On January 7, 2021, the Internal Revenue Service (the “IRS”) and the U.S. Department of the Treasury (the “Treasury”) issued final regulations[1] (the “Final Regulations”) providing guidance on Section 1061 of the Internal Revenue Code (the “Code”).[2] The Final Regulations modify the proposed regulations[3] (the “Proposed Regulations”) that were released in July of 2020. We previously discussed the Proposed Regulations with a series of “Key Takeaways” in our client alert published here. This post highlights certain changes made to the Proposed Regulations, and certain important provisions of the Proposed Regulations that remain unchanged in the Final Regulations.
Section 1446(f) Final Regulations: Key Changes to Guidance on Non-Publicly Traded Partnership Interest Transfers by Non-U.S. Persons
On October 7, 2020, the U.S. Internal Revenue Service (“IRS”) and Treasury Department released final regulations[1] providing guidance on the rules imposing withholding and reporting requirements under the Code[2] on dispositions of certain partnership interests by non-U.S. persons (the “Final Regulations”). The Final Regulations expand and modify proposed regulations[3] that were published on May 13, 2019 (the “Proposed Regulations”), and which we described in a prior Tax Talks post.[4] Unless otherwise specified, this post focuses on the differences between the Proposed Regulations and the Final Regulations affecting transfers of interests in non-publicly traded partnerships.
Enacted as part of the “Tax Cuts and Jobs Act,” Section 1446(f) generally requires a transferee, in connection with the disposition of a partnership interest by a non-U.S. person, to withhold and remit ten percent of the “amount realized” by the transferor, if any portion of any gain realized by the transferor on the disposition would be treated under Section 864(c)(8) as effectively connected with the conduct of a trade or business in the United States (“Section 1446(f) Withholding”).[5]
Prior to issuing the Proposed Regulations, the IRS had issued Notice 2018-08 and Notice 2018-29 to provide interim guidance with respect to Section 1446(f) Withholding.
Section 1446(f) Proposed Regulations: Key Guidance on Partnership Interest Transfers by Non-U.S. Persons
On May 13, 2019, the U.S. Internal Revenue Service (“IRS”) and Treasury Department published proposed regulations providing guidance on the rules imposing withholding and reporting requirements under the Code[1] on dispositions of certain partnership interests by non-U.S. persons (the “Proposed Regulations”). The Proposed Regulations expand and in important ways modify earlier Notice 2018-29[2] on dispositions of non-publicly traded partnership interests.[3] Unless otherwise specified, this post focuses on the aspects of the Proposed Regulations affecting transfers of interests in non-publicly traded partnerships.
Enacted as part of the “Tax Cuts and Jobs Act”, Section 1446(f) generally requires a transferee, in connection with a disposition of a partnership interest by a non-U.S. person, to withhold and remit 10 percent of the “amount realized” by the transferor, if any portion of any gain realized by the transferor would be treated as effectively connected with the conduct of a trade or business in the United States under the substantive sourcing rule of Section 864(c)(8).[4]
Prior to issuing the Proposed Regulations, the IRS issued Notice 2018-08 and Notice 2018-29 to provide interim guidance with respect to these withholding and information reporting requirements. On December 27, 2018, the IRS issued proposed regulations under Section 864(c)(8), providing rules determining the amount of gain or loss treated as effectively connected gain or loss with a U.S. trade or business.
Tax Reform – I.R.S. Updates Withholding Tax Guidance on Sales of Partnership Interests
On April 2, 2018, the Internal Revenue Service (“IRS”) released Notice 2018-29[1] (the “Notice”), announcing the intention of the IRS and the Department of the Treasury to issue regulations regarding the withholding requirements under Section 1446(f),[2] which was promulgated pursuant to recently enacted U.S. tax legislation, commonly referred
IRS Updates Ruling Policy on Corporate Business Purpose and Device Requirements under Section 355
The U.S. Internal Revenue Service (“IRS”) released Revenue Procedure 2016-45 (the “Revenue Procedure”) on August 26, 2016, permitting taxpayers once again to seek private letter rulings on issues of “corporate business purpose” and “device” under Section 355 of the U.S. Internal Revenue Code of 1986, as amended (dealing with tax-free spin-offs and related transactions). The corporate business purpose and device requirements under Section 355 have long been matters on which the IRS has preemptively declined to issue letter rulings or determination letters (these are commonly referred to as “no-rule” areas, the full list of which is reissued annually; see, e.g., Rev. Proc. 2016-3). The Revenue Procedure states that the IRS has determined that there are a number of unresolved legal issues relating to the corporate business purpose and device requirements that may be germane to determining the tax consequences of a transaction. As a result, the IRS will consider ruling requests, dated on or after August 26, 2016, related to the corporate business purpose and device requirements, subject to the overall standard requiring that the request present a “significant issue” and the general latitude of the IRS not to rule if, in their view, the facts and circumstances so warrant.
By removing these issues from the no-rule list, the IRS offers corporations considering a tax-free spin-off the possibility of significantly greater comfort on the U.S. federal income tax treatment of the transaction. The change in position may also reflect recognition by the IRS that while existing published and non-published guidance on corporate business purpose and device addresses many open issues in respect of these requirements of Section 355, significant issues remain that may merit seeking an IRS determination before a transaction proceeds.
The removal of corporate business purpose and device from the no-rule list follows on the heels of the July issuance of proposed regulations under Section 355 addressing the “device” and “active trade or business” requirements of Section 355. Notably, the Revenue Procedure does not specifically discuss whether questions about the application or interpretation of the new proposed regulations relating to device are amenable to ruling requests (indeed, the Revenue Procedure does not mention these proposed regulations at all). Click here for our client alert on the proposed regulations on “device” and “active trade or business”.
A brief background on private letter rulings and no-rule areas under Section 355 follows.