The IRS today released an advance version of Notice 2018-29 to provide interim guidance regarding withholding of U.S. tax related to transfers of interests in non-publicly traded partnerships under Code section 1446(f), under the tax law signed by the president on December 22, 2017 (Pub. L. No. 115-97) (the 2017 Act).
Notice 2018-29 [PDF 188 KB] (22 pages) confirms that section 1446(f)(1) withholding on dispositions of non-publicly traded partnership interests is effective as of January 1, 2018, but waives penalties and interest if all forms and payments due on or before May 31, 2018, are filed with and paid over to IRS on or before May 31, 2018.
Withholding agents must use FIRPTA procedures, pay over withheld amounts within 20 days of transfer, and modify FIRPTA withholding forms until forms and other guidance are issued under section 1446(f)(1). The IRS temporarily suspended section 1446(f)(4) withholding.
Withholding under section 1446(f) relates to the rules codified in section 864(c)(8), also added to the Code by the new tax law, that treat as “effectively connected” with a trade or business in the United States a foreign person’s gain or loss from a disposition of an interest in a partnership that is engaged in a trade or business in the United States. The new withholding rules under section 1446(f) apply with respect to dispositions of certain partnership interests occurring after December 31, 2017, although the new substantive tax rules under section 864(c)(8) apply to transfers of interests in certain partnerships occurring on or after November 27, 2017.
Previously, on December 29, 2017, the IRS announced in Notice 2018-08 that the rules of section 864(c)(8) were currently in effect, and also that the application of withholding under new section 1446(f) as to interests in publicly traded partnerships (within the meaning of section 7704(b)) was temporarily suspended.
Notice 2018-29, which addresses interests in non-publicly traded partnerships, does not affect a transferor’s liability under section 864(c)(8), although Notice 2018-29 contains rules that modify or suspend withholding under section 1446(f).
The 2017 Act creates two new, alternative withholding regimes under new section 1446(f) that are triggered if a portion of the gain (if any) on any disposition of an interest in a partnership would be treated under section 864(c)(8) as effectively connected with the conduct of a trade or business in the United States.
Notice 2018-29 provides guidance on how to comply with the primary section 1446(f)(1) withholding obligations, and temporarily suspends the secondary section 1446(f)(4) withholding obligation.
Notice 2018-29 (Section 5) announces that persons required to withhold under section 1446(f)(1) must use the FIRPTA-related rules in section 1445 and the regulations thereunder for purposes of reporting and paying over the section 1446(f)(1) tax, except as otherwise provided, including:
At present, the IRS will not issue withholding certificates under section 1446(f)(3), such as those provided on Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests.
Notice 2018-29 generally applies to section 1446(f) withholding the general Code rules that impose liability for tax, penalties, and interest for failure to withhold and timely pay over withheld amounts.
Notice 2018-29 (Section 5) effectively waives penalties and interest if withholding is properly reported and paid over to IRS on or before May 31, 2018, stating:
The Treasury Department and the IRS intend to issue regulations providing that with respect to any forms that were required to be filed, or amounts that were due, under section 1446(f) on or before May 31, 2018, no penalties or interest will be asserted if these forms are filed with, and such amounts are paid over to, the IRS on or before May 31, 2018.
More specifically, Notice 2018-29 provides:
Tax professionals have observed the following:
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