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IRS releases section 1446(f) regulations

Nelson Suit
Nelson Suit
Tax Compliance Officer

Sometimes the thing you have long waited for is not the thing you really want. This is the case at times with tax regulations. And this is likely true of the final regulations under Internal Revenue Code section 1446(f) released by Treasury and the IRS relating to requirements for brokers to withhold on proceeds from sales of interests in publicly traded partnerships (PTPs).


  1. The IRS has released section 1446(f) regulations requiring brokers to withhold on amounts realized from sales of publicly traded partnerships by non-U.S. transferors.
  2. The rules, effective 1 January 2022, would apply to payments to both a non-U.S. customer and certain broker counterparties.
  3. Broker systems and processes will need to be updated to identify withholdable PTP trades, account for potential exceptions to withholding, and conduct required tax reporting.

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Essentially, the final regulations under Internal Revenue Code section 1446(f) follow the framework of proposed regulations issued in May 2019.

While the regulations cover withholding with respect to transfers of both non-publicly traded partnerships and PTPs, it has been the PTP withholding piece that has instilled that tinge of apprehensiveness among brokers. That is because for the sale of such PTPs, brokers are responsible for the withholding.

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Broker obligation to withhold on PTP sales

Under the final regulations, brokers must generally withhold 10 percent on the amount realized from the sale or exchange of interests in PTPs if the amount is paid to a person that is treated under the regulations as a non-U.S. person.

This could be a customer that is a non-U.S. customer. Or it could be another broker that facilitates the trade. In both cases, brokers will need to review their systems and processes, and update them to accommodate the new documentation, withholding and reporting requirements of the new regulations.

Take the broker-to-broker payment piece, for example.

There is a general presumption that when a broker pays to another broker, the second broker is a non-U.S. person unless you can document the broker as a U.S. person.

There is no exemption for DVP (delivery versus payment) transactions or multiple broker transactions as there is in the Form 1099-B/backup withholding world. This will mean new procedures for documenting broker counterparties and a rethink of when withholding may actually apply, so that failed trades can be managed or avoided in such PTP sales.

Withholding with respect to intermediaries – QIs and NQIs

The regulations provide a good deal of flexibility if an intermediary counterparty is what is called a ‘qualified intermediary’ or ‘QI’.

A QI is generally a non-U.S. financial institution that has entered into an agreement with the IRS to fulfill certain tax documentation, withholding and reporting obligations. A QI can assume responsibility for section 1446(f) withholding, in which case the broker making the payment would not need to withhold.

A QI can also provide the U.S. broker with withholding rate pools or payee-specific documentation, in which case the U.S. broker would withhold based on the designated rate pools or documentation.

For intermediaries that are not QIs, what are known as non-qualified intermediaries or NQIs, the world is not as rosy. In fact, it is sort of bleak.

While in the ordinary Chapter 3 and Chapter 4 context, an NQI can provide payee-specific documentation for the underlying beneficiaries and the withholding agent would generally withhold based on that information, this is not the case with withholding on PTP sales.

The regulations do not provide for look-through; the NQI is deemed foreign and subject to section 1446(f) in full.

Withholding on non-U.S. customers

The new withholding rules on PTP sales proceeds also make it that much more important to obtain valid tax documentation for customers on onboarding.

This, of course, should already be a priority because existing backup withholding at 24 percent can apply to proceeds of sale in general in case of invalid customer tax documentation. But the new rules provide special documentation quirks, such as for foreign partnerships that can certify to a ‘modified’ amount realized on a PTP sale based on their U.S. vs non-U.S. partner composition.

This requires proper documentation by the foreign partnership and broker systems with an enhanced ability to handle such certifications.

Exceptions and PTP distributions under 1446(f)

Moreover, there are a number of exceptions to withholding that may arise; exceptions that need to be handled by broker systems.

A few of these exceptions are based on certifications by the seller or payee: A certification of non-foreign status (essentially a Form W-9), a claim for exemption under a tax treaty (usually provided on a Form W-8BEN or Form W-8BEN-E) or a foreign dealer with a U.S. operation that can provide a Form W-8ECI.

There is also the an exemption where the PTP is able to certify in a qualified notice that less than 10 percent of the gain from a deemed sale of the PTP’s assets would be treated as gain attributable to a U.S. trade or business.

And broker systems would need to be able to coordinate backup withholding and section 1446(f) withholding, because if there is backup withholding there is no section 1446(f) withholding on the same transfer.

If this is not already complex enough, distributions from PTPs may also be treated as transfers subject to withholding under section 1446(f).

Currently, distributions attributable to income effectively connected with a U.S. trade or business of the PTP are already subject to withholding under section 1446(a).

The new withholding rules would treat that portion of a distribution which is not attributable to cumulative net income of the PTP as subject to section 1446(f) withholding — i.e., certain return of basis distributions.

Qualified notice rules and effective date

There are amendments to qualified notice rules for PTPs, which should increase transparency and reduce overall uncertainty on broker withholding obligations. However, these are also additional facets that broker systems will need to account for.

The effective date of the new regulations is 1 January 2022. That allows for a bit more than a year to digest the requirements of the new regulations, understand where other industry participants are heading in terms of system builds and compliance, develop systems enhancement plans (including new logic engines), and implement and test.

It’s less than the 18-month lead time industry had asked for, and the regulations are likely more complicated than industry had expected. However, with tax regulations, as with governmental regulations in general, you don’t always get what you want.

Refinitiv Maxit, the industry’s only end-to-end tax information reporting solution, allows firms to focus on their core business without the cost and distraction of managing multiple vendors and large operations teams


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