide
such documentation (e.g., Forms W-8BEN, W-8IMY, or W-9) and information
pertaining to its owner(s) to the partnership that permits the partnership to
reliably associate (within the meaning of §1.1441-1 (b) (2) (vii)) such portion
of the trust's allocable share of partnership ECTI with the grantor or other
person that is the [*46] owner of such portion of the trust. If such trust is a
domestic trust, the trust shall furnish the partnership a statement under
penalty of perjury that the trust is, in whole or in part, a grantor trust and
identifying that portion of the trust that is treated as owned by a grantor or
another person under subpart E of subchapter J of the Internal Revenue Code.
The trust shall also provide such documentation and information (e.g., Forms
W-8BEN, W-8IMY, or W-9) pertaining to its owner(s) to the partnership that
permits the partnership to reliably associate such portion of the trust's
allocable share of partnership ECTI with the grantor or other person that is the
owner of such portion of the trust. With respect to nominees, only nominees
described in §1.1446-4 (b) (3) holding interests in publicly traded partnerships
subject to § 1.1446-4 may submit a Form W-9. See §1.1446-4 for additional
documentation that may be submitted by such a nominee. In all other cases
where a nominee holds an interest in a partnership, the beneficial owner of the
partnership interest, not the nominee, shall submit Form W-8BEN, Form W8IMY, or Form W-9. A partnership that has obtained a valid Form W-8BEN,
[*47] Form W-8IMY, or Form W-9 from a partner, nominee, or beneficial
owner prior to the due date for paying any 1446 tax may rely on it to the
extent provided in this paragraph (c) (2).
(ii) Effect of Forms W-8BEN, W-8IMY, W-9, and Statement. In general, for
purposes of this section, a partnership may rely on a valid Form W-8BEN, Form
W-8IMY, Form W-9, statement described in §1.1446-4 (e) (1), or statement
described in this paragraph (c) (2) from a partner, nominee, beneficial owner,
or grantor trust to determine whether that person, beneficial owner, or the
owner of a grantor trust, is a domestic or foreign partner or a nominee, and if
such person is a foreign partner, to determine whether or not such person is a
corporation for U.S. tax purposes. To the extent a partnership receives a Form
W-8IMY from a foreign grantor trust or a statement described in this paragraph
(c) (2) from a domestic grantor trust, but does not receive a Form W-8BEN,
Form W-8IMY, or Form W-9 identifying such grantor or other person, the rules
of paragraph (c) (3) of this section shall apply. Further, a partnership may not
rely on a Form W-8BEN, Form W-8IMY, Form W-9, or statement described in
§1.1446-4 (e) (1) or [*48] this paragraph (c) (2), and such form or
statement is therefore not valid, if the partnership has actual knowledge or has
reason to know that any information on the withholding certificate or
statement is incorrect or unreliable and, if based on such knowledge or reason

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to know, it should pay a 1446 tax in an amount greater than would be the case
if it relied on the information or certifications. A partnership has reason to
know that information on a withholding certificate or statement is incorrect or
unreliable if its knowledge of relevant facts or statements contained on the
form or other documentation is such that a reasonably prudent person in the
position of the withholding agent would question the claims made. See
§§1.1441-1 (e) (4) (viii) and 1.1441-7 (b) (1) and (2). If the partnership does
not know or have reason to know that a Form W-8BEN, Form W-8IMY, Form
W-9, or statement received from a partner, nominee, beneficial owner, or
grantor trust contains incorrect or unreliable information, but it subsequently
determines that it does contain incorrect or unreliable information, and, based
on such knowledge the partnership should pay 1446 tax in an amount greater
than would [*49] be the case if it relied on the information or certification,
the partnership will not be subject to penalties for its failure to pay the 1446
tax in reliance on such form or statement for any installment payment date
prior to the date that the determination is made. See §§1.1446-1 (c) (4) and
1.1446-3 concerning penalties for failure to pay the withholding tax when a
partnership knows or has reason to know that the form or statement is
incorrect or unreliable.
(iii) Requirements for certificates to be valid. Except as otherwise provided in
this paragraph (c), for purposes of this section, the validity of a Form W-9 shall
be determined under section 3406 and §31.3406 (h)-3 (e) of this chapter
which establish when such form may be reasonably relied upon. A Form W8BEN, or Form W-8IMY is only valid for purposes of this section if its validity
period has not expired, the partner submitting the form has signed it under
penalties of perjury, and it contains all the required information.
(A) When period of validity expires. For purposes of this section, a Form W8BEN or W-8IMY submitted by a partner shall be valid until the end of the
period of validity determined for such form under §1.1441-1 (e). [*50] With
respect to a foreign partnership submitting Form W-8IMY, the period of validity
of such form shall be determined under §1.1441-1 (e) as if such foreign
partnership submitted the form required of a nonwithholding foreign
partnership. See § 1.1441-1 (e) (4) (ii).
(B) Required information for Forms W-8BEN and W-8IMY. Forms W-8BEN and
W-8IMY submitted under this section must contain the partner's name,
permanent address and Taxpayer Identification Number (TIN), the country
under the laws of which the partner is formed, incorporated or governed (if the
person is not an individual), the classification of the partner for. U.S. federal
tax purposes (e.g., partnership, corporation), and any other information
required to be submitted by the forms or instructions to Form W-8BEN or Form
W-8IMY, as applicable.
(iv) Partner must provide new withholding certificate when there is a change in
circumstances. The principles of §1.1441-1 (e) (4) (ii) (D) shall apply when a
change in circumstances has occurred (including situations where the status of
a U.S. person changes) that requires a partner to provide a new withholding
certificate.
(v) Partnership must retain withholding certificates. A partnership [*51] or
nominee who has responsibility for paying the withholding tax under this
section or §1.1446-4, must retain each withholding certificate and other
documentation received from its direct and indirect partners (including
nominees) for as long as it may be relevant to the determination of the
withholding agent's tax liability under section 1461 and the regulations
thereunder.
(3) Presumption of foreign status in absence of valid Form W-8BEN, Form W8IMY, Form W-9, or statement. Except as otherwise provided in this paragraph

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(c) (3), a partnership that does not receive a valid Form W-8BEN, Form W8IMY, Form W-9, statement described in §1.1446-4 (e) (1), or statement
required by paragraph (c) (2) of this section from a partner, nominee,
beneficial owner, or grantor trust, or a partnership that receives a withholding
certificate or statement but has actual knowledge or reason to know that the
information on the certificate or statement is incorrect or unreliable, must
presume that the partner is a foreign person. If the partnership knows that the
partner is an individual and not an entity, the partnership shall treat the
partner as a nonresident alien individual. If the partnership knows [*52] that
the partner is an entity, the partnership shall treat the partner as a corporation
if the entity is a corporation as defined in §301.7701-2 (b) (8) of this chapter.
In all other cases, the partnership shall treat the partner as either a
nonresident alien individual or a foreign corporation, whichever classification
results in a higher 1446 tax being due, and shall pay the 1446 tax in
accordance with this presumption. The presumption set forth in this paragraph
(c) (3) that a partner is a foreign person (either because a Form W-9 was not
furnished by such partner or the partnership determines that such form is
incorrect or unreliable) shall not apply to the extent that the partnership relies
on other means to ascertain the non-foreign status of a partner and the
partnership is correct in its determination that such partner is a U.S. person. A
partnership is in no event required to rely upon other means to determine the
non-foreign status of a partner and may demand that a partner furnish a Form
W-9. If a certification is not provided in such circumstances, the partnership
may presume that the partner is a foreign partner, and for purposes of
sections 1461 through 1463, will be [*53] considered to have been required
to pay 1446 tax on such partner's allocable share of partnership ECTI.
(4) Consequences when partnership knows or has reason to know that Form
W-8BEN, Form W-8IMY, or Form W-9 is incorrect or unreliable and does not
withhold. If a partnership knows or has reason to know that a Form W-8BEN,
Form W-8IMY, Form W-9, statement described in §1.1446-4 (e) (1), or
statement required by paragraph (c) (2) of this section submitted by a partner,
nominee, beneficial owner, or grantor trust contains incorrect or unreliable
information (either because the certificate or statement when given to the
partnership contained incorrect information or because there has been a
change in facts that makes information on the certificate or statement
incorrect), and the partnership pays less than the full amount of withholding
tax due on ECTI allocable to that partner, the partnership shall be fully liable
under section 1461 and §1.1461-3 (§1.1461-1 for publicly traded partnerships
subject to §1.1446-4), § 1.1446-3, and for all applicable penalties and interest,
for any failure to pay the 1446 tax for the period during which the partnership
knew or had reason to know that the [*54] certificate contained incorrect or
unreliable information and for all subsequent installment periods. If a partner,
nominee, beneficial owner, or grantor trust, submits a new valid Form W8BEN, Form W-8IMY, Form W-9, or statement, as applicable, the partnership
may rely on that form for paying installments of 1446 tax beginning with the
installment period during which such form is received.
§1.1446-2 Determining a partnership's effectively connected taxable
income allocable to foreign partners under section 704.
(a) In general. A partnership's effectively connected taxable income (ECTI) is
generally the partnership's taxable income as computed under section 703,
with adjustments as provided in section 1446 (c) and this section, and
computed with consideration of only those partnership items which are
effectively connected (or treated as effectively connected) with the conduct of
a trade or business in the United States. For purposes of determining the
section 1446 withholding tax (1446 tax) under § 1.1446-3, partnership ECTI
allocable under section 704 to foreign partners is the sum of the allocable
shares of ECTI of each of the partnership's foreign partners as determined

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under paragraph [*55] (b) of this section. The calculation of partnership
ECTI allocable to foreign partners as set forth in paragraph (b) of this section,
and the determination of the partnership's withholding tax obligation, is a
partnership-level computation solely for purposes of determining the 1446 tax.
Therefore, any deduction that is not taken into account in calculating a
partner's allocable share of partnership ECTI (e.g., percentage depletion), but
which is a deduction that under U.S. tax law the foreign partner is otherwise
entitled to claim, can still be claimed by the foreign partner when computing its
U.S. tax liability and filing its U.S. income tax return, subject to any restriction
or limitation that otherwise may apply.
(b) Computation-(1) In general. A foreign partner's allocable share of
partnership ECTI for the partnership's taxable year that is allocable under
section 704 to a particular foreign partner is equal to that foreign partner's
distributive share of partnership gross income and gain for the partnership's
taxable year that is effectively connected and properly allocable to the partner
under section 704 and the regulations thereunder, reduced by the foreign
partner's distributive [*56] share of partnership deductions for the
partnership taxable year that are connected with such income under section
873 or 882 (c) and properly allocable to the partner under section 704 and the
regulations thereunder, in each case, after application of the rules of this
section. For these purposes, a foreign partner's distributive share of effectively
connected gross income and gain and the deductions connected with such
income shall be computed by considering allocations that are respected under
the rules of section 704 and §1.704-1 (b) (1), including special allocations in
the partnership agreement (as defined in §1.704-1 (b) (2) (ii) (h)), and
adjustments to the basis of partnership property described in section 743
pursuant to an election by the partnership under section 754 (see §1.743-1
(j)). The character of effectively connected partnership items (capital versus
ordinary) shall be separately considered only to the extent set forth in
paragraph (b) (3) (v) of this section.
(2) Income and gain rules. For purposes of computing a foreign partner's
[*57] allocable share of partnership ECTI under this paragraph (b), the
following rules with respect to partnership income and gain shall apply.
(i) Application of the principles of section 864. The determination of whether a
partnership's items of gross income are effectively connected shall be made by
applying the principles of section 864 and the regulations thereunder.
(ii) Income treated as effectively connected. A partnership's items of gross
income that are effectively connected includes any income that is treated as
effectively connected income, including partnership income subject to a
partner's election under section 871 (d) or section 882 (d), any partnership
income treated as effectively connected with the conduct of a U.S. trade or
business pursuant to section 897, and any other items of partnership income
treated as effectively connected under another provision of the Code, without
regard to whether those amounts are taxable to the partner.
(iii) Exempt income. A foreign partner's allocable share of partnership ECTI
does not include income or gain exempt from U.S. tax by reason of a provision
of the Internal Revenue Code. A foreign partner's allocable share of partnership
ECTI [*58] also does not include income or gain exempt from U.S. tax by
operation of any U.S. income tax treaty or reciprocal agreement. In the case of
income excluded by reason of a treaty provision, such income must be derived
by a resident of an applicable treaty jurisdiction, the resident must be the
beneficial owner of the item, and all other requirements for benefits under the
treaty must be satisfied. The partnership must have received from the partner
a valid withholding certificate, that is Form W-8BEN or Form W-8IMY (see
§1.1446-1 (c) (2) (iii) regarding when a Form W-8BEN or Form W-8IMY is valid
for purposes of this section), containing the information necessary to support

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the claim for treaty benefits required in the forms and instructions to those
forms. In addition, for purposes of this section, the withholding certificate must
contain the beneficial owner's taxpayer identification number.
(3) Deduction and losses. For purposes of computing a foreign partner's
allocable share of partnership ECTI under this paragraph (b), the following
rules with respect to deductions and losses shall apply.
(i) Oil and gas interests. The deduction for depletion with respect to oil and gas
wells shall [*59] be allowed, but the amount of such deduction shall be
determined without regard to sections 613 and 613A.
(ii) Charitable contributions. The deduction for charitable contributions
provided in section 170 shall not be allowed.
(iii) Net operating losses and other suspended or carried losses. The net
operating loss deduction of any foreign partner provided in section 172 shall
not be taken into account. Further, the partnership shall not take into account
any suspended losses (e.g., losses in excess of a partner's basis in the
partnership, see section 704 (d)) or any capital loss carrybacks or carryovers
available to a foreign partner.
(iv) Interest deductions. The rules of this paragraph (b) (3) (iv) shall apply for
purposes of determining the amount of interest expense that is allocable to
income which is (or is treated as) effectively connected with the conduct of a
trade or business for purposes of calculating the foreign partner's allocable
share of partnership ECTI. In the case of a non-corporate foreign partner, the
rules of §1.861-9T (e) (7) shall apply. In the case of a corporate foreign
partner, the rules of §1.882-5 shall apply by treating the partnership as a
foreign corporation [*60] and using the partner's pro-rata share of the
partnership's assets and liabilities for these purposes. For these purposes, the
rules governing elections under §1.882-5 (a) (7) shall be made at the
partnership level.
(v) Limitation on capital losses. Losses from the sale or exchange of capital
assets allocable under section 704 to a partner shall be allowed only to the
extent of gains from the sale or exchange of capital assets allocable under
section 704 to such partner.
(vi) Other deductions. No deduction shall be allowed for personal exemptions
provided in section 151 or the additional itemized deductions for individuals
provided in part VII of subchapter B of the Internal Revenue Code (section 211
and following).
(vii) Limitations on deductions. Except as provided in paragraph (b) (3) or (4)
of this section, any limitations on losses or deductions that apply at the partner
level when determining ECTI allocable to a foreign partner shall not be taken
into account.
(4) Other rules-(i) Exclusion of items allocated to U.S. partners. In computing
ECTI allocable to a foreign partner, the partnership shall not take into account
any item of income, gain, loss, or deduction to the extent allocable [*61] to
any partner that is not a foreign partner, as that term is defined in §1.1446-1
(c) of this section.
(ii) Partnership credits. See § 1.1446-3 (a) providing that the 1446 tax is
computed without regard to a partner's distrubutive share of the partnership's
tax credits.
(5) Examples. The following examples illustrate the application of this section:

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Example 1. Limitation on capital losses. PRS partnership has two
equal partners, A and B. A is a nonresident alien individual and B is
a U.S. citizen. A provides PRS with a valid Form W-8BEN, and B
provides PRS with a valid Form W-9. PRS has the following
annualized tax items for the relevant installment period, all of
which are effectively connected with its U.S. trade or business and
are allocated equally between A and B: $100 of long-term capital
gain, $400 of long-term capital loss, $300 of ordinary income, and
$100 of ordinary deductions. Assume that these allocations are
respected under section 704 (b) and the regulations thereunder.
Accordingly, A's allocable share of PRS's effectively connected
items includes $50 of long-term capital gain, $200 of long-term
capital loss, $150 of ordinary income, and $50 of ordinary
deductions. In [*62] determining A's allocable share of
partnership ECTI, the amount of the long-term capital loss that
may be taken into account pursuant to paragraph (b) (3) (v) of
this section is limited to A's allocable share of gain from the sale or
exchange of capital assets. The amount of partnership ECTI
allocable under section 704 to A is $100 ($150 of ordinary income
less $50 of ordinary deductions, plus $50 of capital gains less $50
of capital loss).
Example 2. Limitation on capital losses-special allocations. PRS
partnership has two equal partners, A and B. A and B are both
nonresident alien individuals. A and B each provide PRS with a
valid Form W-8BEN. PRS has the following annualized tax items for
the relevant installment period, all of which are effectively
connected with its U.S. trade or business: $200 of long-term
capital gain, $200 of long-term capital loss, and $400 of ordinary
income. A and B have equal shares in the ordinary income,
however, pursuant to the partnership agreement, capital gains and
losses are subject to special allocations.
The long-term capital gain is allocable to A, and the long-term
capital loss is allocable to B. It is assumed that all of the
partnership's allocations [*63] are respected under section 704
(b) and the regulations thereunder. Pursuant to paragraph (b)
(3) (v) of this section, A's allocable share of partnership ECTI is
$400 ($200 of ordinary income plus $200 of long-term capital
gain), and B's allocable share of partnership ECTI is $200 ($200 of
ordinary income).
Example 3. Withholding tax obligation where partner has net
operating losses. PRS partnership has two equal partners, FC, a
foreign corporation, and DC, a domestic corporation. FC and DC
provide a valid Form W-8BEN and Form W-9, respectively, to PRS.
Both FC and PRS are on a calendar taxable year. PRS is engaged in
the conduct of a trade or business in the United States and for its
first installment period during its taxable year has $100 of
annualized ECTI that is allocable to FC. As of the beginning of the
taxable year, FC had an unused effectively connected net
operating loss carryover in the amount of $300. The net operating
loss carryover is not taken into account in determining PRS's
withholding tax liability for ECTI allocable under section 704 to FC.
PRS must pay 1446 tax with respect to the $100 of ECTI allocable
to FC.

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§1.1446-3 Time and manner of calculating and paying over the 1446
tax.
(a) [*64] In general-(1) Calculating 1446 tax. This section provides rules for
calculating, reporting, and paying over the section 1446 withholding tax (1446
tax). A partnership's 1446 tax is equal to the amount determined under this
section and shall be paid in installments during the partnership's taxable year
(see paragraph (d) (1) of this section for installment payment due dates), with
any remaining tax due paid with the partnership's annual return required to be
filed pursuant to paragraph (d) of this section. For these purposes, a
partnership shall not take into account either a partner's liability for any other
tax imposed under any other provision of the Internal Revenue Code (e.g.,
section 55 or 884) or a partner's distributive share of the partnership's tax
credits when determining the amount of the partnership's 1446 tax.
(2) Applicable percentage. In the case of a foreign partner that is a
corporation, the applicable percentage is the highest rate of tax specified in
section 11 (b) (1) for such taxable year. Except to the extent provided in §
1.1446-5, in the case of a foreign partner that is not taxable as a corporation
(e.g., partnership, individual, trust or estate), the applicable [*65]
percentage is the highest rate of tax specified in section 1.
(b) Installment payments-(1) In general. Except as provided in §1.1446-4 for
certain publicly traded partnerships, a partnership must pay its 1446 tax by
making installment payments of the 1446 tax based on the amount of
partnership ECTI allocable under section 704 to its foreign partners, without
regard to whether the partnership makes any distributions to its partners
during the partnership's taxable year. The amount of the installment payments
are determined in accordance with this paragraph (b), and the tax must be
paid at the times set forth in paragraph (d) of this section. Subject to
paragraph (b) (3) of this section, in computing its first installment of 1446 tax
for a taxable year, a partnership must choose whether it will pay its 1446 tax
for the entire taxable year by using the safe harbor set forth in paragraph (b)
(3) of this section, or by using one of several annualization methods available
under paragraph (b) (2) (ii) of this section for computing partnership ECTI
allocable to foreign partners. In the case of any underpayment of an
installment payment of 1446 tax by a partnership, the partnership shall be
[*66] subject to an addition to tax equal to the amount determined under
section 6655, as modified by this section, as if such partnership were a
domestic corporation, as well as any other applicable interest and penalties.
See §1.1446-3 (f). Section 6425 (permitting an adjustment for an
overpayment of estimated tax by a corporation) shall not apply to a
partnership with respect to the payment of its 1446 tax.
(2) Calculation-(i) General application of the principles of section 6655.
Installment payments of 1446 tax required during the partnership's taxable
year are based upon partnership ECTI for the portion of the partnership
taxable year to which they relate, and, except as set forth in this paragraph (b)
(2) or paragraph (b) (3) of this section, shall be calculated using the principles
of section 6655. Under the principles of section 6655, the partnership's
effectively connected items are annualized to determine each foreign partner's
allocable share of partnership ECTI under §1.1446-2. Each foreign partner's
allocable share of partnership ECTI is then multiplied by the applicable
percentage for each foreign partner. This computation will yield an annualized
1446 tax with respect to such [*67] partner. The installment of 1446 tax due
with respect to a foreign partner's allocable share of partnership ECTI equals
the excess of the section 6655 (e) (2) (B) (ii) percentage of the annualized
1446 tax for that partner (or, if applicable, the adjusted seasonal amount) for
the relevant installment period, over the aggregate of any amounts paid under

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section 1446 with respect to that partner in prior installments during the
partnership's taxable year.
(ii) Annualization methods. A partnership that chooses to annualize its income
for the taxable year shall use one of the annualization methods set forth in
section 6655 (e) and the regulations thereunder, and as described in the
forms and instructions for Form 8804, "Annual Return for Partnership
Withholding Tax (Section 1446)," Form 8805, "Foreign Partner's Information
Statement of Section 1446 Withholding Tax," and Form 8813, "Partnership
Withholding Tax Payment Voucher."
(iii) Partner's estimated tax payments. In computing its installment payments
of 1446 tax, a partnership may not take into account a partner's estimated tax
payments.
(iv) Partner whose interest terminates during the partnership's taxable year.
With respect to a partner [*68] whose interest in the partnership terminates
prior to the end of the period for which the partnership is making an
installment payment, the partnership shall take into account the income that is
allocable to the partner for the portion of the partnership taxable year that the
person was a partner.
(v) Exceptions and modifications to the application of the principles under
section 6655. To the extent not otherwise modified in §§1.1446-1 through
1.1446-6, or inconsistent with those rules, the principles of section 6655 apply
to the calculation of the installment payments of 1446 tax made by a
partnership, except that:

(A) Inapplicability of special rules for large corporations. The principles
of section 6655 (d) (2), concerning large corporations (as defined in
section 6655 (g) (2)), shall not apply.
(B) Inapplicability of special rules regarding early refunds. The principles
of section 6655 (h), applicable to amounts excessively credited or
refunded under section 6425, shall not apply. See paragraph (b) (1)
of this section providing that section 6425 shall not apply for
purposes of the 1446 tax.
(C) Period of underpayment. The period of the underpayment set forth
in section 6655 (b) (2) shall [*69] end on the earlier of the 15th
day of the 4th month following the close of the partnership's taxable
year (or, in the case of a partnership described in §1.6081-5 (a) (1)
of this chapter, the 15th day of the 6th month following the close of
the partnership's taxable year), or with respect to any portion of the
underpayment, the date on which such portion is paid.
(D) Other taxes. Section 6655 shall be applied without regard to any
references to alternative minimum taxable income and modified
alternative minimum taxable income.
(E) 1446 tax treated as tax under section 11. The principles of section
6655 (g) (1) shall be applied to treat the 1446 tax as a tax imposed
by section 11.

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(F) Prior year tax safe harbor. The safe harbor set forth in section 6655
(d) (1) (B) (ii) shall not apply and instead the safe harbor set forth
in paragraph (b) (3) of this section applies.

(3) 1446 tax safe harbor-(i) In general. The addition to tax under section 6655
shall not apply to a partnership with respect to a current installment of 1446
tax if-

(A) The average of the amount of the current installment and prior
installments during the taxable year is at least 25 percent of the
total 1446 tax that would be [*70] payable on the amount of the
partnership's ECTI allocable under section 704 to foreign partners
for the prior taxable year;
(B) The prior taxable year consisted of twelve months;
(C) The partnership timely files (including extensions) an information
return under section 6031 for the prior year; and
(D) The amount of ECTI for the prior taxable year is not less than 50
percent of the ECTI shown on the annual return of section 1446
withholding tax that is (or will be) timely filed for the current year.

(ii) Permission to change to standard annualization method. Except as
otherwise provided in this paragraph (b) (3), if a partnership chooses to pay its
1446 tax for the first installment period based upon the safe harbor method set
forth in this paragraph (b) (3), the partnership must use the safe harbor
method for each installment payment made during the partnership's taxable
year. Notwithstanding the foregoing, if a partnership paying over 1446 tax
during the taxable year pursuant to this paragraph (b) (3) determines during
an installment period (based upon the standard option annualization method
set forth in section 6655 (e) and the regulations thereunder, as modified by
the forms and instructions [*71] to Forms 8804, 8805, and 8813) that it will
not qualify for the safe harbor in this paragraph (b) (3) because the prior
year's ECTI will not meet the 50-percent threshold in paragraph (b) (3) (i) (D)
of this section, then the partnership is permitted, without being subject to the
addition to tax under section 6655, to pay over its 1446 tax for the period in
which such determination is made, and all subsequent installment periods
during the taxable year, using the standard option annualization method. A
change pursuant to this paragraph shall be disclosed in a statement attached
to the Form 8804 the partnership files for the taxable year and shall include
information to allow the Service to determine whether the change was
appropriate.
(c) Coordination with other withholding rules-(1) Fixed or determinable, annual
or periodical income. Fixed or determinable, annual or periodical income
subject to tax under section 871 (a) or section 881 is not subject to
withholding under section 1446, and such income is independently subject to
the withholding requirements of sections 1441 and 1442 and the regulations
thereunder.

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(2) Real property gains-(i) Domestic partnerships. A domestic partnership
[*72] that is otherwise subject to the withholding requirements of sections
1445 and 1446 will be subject to the payment and reporting requirements of
section 1446 only and not section 1445 (e) (1) and the regulations
thereunder, with respect to partnership gain from the disposition of a U.S. real
property interest (as defined in section 897 (c)), provided that the partnership
complies fully with the requirements under section 1446 and the regulations
thereunder, including any reporting obligations, with respect to dispositions of
U.S. real property interests. A partnership that has complied with such
requirements will be deemed to satisfy the withholding requirements of section
1445 and the regulations thereunder. In the event that amounts are withheld
under section 1445 (a) at the time of the disposition of a U.S. real property
interest, such amounts may be credited against the section 1446 tax.
(ii) Foreign partnerships. A foreign partnership that is subject to withholding
under section 1445 (a) during its taxable year may credit the amount withheld
under section 1445 (a) against its section 1446 tax [*73] liability for that
taxable year only to the extent such gain is allocable to foreign partners.
(3) Coordination with section 1443. A partnership that has ECTI allocable
under section 704 to a foreign organization described in section 1443 (a) shall
be required to withhold under this section.
(d) Reporting and crediting the 1446 tax-(1) Reporting 1446 tax. This
paragraph (d) sets forth the rules for reporting and crediting the 1446 tax paid
by a partnership. To the extent that 1446 tax is paid on behalf of a domestic
trust (including a grantor or other person treated as an owner of a portion of
such trust) or a grantor or other person treated as the owner of a portion of a
foreign trust, the rules of this paragraph (d) applicable to a foreign trust or its
beneficiaries shall be applied to such domestic or foreign trust and its
beneficiaries or owners, as applicable, so that appropriate credit for the 1446
tax may be claimed by the trust, beneficiary, grantor, or other person.
(i) Reporting of installment tax payments and notification to partners of
installment tax payments. Each partnership required to make an installment
payment of 1446 tax must file Form 8813, "Partnership Withholding [*74]
Tax Payment Voucher (Section 1446)," in accordance with the instructions of
that form. When making a payment of 1446 tax, a partnership must notify
each foreign partner of the 1446 tax paid on its behalf. A foreign partner
generally may credit a 1446 tax paid by the partnership on the partner's behalf
against the partner's estimated tax that the partner must pay during the
partner's own taxable year. No particular form is required for a partnership's
notification to a foreign partner, but each notification must include the
partnership's name, the partnership's Taxpayer Identification Number (TIN),
the partnership's address, the partner's name, the partner's TIN, the partner's
address, the annualized ECTI estimated to be allocated to the foreign partner,
and the amounts of tax paid on behalf of the partner for the current and prior
installment periods during the partnership's taxable year.
(ii) Payment due dates. The 1446 tax is calculated based on partnership ECTI
allocable under section 704 to foreign partners during the partnership's taxable
year, as determined under section 706. Payments of the 1446 tax generally
must be made during the partnership's taxable year in which such income
[*75] is derived. A partnership must pay to the Internal Revenue Service a
portion of its estimated annual 1446 tax in installments on or before the
15thday of the fourth, sixth, ninth, and twelfth months of the partnership's
taxable year as provided in section 6655. Any additional amount determined to
be due is to be paid with the filing of the annual return of tax required under
this section and clearly designated as for the prior taxable year. Form 8813

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should not be submitted for a payment made under the preceding sentence.
(iii) Annual return and notification to partners. Every partnership (except a
publicly traded partnership that has not elected to apply the general
withholding tax rules under section 1446) that has effectively connected gross
income for the partnership's taxable year allocable under section 704 to one or
more of its foreign partners (or is treated as having paid 1446 tax under
§1.1446-5 (a)), must file Form 8804, "Annual Return for Partnership
Withholding Tax (Section 1446)." Additionally, every partnership that is
required to file Form 8804 also must file Form 8805, "Foreign Partner's
Information Statement of Section 1446 Withholding Tax," and furnish this form
to [*76] the Internal Revenue Service and to each of its partners with
respect to which the 1446 tax was paid. Forms 8804 and 8805 are separate
from Form 1065, "U.S. Return of Partnership Income," and the attachments
thereto, and are not to be filed as part of the partnership's Form 1065. A
partnership must generally file Forms 8804 and 8805 on or before the due date
for filing the partnership's Form 1065. See § 1.6031 (a)-1 (c) for rules
concerning the due date of a partnership's Form 1065. However, with respect
to partnerships described in §1.6081-5 (a) (1), Forms 8804 and 8805 are not
due until the 15th day of the sixth month following the close of the
partnership's taxable year. Any additional tax owed under section 1446 for the
prior taxable year of the partnership must be paid to the Internal Revenue
Service with the Form 8804.
(iv) Information provided to beneficiaries of foreign trusts and estates. A
foreign trust or estate that is a partner in a partnership subject to withholding
under section 1446 shall be provided Form 8805 by the partnership. The
foreign trust or estate must provide to each of its beneficiaries a copy of the
Form 8805 furnished by the partnership. In addition, the [*77] foreign trust
or estate must provide a statement for each of its beneficiaries to inform each
beneficiary of the amount of the credit that may be claimed under section 33
(as determined under this section) for the 1446 tax paid by the partnership.
Until an official IRS form is available, the statement from a foreign trust or
estate that is described in this paragraph (d) (1) (iv) shall contain the following
information-

(A) Name, address, and TIN of the foreign trust or estate;
(B) Name, address, and TIN of the partnership;
(C) The amount of the partnership's ECTI allocated to the foreign trust
or estate for the partnership taxable year (as shown on the Form
8805 provided to the trust or estate);
(D) The amount of 1446 tax paid by the partnership on behalf of the
foreign trust or estate;
(E) Name, address, and TIN of the beneficiary of the foreign trust or
estate;
(F) The amount of the partnership's ECTI allocated to the trust or estate
for purposes of section 1446 that is to be included in the
beneficiary's gross income; and

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(G) The amount of 1446 tax paid by the partnership on behalf of the
foreign trust or estate that the beneficiary is entitled to claim on its
return as a credit under section 33.

(v) [*78] Attachments required of foreign trusts and estates. The statement
furnished to each foreign beneficiary under this paragraph (d) (1) must also be
attached to the foreign trust or estate's U.S. Federal income tax return filed for
the taxable year including the installment period to which the statement
relates.
(vi) Attachments required of beneficiaries of foreign trusts and estates. The
beneficiary of the foreign trust or estate must attach the statement provided
by the trust or estate, along with a copy of the Form 8805 furnished by the
partnership to such trust or estate, to its U.S. income tax return for the year in
which it claims a credit for the 1446 tax. See §1.1446-3 (d) (2) (ii) for
additional rules regarding a partner or beneficial owner claiming a credit for
1446 tax.
(vii) Information provided to beneficiaries of foreign trusts and estates that are
partners in certain publicly traded partnerships. A statement similar to the
statement required by paragraph (d) (1) (iv) of this section shall be provided
by trusts or estates that hold interests in publicly traded partnerships subject
to § 1.1446-4.
(2) Crediting 1446 tax against a partner's U.S. tax liability-(i) In general. A
[*79] partnership's payment of 1446 tax on the portion of ECTI allocable to
a foreign partner relates to the partner's U.S. income tax liability for the
partner's taxable year in which the partner is subject to U.S. tax on that
income. Subject to paragraphs (d) (2) (ii) and (iii) of this section, a partner
may claim as a credit under section 33 the 1446 tax paid by the partnership
with respect to ECTI allocable to that partner. The partner may not claim an
early refund of these amounts under the estimated tax rules.
(ii) Substantiation for purposes of claiming the credit under section 33. A
partner may credit the amount paid under section 1446 with respect to such
partner against its U.S. income tax liability only if it attaches proof of payment
to its U.S. income tax return for the partner's taxable year in which the items
comprising such partner's allocable share of partnership ECTI are included in
the partner's income. Except as provided in the next sentence, proof of
payment consists of a copy of the Form 8805 the partnership provides to the
partner (or in the case of a beneficiary of a foreign trust or estate, the
statement required under paragraph (d) (1) (iv) of this section to be [*80]
provided by such trust or estate and the related Form 8805 furnished to such
trust or estate), but only if the name and TIN on the Form 8805 (or the
statement provided by a foreign trust or estate) match the name and TIN on
the partner's U.S. tax return, and such form (or statement) identifies the
partner (or beneficiary) as the person entitled to the credit under section 33.
In the case of a partner of a publicly traded partnership that is subject to
withholding on distributions under §1.1446-4, proof of payment consists of a
copy of the Form 1042-S, "Foreign Person's U.S. Source Income Subject to
Withholding," provided to the partner by the partnership.
(iii) Tiered structures including trusts or estates-(A) Foreign trusts and estates.
Section 1446 tax paid on the portion of ECTI allocable under section 704 to a
foreign trust or estate that the foreign trust or estate may claim as a credit
under section 33 shall bear the same ratio to the total 1446 tax paid on behalf
of the trust or estate as the total ECTI allocable to such trust or estate and not

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distributed (or treated as distributed) to the beneficiaries of such trust or
estate, and, accordingly not deducted under section 651 [*81] or section
661 in calculating the trust or estate's taxable income, bears to the total ECTI
allocable to such trust or estate. Any 1446 tax that a foreign trust or estate is
not entitled to claim as a credit under this paragraph (d) (2) may be claimed
as a credit by the beneficiary or beneficiaries of such trust or estate that
includes the partnership's ECTI (distributed or deemed distributed) allocated to
the trust or estate in gross income under section 652 or section 662 (with the
same character as effectively connected income as in the hands of the trust or
estate). The trust or estate must provide each beneficiary with a copy of the
Form 8805 provided to it by the partnership and prepare the statement
required by paragraph (d) (1) (iv) of this section.
(B) Use of domestic trusts to circumvent section 1446. This paragraph (d) (2)
(iii) (B) shall apply if a partnership knows or has reason to know that a foreign
person that is the ultimate beneficial owner of the ECTI holds its interest in the
partnership through a domestic trust (and possibly other entities), and such
domestic trust was formed or availed of with a principal purpose of avoiding
the 1446 tax. The use of a domestic [*82] trust in a tiered trust structure
may have a principal purpose of avoiding the 1446 tax even though the tax
avoidance purpose is outweighed by other purposes when taken together. In
such case, a partnership is required to pay 1446 tax under this paragraph as if
the domestic trust was a foreign trust for purposes of section 1446 and the
regulations thereunder. Accordingly, all applicable penalties and interest shall
apply to the partnership for its failure to pay 1446 tax under this paragraph (d)
(2) (iii) (B), commencing with the installment period during which the
partnership knew or had reason to know that this paragraph (d) (2) (iii) (B)
applied.
(iv) Refunds to withholding agent. A partnership (or nominee pursuant to
§1.1446-4) may apply for a refund of the 1446 tax paid only to the extent
allowable under section 1464 and the regulations thereunder.
(v) 1446 tax treated as cash distribution to partners. Amounts paid by a
partnership under section 1446 with respect to a partner are treated as
distributed to that partner on the earliest of the day on which such tax was
paid by the partnership, the last day of the partnership taxable year for which
the tax was paid, or, the last day [*83] during the partnership's taxable year
on which the partner owned an interest in the partnership. Thus, for example,
1446 tax paid by a partnership after the close of a partnership taxable year
that relates to ECTI allocable to a foreign partner for the prior taxable year will
be considered distributed by the partnership to the respective foreign partner
on the last day of the partnership's prior taxable year.
(vi) Examples. The following examples illustrate the application of this section:

Example 1. Simple trust that reports entire amount of ECTI. PRS is
a partnership that has two partners, FT, a foreign trust, and A, a
U.S. person. FT is a simple trust under section 651. FT and A each
provide PRS with a valid Form W-8BEN and Form W-9,
respectively. FT has one beneficiary, NRA, a nonresident alien
individual. In computing its installment obligation during the 2004
taxable year, PRS has $200 of annualized income, all of which is
ordinary ECTI. The $200 of income will be allocated equally to FT
and A under section 704 and it is assumed that such an allocation
will be respected under section 704 (b) and the regulations
thereunder. FT's allocable share of ECTI is $100. PRS withholds
$35 [*84] under section 1446 with respect to the $100 of ECTI

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allocable to FT. FT's only income for its tax year is the $100 of
income from PRS. Pursuant to the terms of the trust's governing
instrument and local law, the $100 of ECTI is not included in FT's
fiduciary accounting income and the deemed distribution of the
$35 withholding tax paid under paragraph (d) (2) (v) of this
section is not included in FT's fiduciary accounting income.
Accordingly, the $100 of ECTI is not income required to be
distributed by FT, and FT may not claim a deduction under section
651 for this amount. FT must report the $100 of ECTI in its gross
income and may claim a credit under section 33 in the amount of
$35 for the 1446 tax paid by PRS. NRA is not required to include
any of the ECTI in gross income and accordingly may not claim a
credit for any amount of the $35 of 1446 tax paid by PRS.
Example 2. Simple trust that distributes a portion of ECTI to the
beneficiary. Assume the same facts as in Example 1, except that
PRS distributes $60 to FT, which is included in FT's fiduciary
accounting income under local law. FT will report the $100 of ECTI
in its gross income and may claim a deduction for the $60 required
[*85] to be distributed under section 651 (a) to NRA. Pursuant
to paragraph (d) (2) (iii) of this section, FT may claim a credit
under section 33 in the amount of $14 for the 1446 tax paid by
PRS ($40/$100 multiplied by $35). NRA is required to include the
$60 of the ECTI in gross income under section 652 (as ECTI) and
may claim a credit under section 33 in the amount of $21 for the
1446 tax paid by PRS ($35 less $14 or $60/$ 100 multiplied by
$35).
Example 3. Complex trust that distributes entire ECTI to the
beneficiary. Assume the same facts as in Example 1, except that
FT is a complex trust under section 661. PRS distributes $60 to FT,
which is included in FT's fiduciary accounting income. FT
distributes the $60 of fiduciary accounting income to NRA and also
properly distributes an additional $40 to NRA from FT's principal.
FT will report the $100 of ECTI in its gross income and may deduct
the $60 required to be distributed to NRA under section 661 (a)
(1) and may deduct the $40 distributed to NRA under section 661
(a) (2). FT may not claim a credit under section 33 for any of the
$35 of 1446 tax paid by PRS. NRA is required to include $100 of
the ECTI in gross income under section 662 [*86] (as ECTI) and
may claim a credit under section 33 in the amount of $35 for the
1446 tax paid by PRS ($35 less $0).

(e) Liability of partnership for failure to withhold-(1) In general. Every
partnership required to pay a 1446 tax is made liable for that tax by section
1461. Therefore, a partnership that is required to pay a 1446 tax but fails to
do so, or pays less than the amount required under this section, is liable under
section 1461 for the payment of the tax required to be withheld under chapter
3 of the Internal Revenue Code and the regulations thereunder unless the
partnership can demonstrate pursuant to paragraph (e) (2) of this section, to
the satisfaction of the Commissioner or his delegate, that the full amount of
effectively connected taxable income allocable to such partner was included in
income on the partner's U.S. Federal income tax return and the full amount of
tax due on such return was paid by such partner to the Internal Revenue
Service. See paragraph (e) (3) of this section and section 1463 regarding the
partnership's liability for penalties and interest even though a foreign partner
has satisfied the underlying tax liability. See § 1.1461-3 for applicable
penalties [*87] when a partnership fails to pay 1446 tax. See paragraph (b)

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of this section for an addition to tax under section 6655 when there is an
underpayment of 1446 tax.
(2) Proof that tax liability has been satisfied. Proof of payment of tax may be
established for purposes of paragraph (e) (1) of this section on the basis of a
Form 4669, "Statement of Payments Received," or such other form as the
Internal Revenue Service may prescribe in published guidance (see §601.601
(d) (2) of this chapter), establishing the amount of tax, if any, actually paid by
the partner on the income. Such partnership's liability for tax, and the
requirement that such partnership file Forms 8804 and 8805 shall be deemed
to have been satisfied with respect to such partner as of the date on which the
partner's income tax return was filed and all tax required to be shown on the
return is paid in full.
(3) Liability for interest and penalties. Notwithstanding paragraph (e) (2) of
this section, a partnership that fails to pay over tax under section 1446 is not
relieved from liability under section 6655 or for interest under section 6601.
See §1.1463-1. Such liability may exist even if there is no underlying tax
liability [*88] due from a foreign partner on its allocable share of partnership
ECTI. The addition to tax under section 6655 or the interest charge under
section 6601 that is required by those sections shall be imposed as set forth in
those sections, as modified by this section. For example, under section 6601,
interest shall accrue beginning on the last date for paying the tax due under
section 1461 (which is the due date, without extensions, for filing the Forms
8804 and 8805). The interest shall stop accruing on the 1446 tax liability on
the date, and to the extent, that the unpaid tax liability under section 1446 is
satisfied. A foreign partner is permitted to reduce any addition to tax under
section 6654 or 6655 by the amount of any section 6655 addition to tax paid
by the partnership with respect to its failure to pay adequate installment
payments of the 1446 tax on ECTI allocable to the foreign partner.
(f) Effect of withholding on partner. The payment of the 1446 tax by a
partnership does not excuse a foreign partner to which a portion of ECTI is
allocable from filing a U.S. tax or informational return, as appropriate, with
respect to that income. Information concerning installment payments [*89]
of 1446 tax paid during the partnership's taxable year on behalf of a foreign
partner shall be provided to such foreign partner in accordance with paragraph
(d) of this section and such information may be taken into account by the
foreign partner when computing the partner's estimated tax liability during the
taxable year. Form 1040NR, "U.S. Nonresident Alien Income Tax Return," Form
1065, "U.S. Return of Partnership Income," Form 1120F, "U.S. Income Tax
Return of a Foreign Corporation," or such other return as appropriate, must be
filed by the partner, and any tax due must be paid, by the filing deadline
(including extensions) generally applicable to such person. Pursuant to
§1.1446-3 (d), a partner may generally claim a credit under section 33 for its
share of any 1446 tax paid by the partnership against the amount of income
tax (or 1446 tax in the case of tiers of partnerships) as computed in such
partner's return.
§1.1446-4 Publicly traded partnerships.
(a) In general. This section sets forth rules for applying the section 1446
withholding tax (1446 tax) to publicly traded partnerships. A publicly traded
partnership (as defined in paragraph (b) of this section) that has effectively
[*90] connected gross income, gain or loss must pay 1446 tax by
withholding from distributions to a foreign partner. Publicly traded partnerships
that withhold on distributions must pay over and report any 1446 tax as
provided in paragraph (c), and generally are not to pay over and report the
1446 tax under the rules in §1.1446-3. However, under paragraph (g) of this
section, a publicly traded, partnership may elect not to apply the rules of this

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section, and instead, to pay the 1446 tax based on the effectively connected
taxable income (ECTI) allocable under section 704 to foreign partners under
the general rules of §§1.1446-1, through. 1.1446-3. The amount of the
withholding tax on distributions, other than distributions excluded under
paragraph (f) of this section, that are made during any partnership taxable
year, equals the applicable percentage (defined in paragraph (b) (2) of this
section) of such distributions.
(b) Definitions-(1) Publicly traded partnership. For purposes of this section, the
term publicly traded partnership has the same meaning as in section 7704
(including the regulations thereunder), but does not include a publicly traded
partnership treated as a corporation under [*91] that section.
(2) Applicable percentage. For purposes of this section, applicable percentage
shall have the meaning as set forth in § 1.1446-3 (a) (2).
(3) Nominee. For purposes of this section, the term nominee means a domestic
person that holds an interest in a publicly traded partnership on behalf of a
foreign person.
(4) Qualified notice. For purposes of this section, a qualified notice is a notice
given by a publicly traded partnership regarding a distribution that is
attributable to effectively connected income, gain or loss of the partnership,
and in accordance with the notice requirements with respect to dividends
described in 17 CFR 240.10b-17 (b) (1) or (3) issued pursuant to the
Securities Exchange Act of 1934, 15 U.S.C. section 78 (a).
(c) Time and manner of payment. The withholding tax required under this
section is to be paid pursuant to the rules and procedures of section 1461,
§§1.1461-1, 1.1461-2, and 1.6302-2. However, the reimbursement and set-off
procedures set forth in those regulations shall not apply. A publicly traded
partnership must use Form 1042, "Annual Withholding Tax Return for U.S.
Source Income of Foreign Persons," and Form 1042-S, "Foreign Person's U.S.
[*92] Source Income Subject to Withholding," to report withholding from
distributions under this section. See §1.1461-1 (b). See §1.1446-3 (d) (1) (vii)
requiring a foreign trust or estate that holds an interest in a publicly traded
partnership to provide a statement to the beneficiaries of such foreign trust or
estate with respect to the credit to be claimed under section 33. For penalties
and additions to the tax for failure to comply with this section, see §§1.1461-1
and 1.1461-3.
(d) Rules for designation of nominees to withhold tax under section 1446. A
nominee that receives a distribution from a publicly traded partnership subject
to withholding under this section, and which is to be paid to (or for the account
of) any foreign person, may be treated as a withholding agent under this
section. A nominee is treated as a withholding agent under this section only to
the extent of the amount specified in the qualified notice (as defined in
paragraph (b) (4) of this section) that the nominee receives. Where a nominee
is designated as a withholding agent with respect to a foreign partner of the
partnership, then the obligation to withhold on distributions to such foreign
partner in accordance [*93] with the rules of this section shall be imposed
solely on the nominee. A nominee under this section shall identify itself as a
nominee by providing Form W-9, "Request for Taxpayer Identification Number
and Certification," to the partnership, along with the statement required by
paragraph (e) (1) of this section. If a nominee furnishes Form W-9 and the
statement required by paragraph (e) (1) of this section to the partnership, but
a qualified notice is not received by the nominee from the partnership, the
nominee shall not be a withholding agent subject to the rules of this section
and the partnership shall presume that such nominee is a nonresident alien
individual or foreign corporation, whichever classification results in a higher
1446 tax being due, and pay a withholding tax consistent with such

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presumption. A nominee responsible for withholding under the rules of this
section shall be subject to liability under sections 1461 and 6655, as well as for
all applicable penalties and interest, as if such nominee was a partnership
responsible for withholding under this section.
(e) Determining foreign status of partners-(1) In general. Except as provided
in paragraph (d) of this section [*94] permitting nominees to submit a Form
W-9 to a publicly traded partnership, the rules of §1.1446-1 shall apply in
determining whether a partner of a publicly traded partnership is a foreign
partner for purposes of the 1446 tax (see §1.1446-4 (a)) and a nominee
obligated to withhold under this section shall be entitled to rely on a Form W8BEN, "Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding," Form W-8IMY, "Certificate of Foreign Intermediary, FlowThrough Entity, or Certain U.S. Branches for United States Tax Withholding," or
Form W-9, "Request for Taxpayer Identification Number," received from
persons on whose behalf it holds interests in the partnership to the same
extent a partnership is entitled to rely on such forms under those rules. In
addition to the rules stated in §§1.1446-1 through 1.1446-3 with respect to
certificates establishing a partner as a domestic or foreign person, a nominee
shall attach a brief statement to the Form W-9 that it furnishes to the
partnership, informing the partnership that the nominee holds interests in the
partnership on behalf of one or more foreign persons, including information
that permits the partnership [*95] to determine the partnership interest held
on behalf of such foreign persons. A statement furnished by a nominee
pursuant to §1.6031 (c)-1T satisfies the requirements of the previous
sentence.
(2) Presumptions regarding payee's status in absence of documentation. The
rules of §1.1446-1 (c) (3) shall apply to determine a partner's status in the
absence of documentation.
(f) Distributions subject to withholding-(1) In general. Except as provided in
this paragraph (f) (1), a publicly traded partnership must withhold at the
applicable percentage with respect to any actual distribution made to a foreign
partner. The amount of a distribution subject to 1446 tax includes the amount
of any 1446 tax required to be withheld on the distribution and, in the case of
a partnership that receives a partnership distribution from another partnership
in which it is a partner (i.e., a tiered structure described in §1.1446-5), any
1446 tax that was withheld from such distribution. For example, a foreign
publicly traded partnership, UTP, owns an interest in domestic publicly traded
partnership, LTP. UTP does not provide LTP any documentation with respect to
its domestic or foreign status. LTP and UTP each [*96] have a calendar
taxable year. LTP makes a distribution subject to section 1446 of $100 to UTP
during its taxable year beginning January 1, 2004, and withholds 35 percent
(the highest rate in section 1) of that distribution under section 1446. UTP
receives a net distribution of $65 which it immediately redistributes to its
partners. UTP has a liability to pay 35 percent of the total actual and deemed
distribution it makes to its foreign partners as a section 1446 withholding tax.
UTP may credit the $35 withheld by LTP against this liability as if it were paid
by UTP. When UTP distributes the $65 it actually receives from LTP to its
partners, UTP is treated for purposes of section 1446 as if it made a
distribution of $100 to its partners ($65 actual distribution and $35 deemed
distribution). UTP's partners (U.S. and foreign) may claim a credit against their
U.S. income tax liability for their allocable share of the $35 of 1446 tax paid on
their behalf.
(2) In-kind distributions. If a publicly traded partnership distributes property
other than money, the partnership shall not release the property until it has
funds sufficient to enable the partnership to pay over in money the required
[*97] 1446 tax.

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(3) Ordering rule relating to distributions. Distributions from publicly traded
partnerships are deemed to be paid out of the following types of income in the
order indicated-

(i)

Amounts attributable to income described in section 1441 or 1442
that are not effectively connected, without regard to whether such
amounts are subject to withholding because of a treaty or statutory
exemption;

(ii) Amounts attributable to recurring dispositions of crops and timber
that are subject to withholding under §1.1445-5 (c) (3) (iv) of the
regulations, which continue to be subject to the rules of §1.1445-5
(c) (3);
(iii)

Amounts effectively connected with a U.S. trade or business, but
not subject to withholding under section 1446 (e.g., exempt by
treaty);

(iv) Amounts subject to withholding under section 1446; and
(v) Amounts not listed in paragraphs (f) (3) (i) through (iv) of this
section.

(4) Coordination with section 1445 (e) (1). Except as otherwise provided in this
section, a publicly traded partnership that complies with the requirements of
withholding under section 1446 and this section will be deemed to have
satisfied the requirements of section 1445 (e) (1) and the regulations
thereunder. [*98] Notwithstanding the excluded amounts set forth in
paragraph (f) (3) of this section, distributions subject to withholding at the
applicable percentage shall include the following-

(i)

Amounts subject to withholding under section 1445 (e) (1) upon
distribution pursuant to an election under § 1.1445-5 (c) (3) of the
regulations; and

(ii) Amounts not subject to withholding under section 1445 because the
distributee is a partnership or is a foreign corporation that has made
an election under section 897 (i).

(g) Election to withhold based upon ECTI allocable to foreign partners instead
of withholding on distributions. A publicly traded partnership may elect to
comply with the requirements of §§ 1.1446-1 through 1.1446-3 (relating to
withholding on ECTI allocable to foreign partners) and §1.1446-5 (relating to
tiered partnership structures) instead of the rules of this section. A publicly
traded partnership shall make the election described in this paragraph (g) by
complying with the payment and reporting requirements of §§1.1446-1
through 1.1446-3 and by complying with the information reporting

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requirements of this paragraph (g). The election is made by attaching a
statement to a timely filed [*99] Form 8804, "Annual Return for Partnership
Withholding Tax (Section 1446)," that is required to be filed by the partnership
for the taxable year, indicating that the partnership is a publicly traded
partnership that is electing to pay the 1446 tax under section 1446 based upon
ECTI allocable under section 704 to its foreign partners. Once made, an
election under this paragraph (g) may be revoked only with the consent of the
Commissioner.
§1.1446-5 Tiered partnership structures.
(a) In general. The rules of this section shall apply in cases where a
partnership (lower-tier partnership) that has effectively connected taxable
income (ECTI), has a partner that is itself a partnership (upper-tier
partnership). A partnership that directly or indirectly (through a chain of
partnerships) owns a partnership interest in a lower-tier partnership shall be
allowed a credit against its own section 1446 withholding tax (1446 tax) for the
tax paid by the lower-tier partnership on its behalf. If an upper-tier domestic
partnership directly owns an interest in a lower-tier partnership, the lower-tier
partnership is not required to pay a withholding tax with respect to the uppertier partnership's allocable [*100] share of effectively connected taxable
income (ECTI), regardless of whether the upper-tier domestic partnership's
partners are foreign.
(b) Reporting requirements-(1) In general. To the extent that an upper-tier
partnership that is a foreign partnership is a partner in a lower-tier
partnership, and the lower-tier partnership has made 1446 tax installment
payments on ECTI allocable to the upper-tier partnership, the upper-tier
partnership shall receive a copy of the statements and forms filed by the
lower-tier partnership allocable to its partnership interest in the lower-tier
partnership under §§1.1446-1 through 1.1446-3 (e.g., Form 8805, "Foreign
Partner's Information Statement of Section 1446 Withholding Tax"). The
upper-tier partnership may treat the 1446 tax paid by the lower-tier
partnership on its behalf as a credit against its liability to pay 1446 tax, as if
the upper-tier partnership actually paid over the amounts at the time that the
amounts were paid by the lower-tier partnership. See §1.1462-1 (b). However,
the upper-tier partnership may not obtain a refund for the amounts paid by the
lower-tier partnership, but instead, must file such forms as prescribed by
§1.1446-3 and [*101] this section to allow the credits under section 33 to be
properly claimed by the beneficial owners of such income. See §1.1462-1. The
upper-tier partnership must file Form 8804, "Annual Return for Partnership
Withholding Tax (Section 1446)," and Form 8805, "Foreign Partner's
Information Statement of Section 1446 Withholding Tax," with respect to its
1446 tax obligation, passing the credit for 1446 tax paid by the lower-tier
partnership to its partners.
(2) Publicly traded partnerships. In the case of an upper-tier foreign
partnership that is a publicly traded partnership, the rules of §1.1446-4 (c)
shall apply.
(c) Look through rules for foreign upper-tier partnerships. For purposes of
computing the 1446 tax obligation of a lower-tier partnership; if an upper-tier
partnership owns an interest in the lower-tier partnership, the upper-tier
partnership's allocable share of the lower-tier partnership's ECTI shall be
treated as allocable to the partners of the upper-tier partnership (as if they
were direct partners in the lower-tier partnership) to the extent that-

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(1) The upper-tier partnership furnishes the lower-tier partnership with
a valid Form W-8IMY, "Certificate of Foreign Intermediary, [*102]
Flow Through Entity, or Certain U.S. Branches for United States Tax
Withholding," indicating that it is a look-through foreign partnership
for purposes of section 1446, and
(2) The lower-tier partnership can reliably associate (within the meaning
of §1.1441-1 (b) (2) (vii)) the effectively connected partnership
items allocable to the upper-tier partnership with a Form W-8BEN,
"Certificate of Foreign Status of Beneficial Owner for U.S. Tax
Withholding," Form W-8IMY, or Form W-9, an "Request for Taxpayer
Identification Number and Certification," for each of the upper-tier
partnership's partners. The principles of §1.1441-1 (b) (2) (vii) shall
apply to determine whether a lower-tier partnership can reliably
associate effectively connected partnership items allocable to the
upper-tier partnership to the partners of the upper-tier partnership.
The upper-tier partnership shall provide the lower-tier partnership
with a withholding certificate for each partner in the upper-tier
partnership and information regarding the allocation of effectively
connected items to the respective partners of the upper-tier
partnership. To the extent the lower-tier partnership receives a valid
Form W-8IMY from [*103] the upper-tier partnership but cannot
reliably associate the upper-tier partnership's allocable share of
effectively connected partnership items with a withholding certificate
for each of the upper-tier partnership's partners, the lower-tier
partnership shall withhold at the higher of the applicable
percentages in section 1446 (b). If a lower-tier partnership has not
received a valid Form W-8IMY from the upper-tier partnership, the
lower-tier partnership shall withhold at the higher of the applicable
percentages in section 1446 (b). See §1.1446-1 (c) (3). The
approach set forth in this paragraph (c) shall not apply to
partnerships whose interests are publicly traded. See § 1.1446-4.

(d) Examples. The following example's illustrate the provisions of § 1.1446-5:

Example 1-Sufficient documentation-tiered partnership structure,
(i) Nonresident alien (NRA) and foreign corporation (FC) are
partners in PRS, a foreign partnership, and share profits and losses
in PRS 70 and 30 percent, respectively. All of PRS's partnership
items are allocated based upon each partner's respective
ownership interest and it is assumed that these allocations are
respected under section 704 (b) and the regulations [*104]
thereunder. NRA and FC each furnish PRS with a valid Form W8BEN establishing themselves as a foreign individual and foreign
corporation, respectively. PRS holds a 40 percent interest in the
profits, losses and capital of LTP, a lower-tier partnership. NRA
holds the remaining 60 percent interest in profits, losses and
capital of LTP. LTP has $100 of annualized ECTI for the relevant
installment period. PRS has no income other than the income
allocated from LTP. PRS provides LTP with a valid Form W-8IMY
indicating that it is a foreign partnership and attaches the valid
Form W-8BENs executed by NRA and FC, as well as a statement
describing the allocation of PRS's effectively connected items
among its partners. Further, NRA provides a valid Form W-8BEN to
LTP.

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(ii) LTP must pay 1446 tax on the $60 allocable to its direct
partner NRA using the highest rate in section 1.
(iii) With respect to the effectively connected partnership items
that LTP can reliably associate with NRA through PRS (70 percent
of PRS's allocable share, or $28), LTP will pay 1446 tax on NRA's
allocable share of LTP's partnership ECTI (as determined by
looking through PRS) using the applicable percentage for noncorporate [*105] partners (the highest rate in section 1).
(iv) With respect to the effectively connected partnership items
that LTP can reliably associate with FC through PRS (30 percent of
PRS's allocable share, or $12), LTP will pay 1446 tax on FC's
allocable share of LTP's ECTI (as determined by looking through
PRS) using the applicable percentage for corporate partners.
(v) LTP's payment of the 1446 tax is treated as a distribution to
NRA and PRS, its direct partners, that those partners may credit
against their respective tax obligations. PRS will report its 1446 tax
obligation with respect to its direct foreign partners, NRA and FC,
on the Form 8804 and Form 8805 that it files with the Internal
Revenue Service and will credit the amount withheld by LTP. Thus,
PRS will, pass along to NRA and FC the credit for the 1446 tax
withheld by LTP which will be treated as a distribution to them.
Example 2-Insufficient documentation-tiered partnership structure.
PRS is a domestic partnership that has two equal partners A and
UTP. A is a nonresident alien individual and UTP is a foreign
partnership that has two equal foreign partners. C and D. Neither
A nor UTP provide PRS with a, valid Form W-8BEN, Form W-8IMY,
[*106] or Form W-9. Neither C nor D provide UTP with a valid
Form W-8BEN, Form W-8IMY, or Form W-9. PRS must presume
that UTP is a foreign person subject, to withholding under section
1446 at the higher of the highest rate under section 1 or 11 (b)
(1). PRS has also not received any documentation with respect to
A. PRS must presume that A is a foreign person, and, if PRS knows
that A is an individual, compute and pay 1446 tax based on that
knowledge.

§1.1446-6 Effective date
Sections 1.1446-1 through 1.1446-5 shall apply to partnership taxable years
beginning after the date that these regulations are published as final
regulations the Federal Register.

Par. 5. Section 1.1461-1 is amended as follows:

1. Paragraph (a) (1) is amended by adding three sentences at the end of the
paragraph.
2. The second sentence of paragraph. (c) (1) (i) is removed and two sentences are

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added in its place.
3. Paragraph (c) (1) (ii) (A) (8) is redesignated as paragraph (c) (1) (ii) (A) (9), and
a new paragraph (c) (1) (ii) (A) (8) is added.
4. The first sentence of paragraph (c) (2) (i) is removed and two sentences are
added in its place.
5. The first sentence of paragraph (c) (3) is removed and two sentences are added
in its [*107] place.
6. Paragraph (i) is revised.

The additions and revisions read as follows:

§1.1461-1 Payment and returns of tax withheld.
(a)
(1)
With respect to withholding under section 1446, this section shall
only apply to publicly traded partnerships that have not made an election
under §1.1446-4 (g). See §1.1461-3 for penalties applicable to partnerships
that fail to withhold under section 1446 on effectively connected taxable
income allocable to foreign partners, including a publicly traded partnership
that has made an election under §1.1446-4 (g). The previous two sentences
shall apply to partnership taxable years beginning after the date that these
regulations are published as final regulations in the Federal Register.

(c)
(1)
(i)
Notwithstanding the preceding sentence, any person that withholds
or is required to withhold an amount under sections 1441, 1442, 1443, or
§1.1446-4 (a) must file a Form 1042-S, "Foreign Person's U.S. Source Income
Subject to Withholding," for the payment withheld upon whether or not that
person is engaged in a trade or business and whether or not the payment is an
amount subject to reporting. The reference in the previous sentence [*108]
to withholding under §1.1446-4 shall apply to partnership taxable years
beginning after the date that these regulations are published as final
regulations in the Federal Register.
(ii)
(A)
(8) A partner receiving a distribution from a publicly traded partnership subject
to withholding under section 1446 and §1.1446-4. This paragraph (c) (1) (ii)
(A) (8) shall apply to partnership taxable years beginning after the date that

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these regulations are published as final regulations in the Federal
Register.

(2) Amounts subject to reporting-(i) In general. Subject to the exceptions
described in paragraph (c) (2) (ii) of this section, amounts subject to reporting
on Form 1042-S are amounts paid to a foreign payee or partner (including
persons presumed to be foreign) that are amounts subject to withholding as
defined in §1.1441-2 (a) or §1.1446-4 (a). The reference in the previous
sentence to withholding under §1.1446-4 shall apply to partnership taxable
years beginning after the date that these regulations are published as final
regulations in the Federal Register.

(3) Required information. The information required to be furnished under this
paragraph (c) (3) shall [*109] be based upon the information provided by or
on behalf of the recipient of an amount subject to reporting (as corrected and
supplemented based on the withholding agent's actual knowledge) or the
presumption rules of §§1.1441-1 (b) (3), 1.1441-4 (a); 1.1441-5 (d) and (e);
1.1441-9 (b) (3), 1.1446-1 (c) (3) or 1.6049-5 (d). The reference in the
previous sentence to presumption rules applicable to withholding under section
1446 shall apply to partnership taxable years beginning after the date that
these regulations are published as final regulations in the Federal
Register.

(i) Effective date. Unless otherwise provided in this section, this section shall
apply to returns required for payments made after December 31, 2000.

Par. 6. Section 1.1461-2 is amended by:

1. Removing the first sentence of paragraph (a) (1) and adding two sentences in its
place.
2. Revising paragraphs (b) and (d).

The revisions and addition read as follows:

§1.1461-2 Adjustments for overwithholding or underwithholding of
tax.
(a) Adjustments of overwithheld tax-(1) In general. Except for partnerships or
nominees required to withhold under section 1446, a withholding agent that
has overwithheld under chapter 3 of [*110] the Internal Revenue Code, and
made a deposit of the tax as provided in § 1.6302-2 (a) may adjust the

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overwithheld amount either pursuant to the reimbursement procedure
described in paragraph (a) (2) of this section or pursuant to the set-off
procedure described in paragraph (a) (3) of this section. References in the
previous sentence excepting from this section certain partnerships withholding
under section 1446 shall apply to partnership taxable years beginning after the
date that these regulations are published as final regulations in the Federal
Register.

(b) Withholding of additional tax when underwithholding occurs. A withholding
agent may withhold from future payments (or a partner's allocable share of
ECTI under section 1446) made to a beneficial owner the tax that should have
been withheld from previous payments (or paid under section 1446 with
respect to a partner's allocable share of ECTI) to such beneficial owner under
chapter 3 of the Internal Revenue Code. In the alternative, the withholding
agent may satisfy the tax from property that it holds in custody for the
beneficial owner or property over which it has control. Such additional
withholding or satisfaction [*111] of the tax owed may only be made before
the date that the annual return (e.g. Form 1042, Form 8804) is required to be
filed (not including extensions) for the taxable year in which the
underwithholding occurred. See §1.6302-2 for making deposits of tax or §
1.1461-1 (a) for making payment of the balance due for a calendar year. See
also §§1.1461-1, 1.1461-3, and 1.1446-1 through 1.1446-5 for rules relating
to withholding under section 1446. References in this paragraph (b) to
withholding under section 1446 shall apply to partnership taxable years
beginning after the date that these regulations are published as final
regulations in the Federal Register.

(d) Effective date. Unless otherwise provided in this section, this section
applies to payments made after December 31, 2000.

Par. 7. Section 1.1461-3 is added to read as follows.

§1.1461-3 Withholding under section 1446.
For rules relating to the withholding tax liability of a partnership or nominee
under section 1446, see §§1.1446-1 through 1.1446-6. For penalties and
additions to the tax for failure to timely pay the tax required to be paid under
section 1446, see sections 6655 (in the case of publicly traded partnerships
that have [*112] not made an election under §1.1446-4 (g), see section
6656), 6672, and 7202 and the regulations under those sections. For
penalties and additions to the tax for failure to file returns or furnish
statements in accordance with the regulations under section 1446, see
sections 6651, 6662, 6663, 6721, 6722, 6723, 6724 (c), 7201, 7203, and the
regulations under those sections. This section shall apply to partnership
taxable years beginning after the date that these regulations are published as
final regulations in the Federal Register.

Par. 8. Section 1.1462-1 is amended by revising paragraphs (b) and (c) to read as follows:

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

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

Par. 9. Section 1.1463-1 is amended by:

1. Adding two sentences at the end of paragraph (a).
2. Revising paragraph [*114] (b).

The addition and revision read as follows:

§1.1463-1 Tax paid by recipient of income.
(a)
See § 1.1446-3 (0 for additional rules where the tax was required
to be withheld under section 1446. The reference in the previous sentence to
withholding under section 1446 shall apply to partnership taxable years
beginning after the date that these regulations are published as final
regulations in the Federal Register.
(b) Effective date. Unless otherwise provided in this section, this section
applies to failures to withhold occurring after December 31, 2000.

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PART 301-PROCEDURE AND ADMINISTRATION
Par. 10. The authority for 26 CFR part 301 continues to read in part as follows:

Authority: 26 U.S.C. 7805

Par. 11. In §301.6109-1 is amended as follows:

1. In paragraph (b) (2) (vi), remove the word "and".
2. In paragraph (b) (2) (vii), remove the period at the end of the paragraph and add
"; and" in its place.
3. Paragraph (b) (2) (viii) is added.
4. In paragraph (c), the first three sentences are revised and a sentence is added at
the end of the paragraph.

The amendments and additions read as follows:

§301.6109-1 Identifying numbers.

(b)
(2)
(viii) A foreign person that furnishes a withholding [*115] certificate
described in §1.1446-1 (c) (2) or (3) of this chapter. This paragraph (b) (2)
(viii) shall apply to partnership taxable years beginning after the date these
regulations are published as final regulations in the Federal Register.
(c) Requirement to furnish another's number. [*116] Every person required
under this title to make a return, statement, or other document must furnish
such taxpayer identifying numbers of other U.S. persons and foreign persons
that are described in paragraph (b) (2) (i), (ii), (iii), (vi), (vii), or (viii) of this
section as required by the forms and the accompanying instructions. The
taxpayer identifying number of any person furnishing a withholding certificate
referred to in paragraph (b) (2) (vi) or (viii) of this section shall also be
furnished if it is actually known to the person making a return, statement, or
other document described in this paragraph (c). If the person making the
return, statement, or other document does not know the taxpayer identifying
number of the other person, and such other person is one that is described in

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paragraph (b) (2) (i), (ii), (iii); (vi), (vii), or (viii) of this section, such person
must request the other person's number.
References in this paragraph
(c) to paragraph (b) (2) (viii) of this section shall apply to partnership taxable
years beginning after the date these regulations are published as final
regulations in the Federal Register.

Par. 12. In §301.6721-1, paragraph (g) (4) [*117] is revised to read as follows:

§301.6721-1 Failure to file correct information returns.

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

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.
(Filed by the Office of the Federal Register on September 2, 2003, 8:45 a.m., and published in the
issue of the Federal Register for September 3, 2003, 68 F.R. 52465)
Source: IRS Cumulative Bulletin and Internal Revenue Bulletin
View: Full
Date/Time: Tuesday, July 5, 2011 - 3:36 PM EDT

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