On December 21st, 2022, the IRS released Notice 2023-8 (the “Notice”). The Notice states that the IRS intends to issue proposed regulations providing additional guidance under existing PTP withholding regulations on three topics regarding U.S. withholding agent compliance under Internal Revenue Code Section 1446(f) (hereafter “Sections” shall refer to sections of such Code): 1) sales of interests in Foreign PTPs; 2) reliance on late certifications; and 3) short sales of PTP interests.
Background
Section 1446(f) was enacted in 2017 as part of the Tax Cuts and Jobs Act (PL 115-97) and imposes a withholding obligation on transferees to withhold 10% of the amount realized on the sale or exchange of certain partnership interests. Final regulations issued in 2020 mandate withholding by a transferee’s broker on sales or exchanges of interests in publicly traded partnerships (“PTPs,” as defined under Section 7704), as well as in connection with certain distributions by PTPs. Exceptions to withholding include where the transferor provides a certification claiming an exception or reduction to withholding or where the PTP provides a qualified notice indicating the exception under Treas. Reg. Sec. 1.1446(f)-4(b)(3)(ii) applies (the “ten-percent exception”).
Sales of interests in foreign PTPs
In general, the existing regulations provide that if a broker is uncertain whether an entity is properly classified as a partnership, the broker may be required to withhold on each sale of an interest in the entity. Rather than requiring a broker to determine whether a foreign interest that trades on a foreign market is a PTP for U.S. tax purposes, the Notice provides that the Treasury Department and IRS intend to issue proposed regulations modifying the 2020 final regulations to allow a broker that effects a sale of an interest in an entity that is organized outside of the United States and that trades solely on a foreign established securities market or foreign secondary market (foreign-traded entity) to presume that the entity is not a PTP for U.S. tax purposes unless the broker has actual knowledge otherwise.
The IRS indicates in the Notice that there would be one important caveat under such proposed regulations: A broker with knowledge that a foreign-traded entity is a PTP for U.S. tax purposes would be required to withhold under Section 1446(f) on the sale of an interest in the PTP unless the PTP has indicated on a qualified notice that the ten-percent exception applies or the transferor provides a certification claiming an exception or reduction to withholding, as the proposed regulations will not allow brokers to presume that such a PTP does not have effectively connected income.
Reliance on late certifications
The Notice further provides that the Treasury Department and IRS also intend to issue proposed regulations modifying the final regulations to allow brokers to rely on late certifications claiming an exception or reduction to withholding. Under the proposed regulations, a broker would be allowed to rely on a certification received within 30 days of payment (or within 1 year of payment if accompanied by a signed affidavit). In addition, such proposed regulations would further provide that if a certification is received more than one year after the date of payment, the broker would be permitted to rely on the certification if it contains the signed affidavit and, in the case of a claim for treaty benefits under §1.1446(f)-4(b)(5), documentary evidence described in §1.1441-6(c)(4)(i) or (ii) to support the treaty claim made on the certificate. The allowance for late certifications would apply to any certification used to claim an exception or reduction to withholding on the transfer of a PTP interest under Treas. Reg. Sec. 1.1446(f)-4.
Short sales of PTP interests
To provide relief in the case of short sales of PTP interests (“PTP shorts”), the Notice additionally states that such proposed regulations will amend the final regulations to include an exception to withholding under Section 1446(f) for short sales of PTP interests (the “PTP short exception”). The Notice includes alternative descriptions of PTP shorts and explains the basic economic benefit of the transaction to the short seller. The Notice notes that such transactions typically involve the taxpayer, the original PTP interest owner and a broker that has legal relationships to both the taxpayer and the owner. However, the Notice further provides that the PTP short exception would not apply (and thus withholding could apply) if the taxpayer holds substantially identical property in an account with the broker or the broker has actual knowledge the taxpayer holds substantially identical property in an account with another broker, as there may be gain from the PTP shorts subject to Section 864(c)(8).
The Notice also provides that the proposed regulations would clarify existing guidance to brokers regarding withholding and reporting associated with PTP shorts that do not qualify for the PTP short exception. Specifically, the date of transfer for purposes of withholding and reporting on a PTP short under Treas. Reg. Sec. 1.1446(f)-4 would be the date on which the sale to market of the PTP interest is entered on the books of the broker, but the broker would not be required to satisfy its withholding liability until payment is made. This approach would allow a broker to withhold from the proceeds of the sale to market when it knows that the PTP short exception does not apply because it holds (or knows that another broker holds) substantially identical property for the taxpayer at the time of such sale.1
Effective date
The proposed regulations would apply to transfers or distributions made on or after January 1, 2023, but prior to their promulgation, a broker or qualified intermediary (QI) may rely on provisions of this Notice.
*The authors gratefully acknowledge the contributions of Robert Schwaba and Anna Vayser
1 A discussion of whether property is substantially identical for such purposes is beyond the scope of both the Notice and this summary.
