Sign Connecticut Assignment of Partnership Interest Now

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today we are going to talk about new section 1446 f related to withholding taxes on sales of partnerships engaged in us business before we get into the new rules it's helpful to provide an overview of the existing rules regarding ongoing earnings of partnerships as opposed to sales of partnerships let's say we have a u.s. partnership that operates a u.s. business the partnership is 50 percent owned by a u.s. partner and 50 percent owned by a foreign partner under Section 8 75 1 the foreign partner is deemed to be engaged in a u.s. business because the partnership is engaged in a u.s. business it doesn't matter whether the partnership is a u.s. partnership or a foreign partnership what matters is that the partnership is engaged in a u.s. business section 1446 a provides that the partnership must withhold on income that is effectively connected with the u.s. business that's allocable to the foreign partner the partnership files forms ad 804 eighty eight oh five and eighty eight thirteen to withhold the tax and report the income the foreign partner must annually file an income tax return for individuals that's form 1040 NR for corporations it's form 1120 F for this slide we've been talking about the ongoing operating income of a partnership now we're going to change to discuss what happens when the foreign partner sells its interest in the partnership let's say that a buyer comes along and pays cash to the foreign partner in exchange for the partnership interest it doesn't matter whether the buyer is a u.s. buyer or a foreign buyer what matters here is that the selling partner is a foreign person in Revenue Ruling 91 - 32 the IRS concluded that gain recognized by the foreign partner would be taxable in the u.s. to the same extent the foreign partner would be taxed as if the partnership had sold all of its assets and allocated 50 percent of the u.s. effectively connected income to the foreign park in July of 2017 the Tax Court in grecian magnesite rejected the IRS as position in Revenue Ruling 91 - 32 the Tax Court held that in general the gain on the sale of the partnership interest by the foreign partner is not subject to US tax in December of 2017 Congress enacted section 861 or c8 which generally overturns the result of Grecian magnesite and effectively reinstates the position in Revenue Ruling 91 - 32 congress also enacted section 1446 F which requires withholding on the disposition of a partnership interest it is Section 1446 F that we will be discussing today to summarize section 875 1 provides that the ongoing earnings of a foreign partner are subject to US tax Section 1446 a provides that the partnership must withhold on the ongoing profits allocable to the foreign partner news section 864 C 8 provides that gain on the sale of a partnership interest is effectively connected income to the extent that gain on the sale of a partnerships assets would be us effectively connected income and new Section 1446 F provides withholding requirements with respect to the sale of a partnership interest by a foreign partner topics were going to discuss today include Section 1446 F withholding generally exceptions to the withholding requirements determining the amount to withhold partnership backup withholding partnerships as transferees themselves we will not discuss sales of interests in publicly traded partnerships so on to Section 1446 F withholding generally using the same structure as before a buyer pays cash in exchange for the partnership interest the seller is the transfer or and the buyer is the transferee the buyer needs to withhold 10% on the amount realized to the foreign seller Section 1446 F is a lot like Fructis under FERPA if a foreign person owns u.s. real estate and a buyer purchases the real estate from the foreign person section 897 causes gain on the US real estate to be deemed effectively connected income section 14 45 requires the buyer to withhold 15% on the amount paid to the foreign seller guidance to date under Section 1446 F includes notice 2018 - 8 which temporarily suspends the withholding requirement for dispositions of publicly traded partnerships notice 2018 - 29 which provides temporary guidance under Section 1446 F and regulations were proposed in May of 2019 in this presentation I will primarily discuss the proposed regulations however the proposed regulations are similar in many ways to the existing rules in notice 2018 - 29 there are six exceptions to withholding here is a list of the six we will go through each of them individually the first exception is the non foreign status exception here the buyer does not need to withhold if the seller provides a form w-9 certifying that the seller is a US person and provides the seller's US taxpayer identification number a buyer can rely on form w-9 already in its possession however if the buyer knows that the w-9 is incorrect the buyer cannot rely on it back to our basic structure but this time the selling partner is a u.s. person in this case the US partner provides a w-9 to the buyer certifying that the seller is a US person if the buyer does not receive a w-9 from the selling partner then the buyer must withhold 10% of the amount realized this can be a trap for the unwary in the wholly domestic context if the buyer does not realize it needs to get a w-9 from the seller as an aside the proposed regulations rely heavily on certifications there are 12 or more certifications in the proposed regulations the w-9 is one example of a certification each of the certifications must include the name and address for the person providing it include the seller's taxpayer identification number be signed under penalties of perjury and be received within 30 days before the transfer if these requirements are not met the certification generally cannot be relied upon and withholding may be required the section exception to withholding is where the seller does not realize any gain on the disposition if the buyer receives from the seller a certification indicating that the sale of the partnership interest will not result in any realized gain to the seller then the buyer does not need to withhold however any ordinary income recognized under Section 751 is considered gain realized so if there is an overall loss but some gain is recognized under Section 751 this exception cannot apply the third exception to withholding is where less than 10% of the total gain would be effectively connected gain this exception applies where the buyer receives from the partnership a certification that states that if the partnership sold all of its assets less than 10% of the net would be effectively connected with the u.s. business let's go through an example say we have a foreign partnership that operates a u.s. business and operates a foreign business with a u.s. partner owning 50% and a foreign partner owning 50% a buyer comes along to acquire the partnership interest but in this case the net gain on the sale of the US business would be less than 10% of the total gain here the partnership can certify to the buyer that less than 10% of the gain would be effectively connected with the u.s. business with this certification in hand the buyer would not need to withhold the fourth exception is where less than 10% of the total distributive share of partnership income is effectively connected taxable income over three years to meet this exception the buyer must receive from the seller a certification that states the seller was a partner for the prior three years the effectively connected taxable income was less than 1 million dollars for each of the three years the effectively connected taxable income was less than 10% of the total distributive share allocable to that partner for each of the three years and the seller filed u.s. tax returns and paid u.s. tax on the effectively connected taxable income for each of the three years the buyer cannot rely on this exception if the seller did not receive a Form 88 o-5 in one or more of the three years or the seller did not have net distributive share in one or more of the three years the fifth exception is where no gain is recognized under a non recognition provision such as section 751 or 721 this exception requires that the buyer received from the seller a certification indicating that no gain is recognized due to a non recognition provision the certification must briefly describe the transfer and the relevant law this exception does not apply if any amount of gain is recognized for example where there is some boot in a 351 exchange the sixth exception is where a treaty exempts the gain from being taxable this exception requires that the buyer received from the seller a certification indicating that an income tax treaty fully exempts the gain from u.s. tax the seller must include a withholding certificate such as a wa8 been or w-8 been e the buyer must mail a copy of the withholding certificate to the IRS those are the six exceptions to withholding for five of the accept the certification was made from the seller to the buyer for one of the exceptions the certification was made from the partnership to the buyer now on to determining the amount to withhold generally 10% of the amount realized must be withheld the amount realized on the disposition of a partnership interest is not as straightforward as on dispositions of other assets we will discuss these special rules the proposed regulations have certain limits on the amount to withhold there is also a reduced withholding if a maximum tax liability is computed generally the amount realizes the cash received by the seller and the fair market value of property received by the seller plus liabilities assumed by the buyer in the partnership context the amount realized also includes the sellers decrease in its share of partnership liabilities under Section 752 section 752 B provides to any decrease in a partner share of partnership liabilities is treated as a distribution of money to the partner when a partner sells its interest in the partnership its share of the partnership liabilities will decrease to zero the buyer is the person who needs to withhold to determine 10 percent of the amount realized the buyer needs to be able to compute the amount realized the buyer knows how much cash and property it is transferring the buyer knows the liabilities that it assumes but the buyer does not know the sellers decrease in its share of partnership liabilities under Section 752 this information is either provided as a certification from the seller or as a certification from the partnership itself the seller can generally certify liabilities using information from the most recent k1 received but not if the seller is the controlling partner the partnership can certify liabilities based on its books and records as of the determination date more on the determination date later back to our basic structure for a minute the seller can certify the reduction in liabilities or the partnership can certify the reduction in liabilities what if the buyer does not receive any certification then the buyer cannot determine the amount realized what if the buyer cannot determine the amount realized the buyer must withhold all of the purchase price the seller gets nothing all of the cash and property goes to the IRS the amount realized can be modified where the selling partner is itself a foreign partnership with the US partners say we have the same structure as before except that the selling partner is a foreign partnership and that partnership has two foreign partners owning 60% and one u.s. partner owning 40% if the foreign partnership was certifies to the buyer unformed w8i my that it has a 40% u.s. partner then the buyer can proportionately reduce the amount realized for example if the amount realized is 100 dollars the modified amount realized would be $60 and the buyer would only need to withhold six dollars instead of ten dollars now let's shift gears to discuss reduced withholding with respect to a maximum tax liability the buyer may withhold less than ten percent of the amount realized if it receives from the seller a certification as to the maximum tax liability for the seller to make this certification the seller must receive a statement from the partnership regarding the amount of the effectively connected gain the maximum tax liability is the highest marginal tax rate multiplied by the effectively connected gain the maximum tax liability concept is somewhat similar to obtaining a withholding certificate from the IRS in the FERPA context back to our basic structure for a minute if the partnership certifies the effectively connected gain to the seller then the seller can certify the maximum tax liability to the buyer instead of withholding ten percent of the amount realized the buyer withholds the maximum tax liability now on to partnership backup withholding if the buyer does not withhold as required the partnership must back up with hold on distributions it makes to the buyer however the partnership does not need to withhold if the buyer certifies to the partnership that there was an exception to withholding or that the buyer withheld ten percent of the amount realized back to our basic structure after the purchase the buyer becomes the partner in the partnership the buyer must certify to the partnership that either an exception to withholding applied or that ten percent of the amount realized was withheld if the buyer fails to make this certification to the partnership then the partnership must withhold on distributions it makes to the buyer again back to our basic structure for a minute let's say that the foreign partner incorrectly provides a w-9 to the buyer the seller is foreign and should not provide a w-9 but the buyer does not know that the w9 is improper the sale goes through the buyer does not withhold on any tax the buyer certifies to the partnership that it did not need to withhold because it received a w-9 with a seller certified it was a non foreign person however the partnership knows that the seller is a foreign person the partnership cannot rely on the certification from the buyer because it knows the certification is not correct the partnership has to withhold on distributions to the buyer until ten percent of the amount realized has been withheld plus interest it therefore would be prudent for a buyer to get the partnership to agree to the amount that needs to be withheld prior to the sale going through now on to the partnership acting as a transferee so far I've primarily used the terminology of seller and buyer however the regulations use the terms transfer or and transferee the partnership can be considered a transferee when it makes a distribution therefore the partnership may need withhold on a distribution to its partner let's say we have a u.s. partnership with two us partners owning 60% of the partnership the remaining 40% is owned by a foreign partner if the partnership makes a cash distribution to the foreign partner and the foreign partner surrenders his interest back to the partnership the foreign partner is the transfer or and the partnership itself is the transferee the foreign partner has effectively sold out his interest in the partnership because the partnership is the transferee it may need to withhold on the distribution I mentioned before we would discuss the determination date the determination date is the date used to determine when a partner is the controlling partner the date used to determine the fair market value and basis for withholding exceptions the date used to determine the seller share of partnership liabilities and the date used to determine the effectively connected gain for the maximum tax liability the determination date is either the date of the transfer any date no more than 60 days before the date of the transfer typically this would be the end of the month prior to the date of the sale or the later of the first day of the partnership year or the most recent revalue an event prior to the date of transfer this third alternative is not allowed for a controlling partner now just briefly I wanted to mention the reporting and paying of the tax the withheld tax must be paid to the IRS within 20 days of the date of transfer use forms 80 to 88 and 80 to 88 - a which are the forms typically used for FERP withholding to claim a credit for the tax withheld the transferee must attach the IRS stamped copy of form 80 to 88 a to its tax return and that is it I hope this video has been helpful