Mr. Chip Harter
Deputy Assistant Secretary (International Tax Affairs)
Department of the Treasury
1400 Pennsylvania Avenue, NW
Washington, DC 20224
Ms. Kamela Nelan
Attorney-Advisor (Office of Tax Policy)
Department of the Treasury
1400 Pennsylvania Avenue, NW
Washington, DC 20224
Mr. Jason Smyczek Office of Associate (Chief Counsel), International
Senior Technical Reviewer, Branch 4
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224
Mr. John Sweeney Office of Associate (Chief Counsel), International
Branch Chief, Branch 8
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224
Re: Recommendations on proposed regulations under section 1446(f)
Dear Gentlemen and Madam:
The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates the opportunity to submit comments on the proposed regulations under section 1446(f) of the Internal Revenue Code.2 SIFMA submitted comments to Notices 2018-083 and 2018-294 (the “Notices”) in letters dated February 13, 2018 and August 2, 2018, regarding the withholding under new section 1446(f) on dispositions of certain partnership interests by foreign persons. We greatly appreciate the consideration of our comments in the drafting of the proposed regulations and the opportunity to comment further.
I. Background
The Tax Cuts and Jobs Act (P.L. 115-97) added two new provisions to the Code concerning sales of partnership interests by foreign persons. Section 864(c)(8) treats a foreign partner’s gain (or loss) from the disposition of an interest in a partnership as effectively connected income (or loss) subject to US net income tax to the extent that the partner would have had effectively connected gain (or loss) had the partnership sold all of its assets at fair market value on the disposition date. Section 1446(f) requires that a buyer/transferee of a partnership interest from a foreign person withhold 10 percent of the “amount realized” by the seller/transferor partner “if any portion of the gain (if any) on any disposition of an interest in a partnership would be” subject to tax under section 864(c)(8). If the transferee fails to withhold the correct amount of tax under section 1446(f), the partnership has the obligation to withhold from future distributions to the buyer/transferee partner.
On December 29, 2017, the Department of the Treasury (the “Treasury”) and the Internal Revenue Service (the “IRS”) released Notice 2018-08, 2018-7 I.R.B. 352 suspending the requirement to withhold on dispositions of interests in publicly traded partnership (“PTP”s). On February 13, 2018, SIFMA submitted a letter requesting a permanent suspension of withholding for dispositions of interests in PTPs due to the significant practical problems referenced in Notice 2018-08 and requested guidance to address other operational challenges. On April 2, 2018, the Treasury Department and the IRS released Notice 2018-29, 2018-16 I.R.B. 495, which provides guidance for withholding on dispositions of interests in non-PTPs and provides several significant exceptions to withholding. Notice 2018-29 also suspends the requirement that partnerships withhold on distributions to new partners if those partners failed to withhold on the amount realized by the selling partners. On August 2, 2018, SIFMA submitted a letter that, among other requests, reiterated its request that Treasury use its regulatory authority under section 1446(f)(6) to indefinitely exclude dispositions of PTP interests from withholding. On May 13, 2019, the proposed regulations under section 1446(f) were published providing requirements for withholding on PTP interests with a proposed effective date of 60 days after the regulations are published as final.5