IRS Delays New Withholding Requirement for Dispositions of Publicly Traded Partnership Interests

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December 29, 2017

In response to public comments, the IRS today issued Notice 2018-08 that delays indefinitely withholding under new Code section 1446(f) with respect to dispositions of certain publicly traded partnerships.  Section 13501 of the enacted tax reform bill added a new Code section 1446(f) to impose a 10% withholding requirement on the amount of gain treated as effectively connected income under new Code section 864(c)(8).  (See earlier coverage here.)  Code section 864(c)(8) treats a portion of the gain or loss on the sale or exchange of a partnership interest by a foreign person as effectively connected income if that partnership is engaged in a U.S. trade or business.   The new provisions are generally effective for sales and exchanges on or after November 27, 2017, and the withholding provisions are effective for sales or exchanges after December 31, 2017.

In recognition of the significant practical problems that withholding under section 1446(f) with respect to the disposition of publicly traded partnership interests (such as the inability of the transferee to determine whether the transferor is foreign or domestic or whether any amount would be treated as effectively connected income).  The legislation addresses this by permitting a broker to deduct and withhold on behalf of the transferee for dispositions of publicly traded partnerships through a broker.  However, new withholding and reporting systems will be required before such withholding can be effectuated.

Notice 2018-08 provides that withholding will not be required under new section 1446(f) with respect to the disposition  publicly traded partnership interests until regulations or other guidance have been issued.  Withholding is required, however, with respect to dispositions of non-publicly traded partnership interests.  According to the notice, future regulations or guidance under section 1446(f) with respect to dispositions of publicly traded partnerships will be prospective and include transition rules to allow sufficient time for implementation.