26 C.F.R. § 1.1446-6T   Special rules to reduce a partnership's 1446 tax with respect to a foreign partner's allocable share of effectively connected taxable income (Temporary).


Title 26 - Internal Revenue


Title 26: Internal Revenue
PART 1—INCOME TAXES
Withholding of Tax on Nonresident Aliens and Foreign Corporations and Tax-Free Covenant Bonds

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§ 1.1446-6T   Special rules to reduce a partnership's 1446 tax with respect to a foreign partner's allocable share of effectively connected taxable income (Temporary).

(a) In general. The rules of this section describe when a partnership required to pay withholding tax under section 1446 (1446 tax), or any installment of such tax, may consider certain partner-level deductions and losses in computing its 1446 tax obligation under §1.1446–3, or otherwise may not be required to pay a de-minimis amount of 1446 tax with respect to a nonresident alien partner. A partnership determines the applicability of this section on a partner-by-partner basis for each installment period and when completing its Form 8804, “Annual Return for Partnership Withholding Tax (Section 1446),” and paying 1446 tax for the partnership taxable year. When applicable, the rules of this section permit a foreign partner to whom this section applies (within the meaning of paragraph (b) of this section) to furnish a certificate to the partnership that sets forth the deductions and losses that are connected with, or properly allocated and apportioned to, as the case may be, gross income that is effectively connected with the partner's U.S. trade or business and that such foreign partner reasonably expects to be available for the partner's taxable year to reduce the partner's U.S. income tax liability on the partner's allocable share of effectively connected income or gain from the partnership. The rules of this section also permit a partner to represent that the partner's investment in the partnership is (and will be) the partner's only investment or activity that will give rise to effectively connected items for the partner's taxable year. To apply the rules of this section, a partner must submit a new certificate for each partnership taxable year. Paragraph (c) of this section sets forth the deductions and losses that a partner may certify as reasonably expected to be available to such partner for the partner's taxable year, and sets forth rules regarding the partner's representation that the partnership investment is the partner's only activity giving rise to effectively connected items. Paragraph (c) of this section also sets forth requirements for a foreign partner's certificate to be valid. Paragraph (d) of this section provides rules regarding when a partnership may rely on and consider a foreign partner's certificate in computing its 1446 tax, and the effect of relying on such a certificate. Paragraph (d) of this section also provides rules regarding how a partnership must handle any certificate or updated certificate received pursuant to this section. Paragraph (e) of this section sets forth examples that illustrate the rules of this section.

(b) Foreign partner to whom this section applies—(1) In general. Subject to paragraph (b)(2) of this section, a foreign partner to whom this section applies is a foreign partner that has provided valid documentation to the partnership to whom a certificate is submitted under this section in accordance with §1.1446–1, has timely filed or will timely file a Federal income tax return in the United States in each of the partner's preceding four taxable years and the partner's taxable year(s) during which the certificate under this section is considered, and has timely paid (or will timely pay) all tax shown on such returns. This section shall not apply to a partner in a publicly traded partnership subject to §1.1446–4.

(2) Special rules. Notwithstanding paragraph (b)(1) of this section:

(i) In the case of a domestic or foreign partnership (upper-tier partnership) that is a partner in another partnership (lower-tier partnership), this section may apply to reduce or eliminate the 1446 tax (or any installment of such tax) of the lower-tier partnership with respect to a foreign partner of the upper-tier partnership only to the extent the provisions of §1.1446–5 apply to look-through the upper-tier partnership to the foreign partner of such upper-tier partnership and the certificate described in paragraph (c) of this section is provided by such foreign partner to the upper-tier partnership and, in turn, provided to the lower-tier partnership with other appropriate documentation. See §1.1446–5(c) and (e). Absent the application of §1.1446–5(c), the upper-tier partnership may not submit a certificate of deductions and losses to the lower-tier partnership.

(ii) This section shall not apply to a partner that is a foreign estate.

(iii) This section shall not apply to a partner that is a domestic or foreign trust, except to the extent that such trust is owned by a grantor or other person under subpart E of subchapter J of the Internal Revenue Code, the documentation requirements of §1.1446–1 have been met by the grantor or other owner of such trust, and the certificate described in paragraph (c) of this section is provided by the grantor or other owner of such trust to the partnership.

(c) Certificate to reduce 1446 tax with respect to a foreign partner—(1) In general. Subject to the rules of this section, a foreign partner may certify under paragraph (c)(1)(i) or (ii) of this section to a partnership for a partnership taxable year of such partnership that it has deductions and losses that the partner reasonably expects to be available to reduce the partner's U.S. income tax liability on the partner's allocable share of effectively connected income or gain from the partnership. Among other requirements, exceptions, and limitations set forth in paragraphs (c)(1)(i), (ii), and (iii) of this section, the foreign partner must generally represent that such deductions and losses have been (or will be) reflected on a timely filed U.S. income tax return of the partner for a taxable year that ends prior to the installment due date or Form 8804 filing date (without regard to extensions) for the partnership taxable year for which the certificate is considered (i.e., no anticipated deduction or loss with respect to the partner's current year operations may be considered). A partner may also certify pursuant to paragraph (c)(1)(iv) of this section that the partner's only investment or activity giving rise to effectively connected items for the partner's taxable year is (and will be) the partner's investment in the partnership. A foreign partner's certificate to a partnership under this section must be in accordance with the form and requirements set forth in paragraph (c)(2)(ii) of this section.

(i) Deductions and losses from the partnership from prior taxable years. Under this section, a partner may certify that it has deductions and losses (certified deductions and losses), other than charitable deductions, from the partnership that the partner reasonably expects to be available to reduce the partner's U.S. income tax liability on the partner's allocable share of effectively connected income or gain from the partnership for the partner's taxable year. The certified deductions and losses must be reflected on a Schedule K–1 issued (or to be issued) to the partner by the partnership for a prior partnership taxable year. A partner that has a loss that is set forth on a Schedule K–1 the partnership issued for a prior year, but is not reflected on any of the partner's prior year returns because the loss is suspended under section 704(d) and, therefore, not deductible, may certify such loss to the partnership. Further, the foreign partner must certify that the deductions and losses are connected with (or, in the case of a corporate partner, allocated and apportioned to) gross income which is effectively connected (or treated as effectively connected) with the conduct of the partner's trade or business in the United States. In addition, the certificate must contain the information and representations set forth in paragraph (c)(2)(ii) of this section.

(ii) Deductions and losses from sources other than the partnership from prior taxable years. Under this section, a foreign partner may certify that it has deductions and losses, other than charitable deductions, from sources other than the partnership that the partner reasonably expects to be available to reduce the partner's U.S. income tax liability on the partner's allocable share of effectively connected income or gain from the partnership for the taxable year. The foreign partner must certify that the deductions and losses are connected with (or, in the case of a corporate partner, allocated and apportioned to) gross income which is effectively connected (or treated as effectively connected) with the conduct of the partner's trade or business in the United States. To the extent the deductions and losses certified under this paragraph (c)(1)(ii) arise from the partner's investment in another partnership, such deductions and losses must be reflected on a Schedule K–1 issued (or to be issued) to the partner by such other partnership for a prior taxable year of such other partnership that ends prior to the installment due date or Form 8804 filing date (without regard to extensions) of the partnership for the partnership taxable year for which the certificate is considered. Further, the partner may not certify to the partnership a loss suspended under section 704(d) from such other partnership. In addition, the certificate must contain the information and representations set forth in paragraph (c)(2)(ii) of this section.

(iii) Limit on the consideration of a partner's net operating loss deduction. A partnership may not consider a partner's net operating loss deduction certified under this section in an amount greater than 90 percent of the partner's allocable share of ECTI.

(iv) Certificate of nonresident alien partner that partnership investment is partner's only activity giving rise to effectively connected items. Under this section, a nonresident alien partner whose only activity giving rise to effectively connected income, gain, deduction, or loss for the partner's taxable year is (and will be) the partner's investment in the partnership, may certify this fact to the partnership. Except as otherwise provided in this paragraph (c)(1)(iv), a certificate submitted under this paragraph is generally subject to all of the applicable requirements and rules of this section (e.g., the partner's preceding four years U.S. income tax returns are (or will be) timely filed, a new certificate is submitted for each partnership year, the time requirements for submitting the certificate are met, the certificate is signed under penalties of perjury). A partnership that receives a certificate from a nonresident alien partner under this paragraph (c)(1)(iv) is not required to pay 1446 tax (or any installment of such tax) with respect to such partner if the partnership estimates that the annualized (or, in the case of a partnership completing its Form 8804, the actual) 1446 tax due with respect to such partner is less than $1,000. For purposes of computing the annualized or actual 1446 tax due with respect to such partner under the previous sentence, the partnership may not consider any of the partner's deductions and losses certified under paragraph (c)(1)(i) or (ii) of this section. In addition to the requirements of paragraph (c)(2) of this section, a nonresident alien partner must notify the partnership in writing and revoke its certificate submitted under this paragraph (c)(1)(iv) within 10 days of the date that the partner invests, or otherwise engages in, an activity that may give rise to effectively connected income, gain, deduction, or loss for the partner's taxable year. A partnership may reasonably rely on a partner's statement under the rules of paragraph (d) of this section and generally will be relieved of an addition to the tax under section 6655 as applied through this section, however, the partnership shall remain liable for the 1446 tax (or any installment of such tax), and any applicable additions to the tax (other than the addition to the tax under section 6655 as applied through this section), interest, and penalties under such paragraph, if the partner's certificate is later determined to be defective. The IRS may determine under the rules of this section, in its sole discretion, that the partner's certificate is defective within the meaning of paragraph (c)(3) of this section and notify the partnership in accordance with the rules of this section.

(2) Time and form of certification—(i) Time for certification provided to partnership—(A) First certificate submitted for a partnership's taxable year. Provided the other requirements of this section are met, the first certificate a foreign partner furnishes with respect to a partnership's taxable year shall not be relied upon for any installment due date, or Form 8804 filing due date (without regard to extensions), arising within 30 days of the date that the partnership receives such certificate. For example, a calendar year domestic partnership must generally receive a certificate under this section from a foreign partner on or before March 16th for the partnership to consider it for its first installment due date of 1446 tax on April 15th. If the foreign partner's first certificate for the partnership's current taxable year is received on April 10th, the partnership may not consider such certificate until the partnership's second installment due date of June 15th. See §1.1446–3 for 1446 tax installment due dates. See also paragraph (e) of this section for examples illustrating the rules of this paragraph (c)(2).

(B) Updated certificates and status updates—(1) Foreign partner's prior year tax returns not yet filed. If a foreign partner's U.S. Federal income tax return for a preceding taxable year has not been filed at the time that the partner submits its first certificate under this paragraph (c) to the partnership for a partnership taxable year, the partner shall specify this fact, set forth the filing due date for such return to the partnership in accordance with paragraph (c)(2)(ii) of this section, and submit an updated certificate in accordance with this paragraph (c) no later than 10 days after the date that the partner timely files its U.S. Federal income tax return for any such taxable year. If a prior year return has not been filed under the previous sentence, the partner shall provide the partnership a status update with respect to any unfiled prior year return, which must be received by the partnership at least 10 days prior to the partnership's final installment due date. The status update must be submitted under penalties of perjury and shall set forth the filing due date for any unfiled return identified in the first certificate and indicate whether the partner's first certificate submitted for the taxable year may continue to be considered. A status update shall apply only with respect to the timely filing of a partner's prior year tax returns. If the partnership does not receive an updated certificate (that includes the information required by this paragraph (c) for a status update) or a status update from the partner at least 10 days prior to the partnership's final installment due date, the partnership shall disregard the partner's certificate for the fourth installment period and when completing its Form 8804 for the taxable year and no additional certificate may be submitted or substituted for such disregarded certificate. Notwithstanding the previous sentence, if the partner can meet the requirements of this section for the next year, the partner may submit a certificate under this section.

(2) Other circumstances requiring a foreign partner to submit an updated certificate. Notwithstanding paragraph (c)(2)(i)(B)(1) of this section, if at any time the partner estimates that it reasonably expects to have available deductions and losses in an amount less than the corresponding amounts set forth on the most recent certificate furnished to the partnership for the partnership taxable year, then, within 10 days of such determination, the foreign partner shall submit an updated certificate under this paragraph (c) to the partnership. Similarly, if at any time the partner determines that its certificate is incorrect, other than by reason of the preceding sentence (e.g., the character of a certified loss is capital rather than ordinary), then such partner shall update its certificate within 10 days of such determination.

(3) Form and content of updated certificate. The updated certificate required by this paragraph (c)(2)(i) must be submitted in the same form as the original certificate (described in paragraph (c)(2)(ii) of this section), and must include a caption at the top of the certificate, in lieu of the caption required by paragraph (c)(2)(ii), that states “UPDATED CERTIFICATE OF PARTNER-LEVEL ITEMS UNDER TEMP. REG. §1.1446–6T TO REDUCE SECTION 1446 WITHHOLDING.” Further, the partner must attach a copy of the certificate that is being updated (superseded certificate) that was previously submitted for the same partnership taxable year.

(4) When a partnership may consider an updated certificate. A partnership may only consider an updated certificate that meets all the requirements of this paragraph (c) that it receives at least 10 days prior to an installment due date in the same partnership taxable year for which the superseded certificate was provided, or at least 10 days prior to the due date of its Form 8804 (without regard to extensions) to be filed for the year the superseded certificate was provided. An updated certificate that may be considered under the previous sentence supersedes all prior certificates submitted by the foreign partner for the same partnership taxable year, beginning with the installment period or Form 8804 filing date for which the partnership may consider the updated certificate. See §1.1446–6T(e) Example 2.

(ii) Form of certification. No particular form is required for the partner's certificate of deductions and losses to the partnership, but the partner's certificate must have a caption at the top of the page that reads: “CERTIFICATE OF PARTNER-LEVEL ITEMS UNDER TEMP. REG. §1.1446–6T TO REDUCE SECTION 1446 WITHHOLDING.” Further, the certificate must include:

(A) The partner's name, address, Taxpayer Identification Number (TIN), and the date of the certification;

(B) The partnership's name, address, and TIN;

(C) The partnership taxable year for which the certificate is submitted;

(D) A representation that the partner is described in paragraph (b) of this section, and that the deductions and losses set forth in the certificate are described in paragraph (c)(1) of this section;

(E) The amount of the deductions and losses described in paragraph (c)(1) and, if applicable, the character of such deductions and losses (e.g., capital or ordinary), as well as any particular deductions and losses that are subject to limitation or otherwise warrant special consideration (e.g., suspended passive activity losses under section 469, suspended losses under section 704(d)), that the partner reasonably expects to be available to reduce the partner's U.S. income tax liability on the partner's allocable share of effectively connected income or gain from the partnership for the partner's taxable year in which such income or gain is includible in gross income;

(F) A representation that the deductions and losses described in paragraph (c)(1) and set forth in the certificate have been reflected on a timely filed U.S. income tax return, consistent with sections 874 and 882 of the Internal Revenue Code and the regulations thereunder (and such other provisions that impose requirements for the use of such deductions and losses);

(G) A representation that the deductions and losses described in paragraph (c)(1) and set forth in the certificate have not been set forth in a certificate provided to another partnership for the same taxable year for the purpose of reducing withholding under this section;

(H) A representation that the partner has timely filed, or will timely file its U.S. Federal income tax return for each of the preceding four taxable years and the partner's taxable year during which the certificate is considered, and has timely paid (or will timely pay) all tax shown on such returns as required under paragraph (b) of this section. The partner shall specify any taxable year for which a U.S. income tax return has not been filed as of the time of submission of the certificate, set forth the filing due date for such return, and represent that the partner will comply with the provisions of this paragraph (c) for providing an updated certificate or status update with respect to the filing of any such return;

(I) A representation that all of the deductions and losses described in paragraph (c)(1) (other than losses suspended under section 704(d)) and set forth in the certificate are (or will be) reflected on an income tax return of the partner that is filed (or will be filed) with respect to a taxable year of the partner that ends prior to the installment due date or Form 8804 filing due date (without regard to extensions) for the partnership taxable year for which such certificate will be considered;

(J) A representation that such deductions and losses described in paragraph (c)(1) and set forth in such certificate have not been disallowed by the IRS as part of a proposed adjustment described in §601.103(b) of this chapter (relating to examination and determination of tax liability) or §601.105(b) of this chapter (relating to examination of returns);

(K) A representation, when applicable (see paragraph (c)(1)(iv) of this section), that the partner's only activity that gives rise to effectively connected income, gain, deduction, or loss is (and will be) during the partner's taxable year the partner's investment in the partnership;

(L) The following statement: “Consent is hereby given to disclosures of return and return information by the Internal Revenue Service pertaining to the validity of this certificate to the partnership or other withholding agent to which this certificate is submitted for the purpose of administering section 1446.” If a representative of the partner signs and dates the certificate under paragraph (c)(2)(ii)(M) of this section, a power of attorney specifically authorizing the agent to make the representation contained in this paragraph (c)(2)(ii)(L) must be attached to the certificate; and

(M) The signature of the partner, or its authorized representative, under penalties of perjury, and the date that the certificate was signed.

(3) Notification to partnership when a partner's certificate cannot be relied upon. Subject to paragraphs (c)(2), (c)(5), and (d)(2) of this section, a partnership may generally rely on a partner's certificate of available deductions and losses provided that the partnership does not have actual knowledge or reason to know that the certificate is defective within the meaning of this paragraph (c)(3). However, a partnership may not rely on a partner's certificate if the IRS determines, in its sole discretion, whether upon audit or otherwise, that a certificate submitted by a partner is defective, or that it lacks sufficient information to determine if the certificate is defective after written request to the partner for verification of the statements on the certificate. For example, a foreign partner's certificate is defective and, therefore, invalid if the IRS determines that the foreign partner has not timely filed a U.S. income tax return for a taxable year that the partner represented was or would be timely filed. See paragraph (e) Example 3 of this section. If the IRS determines under this paragraph (c) that a certificate is defective (or lacks information sufficient to make this determination) and notifies the partnership in writing, the partnership may not rely on any certificate submitted by the partner for the partnership taxable year to which the defective certificate relates (or any subsequent partnership taxable year), until the IRS notifies the partnership again in writing and revokes or modifies the original notice. A partner's certificate of available deductions and losses is defective if—

(i) The partner is not described in paragraph (b) of this section;

(ii) The deductions and losses set forth in such certificate are not described in paragraph (c)(1) of this section;

(iii) The timing requirements for submitting certificates (including updated certificates and status updates) under paragraph (c)(2) of this section, or the requirements for submitting such updated certificates or status updates under such paragraph, are not observed;

(iv) The certificate does not include all of the information required by paragraph (c)(2)(ii) (e.g., the partner's TIN is not set forth on such certificate);

(v) Any representation set forth in such certificate is incorrect (e.g., a partner's prior year return certified to have been timely filed was not timely filed, or, where applicable, that the partner is invested in or otherwise engaged in an activity (other than its investment in the partnership) that may give rise to effectively connected items); or

(vi) The actual deductions and losses available to the partner are less than the deductions and losses last certified to the partnership for the partnership taxable year and considered by the partnership.

(4) Partner to receive copy of notice. If the IRS notifies a partnership or withholding agent under this section that a certificate of a foreign partner is defective, the IRS shall also send a copy of such notice to the partner's address as shown on the certificate. The partnership shall promptly furnish the foreign partner whose certificate is the subject of the notice the copy of the notice received from the IRS.

(5) Partner's certificate valid only for partnership taxable year for which submitted. A partnership may only consider a certificate submitted under this paragraph (c) for the partnership taxable year for which the certificate is submitted, as set forth on the certificate. Therefore, for each year a partner wants the provisions of this section to apply, the partner must submit a new first certificate (as described in this paragraph (c)) for that year.

(d) Effect of certificate of deductions and losses on partners and partnership—(1) Effect on partner—(i) No effect on substantive tax liability of foreign partner. A foreign partner's submission of a certificate under this section to reduce or eliminate the partnership's 1446 tax (or any installment of such tax) with respect to ECTI allocable to such partner has no effect on the partner's substantive tax liability on the partner's allocable share of effectively connected income or gain from the partnership. Further, the submission of a certificate under this section does not constitute an acceptance by the IRS of the amount or character of the deductions or losses certified.

(ii) No effect on partner's estimated tax obligations. A foreign partner that certifies deductions and losses to a partnership under this section is not relieved of any estimated tax obligation otherwise applicable to such partner with respect to income or gain allocated from the partnership.

(2) Effect on partnership—(i) Reasonable reliance to relieve partnership from addition to the tax under section 6655. Subject to §1.1446–2 and the rules of this section (e.g., paragraph (c)(1)(iii) of this section), a partnership receiving a certificate (including an updated certificate or status update) of deductions and losses from a partner under this section may reasonably rely on such certificate (to the extent of the certified deductions and losses or other representations set forth in the certificate) for such time during which it has no actual knowledge or reason to know that the certificate is defective (within the meaning of paragraph (c)(3) of this section). To the extent a partnership has reasonably relied on a certificate under the preceding sentence, the partnership shall not be liable for any addition to the tax under section 6655 (as applied through §1.1446–3) for any period during which the partnership reasonably relied on such certificate, even if either it is later determined that the partner's certificate is defective or the partner submits an updated certificate under paragraph (c)(2) of this section that increases the 1446 tax due with respect to such partner. A partnership will not be considered to have actual knowledge or reason to know that a certificate is defective if the partnership receives an updated certificate that, pursuant to paragraph (c)(2)(i)(B)(4) of this section, the partnership cannot reasonably rely upon for an installment due date or Form 8804 filing date because it was received less than 10 days before such date. See paragraph (e) Example 2 of this section.

(ii) Filing requirement. A partnership that relies in whole or in part on a partner's certificate pursuant to this section must file Form 8813, “Partnership Withholding Tax Payment Voucher (Section 1446)” or Forms 8804, “Annual Return for Partnership Withholding Tax (Section 1446)” and 8805, “Foreign Partner's Information Statement of Section 1446 Withholding Tax,” whichever is applicable, for the period for which the certificate is considered, even if no 1446 tax (or an installment of such tax) is due with respect to such foreign partner. The partnership must also attach a copy of such certificate, and the partnership's computation of 1446 tax due with respect to such partner, to both the Form 8813 and Form 8805, filed with the IRS for any period for which such certificate is considered in computing the partnership's 1446 tax (or any installment of such tax). See §1.1446–3(d)(1)(iii) requiring the partnership to provide Form 8805 to such foreign partner even if no 1446 tax is paid on behalf of the partner.

(iii) Continuing liability for withholding tax under section 1461 and for applicable interest and penalties. Except as provided in paragraph (d)(2)(i) of this section and this paragraph (d)(2)(iii), a partnership is not relieved from liability for the 1446 tax under section 1461 or for any applicable addition to the tax, interest, or penalties if the partnership or the IRS, in its sole discretion, determines that a partner's certificate is defective (within the meaning of paragraph (c)(3) of this section), or the partner submits an updated certificate under paragraph (c)(2) of this section that increases the 1446 tax due with respect to such partner. If a certificate is determined to be defective for a reason other than the amount or character of the deductions and losses set forth on such certificate (e.g., partner failed to timely file a U.S. income tax return), then the partnership shall be liable for the full 1446 tax under section 1461 (or any installment of such tax) due with respect to such partner, without regard to the certificate. However, see §1.1446–3(e) which deems a partnership to have paid 1446 tax with respect to ECTI allocable to a partner in certain circumstances. Further, if the partnership or the IRS, in its sole discretion, determines that a certificate is defective because the actual deductions and losses available to the partner are less than the amount certified to the partnership (other than when it is determined that the partner certified the same deduction or loss to more than one partnership), or that the character of the certified deductions and losses is erroneous, then the partnership shall be liable for 1446 tax under section 1461 (or any installment of such tax) with respect to such partner only to the extent it considers the certified deductions and losses in an amount greater than the amount determined to be actually available to the partner and permitted to be used under §1.1446–1 through §1.1446–6T, or to the extent that a mistake in the character of the deductions and losses results in an increase in the 1446 tax due with respect to such partner. See paragraph (e) Example 4 of this section. Although a partnership is generally liable for the 1446 tax, any addition to the tax, interest, and penalties under this paragraph (d)(2), the partnership may be relieved of some penalties in certain circumstances. See §§301.6651–(1)(c) and 301.6724–1 of this chapter. See also paragraph (e) Example 3 of this section.

(iv) Partner's certified deductions and losses to offset foreign partner's annualized allocable share of partnership ECTI. For purposes of section 1446, when considering a foreign partner's certificate submitted under this section in computing the 1446 tax due (or any installment of such tax) with respect to the foreign partner, a partnership shall first annualize the partner's allocable share of the partnership's effectively connected items of income, gain, deduction, and loss before considering the partner's certified deductions and losses.

(e) Examples. The following examples illustrate the application of this section. In considering the examples, disregard the potential application of §1.1446–3(b)(2)(v)(F) (relating to the de minimis exception to paying 1446 tax) and paragraph (c)(1)(iv) of this section (relating to a foreign partner whose sole investment generating effectively connected income or gain is the partnership), and assume, where necessary, that the election to apply the temporary regulations is made. The examples are as follows:

Example 1.  General application of the rules of §1.1446–6T. NRA, a nonresident alien, and B, a U.S. person form a partnership, PRS, to conduct a trade or business in the United States. NRA and B are equal partners under the partnership agreement and the partnership, NRA, and B all maintain a calendar taxable year. NRA and B provide PRS with a valid Form W–8BEN and Form W–9, respectively. Prior to the formation of PRS, NRA had neither invested in, nor been considered to be engaged in a U.S. trade or business. In each of years 1, 2, and 3, PRS incurs a $1,000 net loss from operations which is allocated equally to NRA and B. Assume the net loss is not a passive activity loss within the meaning of section 469, is comprised entirely of ordinary items and, with respect to NRA, is an effectively connected net loss. Further, assume that NRA has timely filed U.S. Federal income tax returns for each of the first three years reflecting the losses allocated from PRS, as reflected on the Schedule K–1 issued to NRA for each of those years.

(i) With respect to Year 4, NRA may not submit a certificate under paragraph (c) of this section to PRS because NRA has not and will not have timely filed a U.S. Federal income tax return for the preceding four years. That is, during Year 4, NRA can only certify that it has or will timely file its U.S. Federal income tax returns for the preceding three years (Years 1 through 3) and the current year, Year 4. Therefore, with respect to Year 4, PRS may not use the procedures in this section to reduce its withholding tax.

(ii) Assume that in Year 4, PRS has a net income of $1,000 from its U.S. business operations and that all of such income is comprised of ordinary items. NRA's allocable share of this income is $500 and such income is effectively connected income. PRS satisfies its 1446 tax obligations for Year 4.

(iii) During Year 5, PRS uses an acceptable annualization method under §1.1446–3 and estimates for its first installment period that it will earn $4,000 of taxable income for the taxable year. Assume that all of this income is ordinary in character and is allocable to NRA and B equally. NRA's allocable share of $2,000 is NRA's share of partnership ECTI. NRA has not yet filed its income tax return for Year 4, although NRA has received the Schedule K–1 issued by PRS pertaining to Year 4. On or before March 16th (at least 30 days prior to the first installment date) of Year 5, PRS receives a certificate described in this section from NRA which certifies that NRA reasonably expects to have available ordinary losses of $1,000 ($500 loss in each of Years 1, 2, and 3 less $500 of income in Year 4). Further, NRA makes all of the statements and representations required for the certificate to be valid.

(iv) With respect to Year 5, and based upon paragraph (b)(1) of this section, NRA can include Year 4 (NRA's preceding taxable year) as one of the preceding four years that it has timely filed or will timely file its U.S. Federal income tax return (and timely paid or will timely pay all tax shown on such returns). Therefore, provided PRS has no actual knowledge or reason to know the certificate is defective, PRS may reasonably rely on NRA's certificate. Accordingly, PRS may consider NRA's certificate to reduce the amount that would otherwise be required to be paid on NRA's behalf under section 1446. Specifically, the $1,000 of net losses that have been reflected on Schedule K–1s issued to NRA that are available to reduce NRA's U.S. income tax on NRA's allocable share of effectively connected income or gain allocable from PRS may be used to reduce the $2,000 of ECTI estimated to be allocable to NRA. As a result, PRS must pay 1446 tax on only $1,000 of NRA's allocable share of partnership ECTI for the first installment period in Year 5. PRS must pay 1446 tax of $87.50 for its first installment period with respect to the ECTI allocable to NRA ($1,000 (net ECTI after considering certified losses) × .35 (withholding tax rate) × .25 (§6655(e)(2)(B) percentage for first installment)). Pursuant to paragraph (d)(2) of this section, PRS must also attach NRA's certificate and PRS's computation of its 1446 tax obligation with respect to NRA to its Form 8813, “Partnership Withholding Tax Payment Voucher (Section 1446),” filed for the first installment period. Under paragraph (c)(2)(i)(B), NRA is required to update its certified available losses on or before the 10th day after NRA files its U.S. Federal income tax return for Year 4, even if the updated certificate results in no change to the deductions and losses certified.

(v) The result in this example is the same even if NRA had not yet received a Schedule K–1 from PRS for Year 4. In such case, NRA is still permitted to certify the losses that it reasonably expects to be available for Year 5, and certify that it will timely file its U.S. Federal income tax return for Year 4 and Year 5 (and timely pay all U.S. income tax due).

Example 2.  Updated certificate submitted for losses. On January 1, 2005, NRA, a foreign individual, and B, a U.S. individual, form a domestic partnership, PRS, to conduct a business in the United States, with NRA and B as equal partners in PRS. NRA and B provide a valid Form W–8BEN and Form W–9, respectively, to PRS. NRA, B, and PRS all maintain a calendar taxable year. For the preceding seven calendar taxable years (1998–2004), NRA has been engaged in a U.S. trade or business through its investment in another partnership, XYZ, and timely filed its Form 1040NR U.S. Federal income tax return reporting its share of XYZ's activity for each of years 1998–2003 (and timely paid all tax shown on such returns). NRA also timely files its income tax return for the 2004 taxable year (and timely pays all tax shown on such return) on June 8, 2005 (due date June 15, 2005). During the taxable years 1998–2004, NRA's only activity generating effectively connected items was its investment in XYZ. Assume that the losses that XYZ allocated to NRA are not considered passive activity losses to NRA within the meaning of section 469. The XYZ partnership liquidated and ceased doing business on December 31, 2004. Assume that PRS uses an acceptable annualization method under §1.1446–3 for purposes of section 1446.

(i) On or before March 16, 2005, NRA provides and PRS receives a valid certificate under this section in which NRA certifies that it reasonably expects to have available effectively connected net operating losses in the amount of $5,000. Among other statements made in accordance with paragraph (c) of this section, NRA represents that it has not filed its 2004 U.S. income tax return, but will timely file such return (and timely pay all tax shown on such return). PRS reasonably relies on such certificate within the meaning of paragraph (d) of this section. For its first installment period in 2005, PRS estimates that it will earn taxable income of $10,000 for the year which will be allocated equally to NRA and B (NRA's allocable share of $5,000 is considered NRA's share of partnership ECTI). Assume that all of this income is ordinary in character.

(ii) Under these facts, PRS may consider NRA's certified available losses when computing its 1446 tax obligation for the first installment period. PRS is limited under paragraph (c)(1)(iii) of this section and may consider only $4,500 of NRA's certified net operating loss. After consideration of the certified loss, PRS owes 1446 tax in the amount of $43.75 for the first installment period ($5,000 estimated allocable ECTI less $4,500 (certified loss as limited under paragraph (c)(1)(iii)) × .35 (1446 tax applicable percentage) × .25 (section 6655(e)(2)(B) percentage for first installment period). Pursuant to paragraph (d)(2) of this section, PRS must file Form 8813 with respect to NRA, and attach to the form a copy of NRA's certificate and PRS's computation of its 1446 tax obligation.

(iii) Assume that PRS's estimates of its net income allocable to NRA for the second and third installment periods are the same as for the first installment period (i.e., NRA's allocable share of annualized ECTI is $5,000), and that on June 10, 2005, PRS receives an updated certificate under this section from NRA that certifies that NRA reasonably expects to have only $4,000 of losses available to reduce NRA's income tax liability on NRA's allocable share of the effectively connected income or gain from PRS. NRA provided this certificate within 10 days of filing its U.S. Federal income tax return for the 2004 taxable year, as required by paragraph (c) of this section. However, PRS received the updated certificate less than 10 days before its second installment due date (June 15, 2005) and, under paragraph (c)(2)(i)(B) of this section, is not permitted to reasonably rely on the updated certificate for the second installment period. Notwithstanding that the updated certificate indicates to PRS that NRA's certified losses are less than the $5,000 set forth on NRA's first certificate, under paragraph (d)(2) of this section, PRS will not be considered to have actual knowledge or reason to know that the first certificate is defective for the second installment period. Provided the updated certificate is otherwise valid, it may be relied upon for the third installment period (due date September 15, 2005).

(iv) Under paragraph (d) of this section, PRS may reasonably rely on all or a portion of NRA's first certificate for the second installment period. That is, PRS may consider all $4,500 of NRA's certified losses, as limited by paragraph (c)(1)(iii) of this section, or some lesser amount (e.g., only $4,000) for the second installment period. Further, if PRS considers NRA's first certificate for the second installment period, PRS must file Form 8813 and attach the certificate it reasonably relied upon for the second installment period. Assume that PRS considers $4,500 of the net operating losses for the second installment period, as limited by paragraph (c)(1)(iii) of this section, and therefore makes a 1446 tax payment of $43.75 on behalf of NRA.

(v) Under paragraph (d) of this section, PRS is not relieved from its liability for 1446 tax under section 1461 when it accepts a certificate of losses from a foreign partner and it is later determined that the certificate is defective, or the partner updates its certificate and represents losses in an amount less than previously certified. Under the principles of section 6655 (as applied through §1.1446–3), PRS is required to have paid in 75 percent of the annualized 1446 tax on or before the third installment payment date (section 6655(e)(2)(B) percentage for third installment period). Under paragraph (c)(2)(i)(B) of this section, because NRA's updated certificate is valid for the third installment period, if PRS considers any certificate for that period it must consider the updated certificate. Assuming PRS considers NRA's updated certificate for the third installment period, PRS must have paid a total of $262.50 with respect to the ECTI estimated to be allocable to NRA as of the third installment due date ($1,000 (ECTI subject to 1446 tax after considering the $4,000 of certified losses on the updated certificate) × .35 (withholding tax rate) × .75 (section 6655(e)(2)(B) percentage for the third installment period)). After considering PRS's payments of 1446 tax for the first and second installment periods, PRS is required to pay $175 for the third installment period ($262.50 less previous payments totaling $87.50).

(vi) Under paragraph (d) of this section, PRS is not liable for the addition to the tax under section 6655 (as applied through §1.1446–3) for the first or second installment period because PRS reasonably relied on NRA's certificate of losses during those periods.

Example 3.  IRS determines in subsequent taxable year that partner's certificate is defective because partner failed to timely file an income tax return. NRA, a foreign individual, and B, are the only partners in PRS, a domestic partnership that conducts a trade or business in the United States. Each partner provides appropriate documentation under §1.1446–1 (e.g., Form W–8BEN, Form W–9) to establish the partner's status for purposes of section 1446. Both partners and the partnership maintain a calendar taxable year. NRA timely submits a certificate under this section to PRS to be considered for PRS's first installment period in the 2005 taxable year. The certificate sets forth that NRA reasonably expects to have $5,000 of an effectively connected net operating loss available to offset effectively connected income or gain allocable from PRS for the 2005 taxable year. No part of this loss is a passive activity loss within the meaning of section 469. NRA is eligible to submit this certificate under paragraph (b) of this section and the certificate complies with all necessary requirements set forth in this section. PRS estimates for each installment period that NRA's allocable share of ECTI will be $5,000. Further, PRS's actual operating results for the year result in $5,000 of ECTI allocable to NRA.

(i) PRS reasonably relies on (within the meaning of paragraph (d)(2) of this section) NRA's certificate when computing each installment payment during the 2005 taxable year and its 1446 tax on Form 8804, and appropriately considers the limitation set forth in paragraph (c)(1)(iii) of this section. As a result, PRS paid a total of $175 of 1446 tax on behalf of NRA for the taxable year ($5,000 allocable share of ECTI − $4,500 losses permitted to be considered under paragraph (c)(1)(iii) of this section × .35 applicable percentage). As required under paragraph (d) of this section, PRS attached the certificate it relied upon and its calculation of 1446 tax for each period to the Form 8813 or Form 8805 it filed for such period with the IRS.

(ii) Assume that NRA timely submits a certificate under this section to be considered for PRS's first installment due date of the 2006 taxable year (due date April 17, 2006). The certificate represents that NRA reasonably expects to have $5,000 of an effectively connected net operating loss available to offset effectively connected income or gain allocated from PRS for the 2006 taxable year. No part of this loss is a passive activity loss within the meaning of section 469. Further, the certificate contains all of the necessary representations required under this section. For the first installment period of 2006, PRS estimates that NRA's allocable share of partnership ECTI is $5,000. Assume all of the estimated ECTI is ordinary in character and, pursuant to paragraph (d)(2) of this section, PRS reasonably relies on NRA's certificate for the first installment period and appropriately determines that it is required to make an installment payment of 1446 tax on behalf of NRA in the amount of $43.75 ($5,000 estimated allocable ECTI less $4,500 (certified loss as limited under paragraph (c)(1)(iii) of this section) × .35 (1446 tax applicable percentage) × .25 (section 6655(e)(2)(B) percentage for first installment period). PRS makes the $43.75 installment payment of 1446 tax with the Form 8813 it files for the first installment period, and complies with paragraph (d)(2) of this section and attaches NRA's certificate and PRS's computation of 1446 tax to its Form 8813.

(iii) Assume that the IRS notifies the partnership on June 1, 2006, pursuant to paragraph (c)(3) of this section, that NRA's certificate for PRS's 2005 taxable year is defective because NRA failed to timely file its U.S. Federal income tax return for one of the taxable years that NRA represented was (or would be) timely filed (e.g., 2001, 2002, 2003, or 2004). The IRS notice states that PRS is not to rely on any certificate that NRA has submitted for the 2006 taxable year.

(iv) Under paragraph (d)(2)(iii) of this section, PRS is not relieved from its liability for 1446 tax under section 1461 when it accepts a certificate of losses from a foreign partner and it is later determined that the certificate is defective. Because NRA's certificate was determined to be defective for a reason other than the amount or character of the certified deductions and losses, PRS is fully liable for the 1446 tax due with respect to NRA's allocable share of partnership ECTI for the 2005 taxable year without regard to the certificate. The total 1446 tax due for 2005 is $1,750 ($5,000 ECTI × .35) and PRS has paid $175 of this liability. Therefore, PRS owes $1,575 of 1446 tax. However, PRS may be deemed to have paid the outstanding 1446 tax due if NRA has paid all of its tax. See §1.1446–3(e).

(v) Because PRS neither had actual knowledge nor reason to know that the certificate submitted by NRA was defective, PRS reasonably relied on NRA's certificate for the 2005 taxable year under paragraph (d)(2) of this section. Therefore, PRS is not liable for an underpayment addition to the tax under the principles of section 6655 (as applied through §1.1446–3) for any installment period during the 2005 taxable year.

(vi) However, PRS is generally liable for interest under section 6601 and for the failure to pay penalty under section 6651(a)(2) on the $1,575 of 1446 tax due for the 2005 taxable year from April 17, 2006 (last date prescribed for payment of 1446 tax), to the date that the partnership pays the 1446 tax or is deemed to have paid such tax under §1.1446–3(e).

(vii) With respect to the 2006 taxable year, PRS reasonably relied on NRA's certificate when computing its first installment payment for the 2006 taxable year (due on April 17, 2006). Therefore, PRS will not be liable for the underpayment addition to the tax under section 6655 (as applied through §1.1446–3) for the first installment period in 2006. However, because PRS was notified on June 1, 2006, to disregard any certificate received from NRA for the 2006 taxable year, PRS may not rely on NRA's certificate (or any new certificate provided by NRA) when PRS computes its second installment payment of 1446 tax due on June 15, 2006. PRS is not permitted to consider any certificate submitted by NRA under this section until the IRS notifies the partnership again in writing and revokes or modifies the original notice.

Example 4.  IRS determines in subsequent taxable year that partner's certificate is defective because partner's actual losses are less than amount certified and considered by the partnership. Assume the same facts as in Example 3, except that the IRS does not determine that NRA's certificate for 2005 was defective because NRA failed to timely file a U.S. income tax return for a prior year. Rather, the IRS determines that NRA's certificate was defective for the 2005 taxable year because NRA's actual available net operating loss for the taxable year was $1,000, not the $5,000 amount that was certified. In Example 3, pursuant to paragraph (c)(1)(iii) of this section, PRS considered $4,500 of the certified loss in each installment period and when completing Form 8804.

(i) Under paragraph (d)(2)(iii) of this section, PRS is not relieved from its liability for 1446 tax under section 1461 when it accepts a certificate of losses from a foreign partner and it is later determined that the certificate is defective. However, when the IRS determines that a partner's certificate is defective because of the amount or character of the certified deductions and losses set forth on such certificate, the partnership is only liable for the 1446 tax, interest, and penalties to the extent it considered the certified deductions and losses on such certificate when computing its 1446 tax (or any installment of such tax) in an amount greater than the partner's actual available losses. Here, PRS considered the certified deductions and losses in the amount of $4,500. It was later determined that NRA only had $1,000 of actual losses. Accordingly, PRS is liable for the 1446 tax due with respect to the portion of the overstated losses that it considered when computing its 1446 tax. The remaining 1446 tax due for 2005 is $1,225 ($3,500 of excess losses considered × .35). However, PRS may be deemed to have paid the $1,225 of 1446 tax under §1.1446–3(e) if NRA has paid all of NRA's U.S. income tax.

(ii) If PRS had considered only $1,000 of NRA's certified net operating loss when computing and paying its 1446 tax during the 2005 taxable year then, under paragraph (d)(2)(iii) of this section, PRS would not be liable for 1446 tax because it did not consider the certified deductions and losses in an amount greater than the amount determined to be actually available to the partner.

Example 5.  Partner with different taxable year than partnership. PRS partnership has two equal partners, FC, a foreign corporation, and DC, a domestic corporation. PRS conducts a trade or business in the United States and generates effectively connected income. FC maintains a June 30 fiscal taxable year end, while DC and PRS maintain a calendar taxable year end. FC and DC provide a valid Form W–8BEN and Form W–9, respectively, to PRS. PRS uses an acceptable annualization method under §1.1446–3 in computing its 1446 tax. FC and DC are the only persons that have ever been partners in PRS. For its 2000 through 2004 taxable years, PRS issued Schedule K–1s to each of its partners. In the aggregate, the Schedule K–1s passed through $100 of net ordinary loss to each partner. For its 2005 taxable year, PRS issued Schedule K–1s to its partners passing through $150 of ordinary loss to each partner. All of the losses passed through on the Schedule K–1s are effectively connected to PRS's and FC's trade or business in the United States.

(i) Assume that all the requirements of this section have been met to permit FC to certify losses to the partnership for the partnership's 2006 taxable year. Further, assume that FC's only source of effectively connected income, gain, deduction, or loss is the activity of PRS.

(ii) For PRS's first installment period in 2006, FC may only certify deductions and losses under this section in the amount of $100 (the losses as reflected on the Schedule K–1s issued for PRS's 2000–2004 taxable years). Under section 706, the taxable income of a partner shall include the income, gain, loss, deduction, or credit of the partnership for the partnership taxable year ending within or with the taxable year of the partner. PRS's 2005 calendar taxable year ends during FC's fiscal taxable year ending June 30, 2006. Therefore, under paragraph (c)(1) of this section, as of March 18, 2006 (the last date FC may submit its first certificate under paragraph (c) to have it considered for PRS's first installment due date of April 17, 2006), the losses passed through from PRS for the 2000–2004 partnership taxable years will be the only losses that FC can represent will be reflected on an FC U.S. income tax return filed for a taxable year ending prior to such installment due date.

(iii) The result in (ii) is the same for the second installment period, the due date of which is June 15, 2006.

(iv) FC may submit an updated certificate under this section after June 30, 2006, that includes the 2005 Schedule K–1 loss in the amount of $150. PRS may consider such an updated certificate for its third installment period (due date September 15, 2006), provided the updated certificate is received in accordance with paragraph (c) of this section, by September 5, 2006.

Example 6.  Failure to provide status update with respect to prior year unfiled returns. PRS partnership has two equal partners, FC, a foreign corporation, and DC, a domestic corporation. Both partners and PRS maintain calendar taxable years. PRS is engaged in a trade or business in the United States. FC and DC provide Form W–8BEN and Form W–9, respectively, to establish each partner's status for purposes of section 1446. Assume all partnership items allocated from the partnership arise from the partnership's trade or business in the United States and, therefore, FC's allocable share of these items is considered effectively connected.

(i) Assume FC is eligible to submit a certificate under this section and submits a certificate at least 30 days prior to PRS's first installment due date. FC represents that it has or will timely filed an income tax return in the United States in each of the preceding four taxable years (and has timely paid or will timely pay all tax shown on such returns). FC specifies that it has not filed its U.S. income tax return for the immediately preceding taxable year. FC also represents that it will timely file its U.S. income tax return for the partner taxable year during which the certificate is considered (and will timely pay all tax shown on such return). All other requirements under paragraph (c) of this section are met for FC's certificate to be valid.

(ii) Provided that PRS does not possess actual knowledge or reason to know that FC's certificate is defective, and an updated certificate is not provided to PRS, under paragraph (d) of this section, PRS may reasonably rely on FC's certificate for its first, second, and third installment payments.

(iii) If FC does not submit either an updated certificate or a status update as required by paragraph (c) of this section with respect to the filing of the previous year's income tax return by December 5th of PRS's current taxable year, PRS must disregard FC's certificate when computing its fourth installment payment of 1446 tax and when completing its Form 8804 for the taxable year. Further, even if the status update with respect to the preceding year's return is provided, PRS may only rely on the certificate provided the status update does not contradict the certificate and such update indicates that the preceding year's return may still be, and will be, timely filed.

(f) Effective dates. The rules of this section are applicable for partnership taxable years beginning after May 18, 2005. However, a partnership may elect to apply all of the provisions of the temporary regulations to partnership taxable years beginning after December 31, 2004, provided the partnership also elects under §1.1446–7 to apply §§1.1446–1 through 1.1446–5 to partnership taxable years beginning after December 31, 2004. A partnership shall make the election under this section by complying with the provisions of this section and attaching a statement to the Form 8804 annual return filed for the taxable year in which the regulation provisions first apply, that indicates that the partnership is making the election under this section and §1.1446–7.

[T.D. 9200, 70 FR 28717, May 18, 2005]

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