Commentators have expressed concern that advice given after a tax return is filed, in particular advice given in the context of an IRS examination or litigation, might constitute a covered opinion within the meaning of the Final Regulations. In response to this concern, the definition of excluded advice in §10.35 is expanded to include written advice prepared for and provided to a taxpayer, solely for use by that taxpayer, after the taxpayer has filed a tax return reflecting the tax benefits of the transaction described in or referred to in the written advice. This exclusion does not apply if the practitioner knows or has reason to know that the taxpayer will rely upon the written advice to take a position on a return (including an amended return that claims tax benefits not reported on the original return) filed after the date on which the advice is provided to the taxpayer.

Commentators have also expressed concern that written advice provided by in-house counsel to the employer for purposes of determining the employer’s tax liability could constitute a covered opinion and that the concept of a covered opinion in that context raises numerous issues. In response to these concerns, the definition of excluded advice in §10.35 is expanded to include advice provided to an employer by a practitioner in that practitioner’s capacity as an employee of that employer solely for purposes of determining the tax liability of the employer. Written advice provided by in-house counsel that falls within the revised definition of excluded advice will continue to be subject to the requirements set forth in §10.37 for other written advice. The exclusion of written advice provided by in-house counsel from the covered opinion standards of §10.35 is in no way intended to affect other aspects of the relationship between in-house counsel and the employer, such as whether, and in what circumstances, the attorney-client privilege applies to communications involving in-house counsel, or the circumstances in which written advice provided by in-house counsel might be relevant to determining the employer’s good faith and reasonable cause.

Several commentators have suggested that negative advice, i.e., advice concluding that a Federal tax issue will not be resolved in the taxpayer’s favor, could constitute a covered opinion. This concern is most prevalent (1) in the context of written advice relating to a listed transaction or a transaction having the principal purpose of tax avoidance and (2) where written advice addresses more than one Federal tax issue and the advice concludes that one or more Federal tax issues will not be resolved in the taxpayer’s favor.

Treasury and the IRS encourage practitioners to advise taxpayers that a transaction is not appropriate or that one or more Federal tax issues will not be resolved in the taxpayer’s favor. Treasury and the IRS are concerned, however, about written advice that could be construed as encouraging taxpayers to take aggressive positions on their tax returns, such as advice that concludes one or more Federal tax issues will not be resolved in the taxpayer’s favor, but also reaches a conclusion favorable to the taxpayer at any confidence level (e.g., not frivolous, realistic possibility of success, reasonable basis or substantial authority) with respect to that issue(s). Consequently, the regulations are revised to provide that written advice that concludes that a Federal tax issue will not be resolved in the taxpayer’s favor is not a covered opinion with respect to that issue, unless the written advice also reaches a conclusion favorable to the taxpayer at any confidence level (e.g., not frivolous, realistic possibility of success, reasonable basis or substantial authority) with respect to that issue. If written advice concerns more than one Federal tax issue, the advice must comply with the requirements of §10.35(c) with respect to any Federal tax issue that is not treated as excluded advice pursuant to the preceding sentence.

Commentators have raised questions about how to apply the definition of prominently disclosed under §10.35(b)(8). The prominent disclosure requirement is intended to ensure transparency between taxpayers and practitioners and to provide taxpayers with notice of any limitation on their ability to rely on written advice. To achieve these goals while minimizing the burden of compliance on practitioners, these regulations modify the definition of prominently disclosed.

Commentators have asked for clarification of the term the principal purpose of tax avoidance or evasion and in particular have asked whether the definition in 26 CFR 1.6662-4(g)(2)(i) and (ii) is incorporated into §10.35. In response, these regulations define the principal purpose in §10.35(b)(10) similar to the definition in 26 CFR 1.6662-4(g)(2)(ii). This definition also provides that a transaction can be a listed transaction or can have a significant purpose of tax avoidance even if it lacks the principal purpose of tax avoidance. Practitioners must evaluate transactions under the rules in §10.35(b)(2)(i)(A) and (C), even if those transactions are not covered by §10.35(b)(2)(i)(B) because they do not have the principal purpose of avoidance or evasion within the meaning of §10.35(b)(10) of these regulations.

* * * * *

(b) * * *

(2) * * *

(ii) Excluded advice. A covered opinion does not include—

(A) Written advice provided to a client during the course of an engagement if a practitioner is reasonably expected to provide subsequent written advice to the client that satisfies the requirements of this section;

(B) Written advice, other than advice described in paragraph (b)(2)(i)(A) of this section (concerning listed transactions) or paragraph (b)(2)(i)(B) of this section (concerning the principal purpose of avoidance or evasion) that—

(1) Concerns the qualification of a qualified plan;

(2) Is a State or local bond opinion; or

(3) Is included in documents required to be filed with the Securities and Exchange Commission;

(C) Written advice prepared for and provided to a taxpayer, solely for use by that taxpayer, after the taxpayer has filed a tax return with the Internal Revenue Service reflecting the tax benefits of the transaction. The preceding sentence does not apply if the practitioner knows or has reason to know that the written advice will be relied upon by the taxpayer to take a position on a tax return (including for these purposes an amended return that claims tax benefits not reported on a previously filed return) filed after the date on which the advice is provided to the taxpayer;

(D) Written advice provided to an employer by a practitioner in that practitioner’s capacity as an employee of that employer solely for purposes of determining the tax liability of the employer; or

(E) Written advice that does not resolve a Federal tax issue in the taxpayer’s favor, unless the advice reaches a conclusion favorable to the taxpayer at any confidence level (e.g., not frivolous, realistic possibility of success, reasonable basis or substantial authority) with respect to that issue. If written advice concerns more than one Federal tax issue, the advice must comply with the requirements of paragraph (c) of this section with respect to any Federal tax issue not described in the preceding sentence.

* * * * *

(8) Prominently disclosed. An item is prominently disclosed if it is readily apparent to a reader of the written advice. Whether an item is readily apparent will depend on the facts and circumstances surrounding the written advice including, but not limited to, the sophistication of the taxpayer and the length of the written advice. At a minimum, to be prominently disclosed an item must be set forth in a separate section (and not in a footnote) in a typeface that is the same size or larger than the typeface of any discussion of the facts or law in the written advice.

* * * * *

(10) The principal purpose. For purposes of this section, the principal purpose of a partnership or other entity, investment plan or arrangement, or other plan or arrangement is the avoidance or evasion of any tax imposed by the Internal Revenue Code if that purpose exceeds any other purpose. The principal purpose of a partnership or other entity, investment plan or arrangement, or other plan or arrangement is not to avoid or evade Federal tax if that partnership, entity, plan or arrangement has as its purpose the claiming of tax benefits in a manner consistent with the statute and Congressional purpose. A partnership, entity, plan or arrangement may have a significant purpose of avoidance or evasion even though it does not have the principal purpose of avoidance or evasion under this paragraph (b)(10).

* * * * *

Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement,
Internal Revenue Service.

Approved May 12, 2005.

James W. Carroll,
Acting General Counsel,
Department of the Treasury.

* * * * *

(d) * * *

(3) Election by partnership. * * * A nonresident alien or foreign corporation that makes an election generally must provide the partnership a Form W-8ECI, “Certificate of Foreign Person’s Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States,” and attach to such form a copy of the election (or a statement that indicates that the nonresident alien or foreign corporation will make the election). However, if the nonresident alien or foreign corporation has already submitted a valid form to the partnership that establishes such partner’s foreign status, the partner shall furnish the partnership a copy of the election (or a statement that indicates that the nonresident alien or foreign corporation will make the election). To the extent the partnership has income to which the election pertains, the partnership shall treat such income as effectively connected income subject to withholding under section 1446. See also §1.1446-2.

(e) Effective dates. This section shall apply for taxable years beginning after December 31, 1966, except the last four sentences of paragraph (d)(3) of this section shall apply to partnership taxable years beginning after May 18, 2005, or such earlier time as the regulations under §§1.1446-1 through 1.1446-5 apply by reason of an election under §1.1446-7.* * *

Par. 3. Section 1.1443-1 is amended by revising paragraphs (a) and (c)(1) to read as follows:

(a) Income includible in computing unrelated business taxable income. In the case of a foreign organization that is described in section 501(c), amounts paid or effectively connected taxable income allocable to the organization that are includible under section 512 and section 513 in computing the organization’s unrelated business taxable income are subject to withholding under §§1.1441-1, 1.1441-4, 1.1441-6, and 1.1446-1 through 1.1446-6T, in the same manner as payments or allocations of effectively connected taxable income of the same amounts made to any foreign person that is not a tax-exempt organization. Therefore, a foreign organization receiving amounts includible under section 512 and section 513 in computing the organization’s unrelated business taxable income may claim an exemption from withholding or a reduced rate of withholding with respect to that income in the same manner as a foreign person that is not a tax-exempt organization. See §1.1441-9(b)(3) for a presumption that amounts are includible under section 512 and section 513 in computing the organization’s unrelated business taxable income in the absence of reliable certification. See also §1.1446-3(c)(3), applying this presumption in the context of section 1446.

* * * * *

(c)* * *(1) In general. This section applies to payments made after December 31, 2000, except that the references in paragraph (a) of this section to effectively connected taxable income and withholding under section 1446 shall apply to partnership taxable years beginning after May 18, 2005, or such earlier time as the regulations under §§1.1446-1 through 1.1446-5 apply by reason of an election under §1.1446-7.

* * * * *

Par. 4. Sections 1.1446-0 through 1.1446-5, 1.1446-6T and 1.1446-7 are added to read as follows:

This section lists the captions contained in §§1.1446-1 through 1.1446-7.

(a) In general.

(b) Steps in determining 1446 tax obligation.

(c) Determining whether a partnership has a foreign partner.

(1) In general.

(2) Submission of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, and W-9.

(i) In general.

(ii) Withholding certificate applicable to each type of partner.

(A) U.S. person.

(B) Nonresident alien.

(C) Foreign partnership.

(D) Disregarded entities.

(E) Domestic and foreign grantor trusts.

(F) Nominees.

(G) Foreign governments, foreign tax-exempt organizations and other foreign persons.

(H) Foreign corporations, certain foreign trusts, and foreign estates

(iii) Effect of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, W-9, and statement.

(A) Partnership reliance on withholding certificate.

(B) Reason to know.

(C) Subsequent knowledge and impact on penalties.

(iv) Requirements for certificates to be valid.

(A) When period of validity expires.

(B) Required information for Forms W-8BEN, W-8IMY, W-8ECI, and W-8EXP.

(v) Partner must provide new withholding certificate when there is a change in circumstances.

(vi) Partnership must retain withholding certificates.

(3) Presumptions in the absence of valid Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement.

(4) Consequences when partnership knows or has reason to know that Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, or Form W-9 is incorrect or unreliable and does not withhold.

(5) Acceptable substitute form.

(a) In general.

(b) Computation.

(1) In general.

(2) Income and gain rules.

(i) Application of the principles of section 864.

(ii) Income treated as effectively connected.

(iii) Exempt income.

(3) Deductions and losses.

(i) Oil and gas interests.

(ii) Charitable contributions.

(iii) Net operating losses and other suspended or carried losses.

(iv) Interest deductions.

(v) Limitation on capital losses.

(vi) Other deductions.

(vii) Limitations on deductions.

(4) Other rules.

(i) Exclusion of items allocated to U.S. partners.

(ii) Partnership credits.

(5) Examples.

(a) In general.

(1) Calculating 1446 tax.

(2) Applicable percentage.

(i) In general.

(ii) Special types of income or gain.

(b) Installment payments.

(1) In general.

(2) Calculation.

(i) General application of the principles of section 6655.

(ii) Annualization methods.

(iii) Partner’s estimated tax payments.

(iv) Partner whose interest terminates during the partnership’s taxable year.

(v) Exceptions and modifications to the application of the principles under section 6655.

(A) Inapplicability of special rules for large corporations.

(B) Inapplicability of special rules regarding early refunds.

(C) Period of underpayment.

(D) Other taxes.

(E) 1446 tax treated as tax under section 11.

(F) Application of section 6655(f).

(G) Application of section 6655(i).

(H) Current year tax safe harbor.

(I) Prior year tax safe harbor.

(3) 1446 tax safe harbor.

(i) In general.

(ii) Permission to change to standard annualization method.

(c) Coordination with other withholding rules.

(1) Fixed or determinable, annual or periodical income.

(2) Real property gains.

(i) Domestic partnerships.

(ii) Foreign partnerships.

(3) Coordination with section 1443.

(d) Reporting and crediting the 1446 tax.

(1) Reporting 1446 tax.

(i) Reporting of installment tax payments and notification to partners of installment tax payments.

(ii) Payment due dates.

(iii) Annual return and notification to partners.

(iv) Information provided to beneficiaries of foreign trusts and estates.

(v) Attachments required of foreign trusts and estates.

(vi) Attachments required of beneficiaries of foreign trusts and estates.

(vii) Information provided to beneficiaries of foreign trusts and estates that are partners in certain publicly traded partnerships.

(2) Crediting 1446 tax against a partner’s U.S. tax liability.

(i) In general.

(ii) Substantiation for purposes of claiming the credit under section 33.

(iii) Special rules for apportioning the tax credit under section 33.

(A) Foreign trusts and estates.

(B) Use of domestic trusts to circumvent section 1446.

(iv) Refunds to withholding agent.

(v) 1446 tax treated as cash distribution to partners.

(vi) Examples.

(e) Liability of partnership for failure to withhold.

(1) In general.

(2) Proof that tax liability has been satisfied and deemed payment of 1446 tax.

(3) Liability for interest, penalties, and additions to the tax.

(i) Partnership.

(ii) Foreign partner.

(4) Examples.

(f) Effect of withholding on partner.

(a) In general.

(b) Definitions.

(1) Publicly traded partnership.

(2) Applicable percentage.

(3) Nominee.

(4) Qualified notice.

(c) Paying and reporting 1446 tax.

(d) Rules for designation of nominees to withhold tax under section 1446.

(e) Determining foreign status of partners.

(f) Distributions subject to withholding.

(1) In general.

(2) In-kind distributions.

(3) Ordering rule relating to distributions.

(4) Coordination with section 1445(e)(1).

(a) In general.

(b) Reporting requirements.

(1) In general.

(2) Publicly traded partnerships.

(c) Look through rules for foreign upper-tier partnerships.

(d) Publicly traded partnerships.

(1) Upper-tier publicly traded partnership.

(2) Lower-tier publicly traded partnership.

(e) Election by a domestic upper-tier partnership to apply look through rules.

(1) In general.

(2) Information required for valid election statement.

(3) Consent of lower-tier partnership.

(f) Examples.

(a) In general.

(b) Foreign partner to whom this section applies.

(1) In general.

(2) Special rules.

(c) Certificate to reduce 1446 tax with respect to a foreign partner.

(1) In general.

(i) Deductions and losses from the partnership from prior taxable years.

(ii) Deductions and losses from sources other than the partnership from prior taxable years.

(iii) Limit on the consideration of a partner’s net operating loss deduction.

(iv) Certificate of nonresident alien partner that partnership investment is partner’s only activity giving rise to effectively connected items.

(2) Time and form of certification.

(i) Time for certification provided to partnership.

(A) First certificate submitted for a partnership’s taxable year.

(B) Updated certificates and status updates.

(1) Foreign partner’s prior year tax returns not yet filed.

(2) Other circumstances requiring a foreign partner to submit an updated certificate.

(3) Form and content of updated certificate.

(4) When partnership may consider an updated certificate.

(ii) Form of certification.

(3) Notification to partnership when a partner’s certificate cannot be relied upon.

(4) Partner to receive copy of notice.

(5) Partner’s certificate valid only for partnership taxable year for which submitted.

(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.

(ii) No effect on partner’s estimated tax obligations.

(2) Effect on partnership.

(i) Reasonable reliance to relieve partnership from addition to the tax under section 6655.

(ii) Filing requirement.

(iii) Continuing liability for withholding tax under section 1461 and for applicable interest and penalties.

(iv) Partner’s certified deductions and losses to offset foreign partner’s annualized allocable share of partnership ECTI.

(e) Examples.

(f) Effective dates.

 

(a) In general. If a domestic or foreign partnership has effectively connected taxable income (ECTI) as computed under §1.1446-2 for any partnership tax year, and any portion of such taxable income is allocable under section 704 to a foreign partner, then the partnership must pay a withholding tax under section 1446 (1446 tax) at the time and in the manner prescribed in this section, and §§1.1446-2 through 1.1446-6T.

(b) Steps in determining 1446 tax obligation. In general, a partnership determines its 1446 tax as follows. The partnership determines whether it has any foreign partners in accordance with paragraph (c) of this section. If the partnership does not have any foreign partners (including any person presumed to be foreign under paragraph (c) of this section and any domestic trust treated as foreign under §1.1446-3(d)) during its taxable year, it generally will not have a 1446 tax obligation. If the partnership has one or more foreign partners, it then determines under §1.1446-2 whether it has ECTI any portion of which is allocable under section 704 to one or more of the foreign partners. If the partnership has ECTI allocable under section 704 to one or more of its foreign partners, the partnership computes its 1446 tax, pays over 1446 tax, and reports the amount paid in accordance with the rules in §1.1446-3. For special rules applicable to publicly traded partnerships, see §1.1446-4. For special rules applicable to tiered partnership structures, see §1.1446-5. For special rules that may apply in determining the amount of 1446 tax due with respect to a partner, see §1.1446-6T.

(c) Determining whether a partnership has a foreign partner—(1) In general. Except as otherwise provided in this section, §1.1446-3, and §1.1446-5, only a partnership that has at least one foreign partner during the partnership’s taxable year can have a 1446 tax liability. Generally, the term foreign partner means any partner of the partnership that is not a U.S. person within the meaning of section 7701(a)(30). Thus, a partner of the partnership is generally a foreign partner if the partner is a nonresident alien, foreign partnership (see §1.1446-5 for rules that allow a lower-tier partnership to look through an upper-tier foreign partnership to the partners of such partnership for purposes of computing its 1446 tax), foreign corporation (which includes a foreign government pursuant to section 892(a)(3)), foreign estate or trust (see paragraph (c)(2) of this section for rules that instruct a partnership to consider the grantor or other owner of a trust under subpart E of subchapter J as the partner for purposes of computing the partnership’s 1446 tax), as those terms are defined under section 7701 and the regulations thereunder, or a foreign organization described in section 501(c), or other foreign person. A person also is a foreign partner if the person is presumed to be a foreign person under paragraph (c)(3) of this section. For purposes of this section, a partner that is treated as a U.S. person for all income tax purposes (by election or otherwise, see e.g., sections 953(d) and 1504(d)) will not be a foreign partner, provided the partner has provided the partnership a valid Form W-9, “Request for Taxpayer Identification Number and Certification,” or the partnership uses other means to determine that the partner is not a foreign partner (see paragraph (c)(3) of this section). A partner that is treated as a U.S. person only for certain specified purposes is considered a foreign partner for purposes of section 1446, and a partnership must pay 1446 tax on the portion of ECTI allocable to that partner. For example, a partnership must generally pay 1446 tax on ECTI allocable to a foreign corporate partner that has made an election under section 897(i).

(2) Submission of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, and W-9—(i) In general. Except as otherwise provided in this paragraph (c)(2) or paragraph (c)(3) of this section, a partnership must generally determine whether a partner is a foreign partner, and the partner’s tax classification (e.g., corporate or non-corporate), by obtaining a withholding certificate from the partner that is a Form W-8BEN, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding,” Form W-8IMY, “Certificate of Foreign Intermediary, Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding,” Form W-8ECI, “Certificate of Foreign Person’s Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States,” Form W-8EXP, “Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding,” or a Form W-9, as applicable, or an acceptable substitute form permitted under paragraph (c)(5) of this section. Generally, a foreign partner that is a nonresident alien, a foreign estate or trust (other than a grantor trust described in this paragraph (c)(2)), a foreign corporation, or a foreign government should provide a valid Form W-8BEN.

(ii) Withholding certificate applicable to each type of partner. A partner that submits a valid Form W-8 (e.g., Form W-8BEN) for purposes of section 1441 or 1442 will generally satisfy the documentation requirements of this section provided that the submission of such form is not inconsistent with the rules of this paragraph (c)(2) or paragraph (c)(3) of this section. The following rules shall apply for purposes of this section.

(A) U.S. person. A partner that is a U.S. person (other than a grantor trust described in this paragraph (c)(2)), including a domestic partnership and domestic simple or complex trust (including an estate), shall provide a valid Form W-9.

(B) Nonresident alien. A Form W-8 (e.g., Form W-8BEN) submitted by a nonresident alien for purposes of withholding under section 1441 will generally be accepted for purposes of section 1446. If no such form is submitted for purposes of section 1441, such nonresident alien shall submit Form W-8BEN for purposes of section 1446.

(C) Foreign partnership. A partner that is a foreign partnership generally shall provide a valid Form W-8IMY for purposes of section 1446. See §1.1446-5 (permitting a lower-tier partnership to look through an upper-tier foreign partnership in certain circumstances when computing 1446 tax).

(D) Disregarded entities. An entity that is disregarded as an entity separate from its owner under §301.7701-3 of this chapter (whether domestic or foreign) shall not submit a Form W-8 (e.g., Form W-8BEN) or Form W-9. Instead, the owner of such entity for Federal tax purposes shall submit appropriate documentation to comply with this section. See §§301.7701-1 through 301.7701-3 of this chapter for determining the U.S. Federal tax classification of a partner.

(E) Domestic and foreign grantor trusts. To the extent that a grantor or other person is treated as the owner of any portion of a trust under subpart E of subchapter J of the Internal Revenue Code, such trust shall provide documentation under this paragraph (c)(2) to identify the trust as a grantor trust and provide documentation on behalf of the grantor or other person treated as the owner of all or a portion of such trust as required by this paragraph (c)(2). If such trust is a foreign trust, the trust shall submit Form W-8IMY to the partnership identifying itself as a foreign grantor trust and shall provide such documentation (e.g., Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, or W-9) and information pertaining to its grantor or other owner to the partnership that permits the partnership to reliably associate (within the meaning of §1.1441-1(b)(2)(vii)) such portion of the trust’s allocable share of partnership ECTI with the grantor or other person that is the owner of such portion of the trust. If such trust is a domestic trust, the trust shall furnish the partnership a statement under penalty of perjury that the trust is, in whole or in part, a domestic grantor trust and such statement shall identify that portion of the trust that is treated as owned by a grantor or another person under subpart E of subchapter J of the Internal Revenue Code. The trust shall also provide such documentation and information (e.g., Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, or W-9) pertaining to its grantor or other owner(s) to the partnership that permits the partnership to reliably associate (within the meaning of §1.1441-1(b)(2)(vii)) such portion of the trust’s allocable share of partnership ECTI with the grantor or other person that is the owner of such portion of the trust.

(F) Nominees. Where a nominee holds an interest in a partnership on behalf of another person, the beneficial owner of the partnership interest, not the nominee, shall submit a Form W-8 (e.g., Form W-8BEN) or Form W-9 to the partnership or nominee that is the withholding agent.

(G) Foreign governments, foreign tax-exempt organizations and other foreign persons. A Form W-8 (e.g., Form W-8EXP) submitted by a partner that is a foreign government, foreign tax-exempt organization, or other foreign person for purposes of withholding under §§1441 through 1443 will also operate to establish the foreign status of such partner under this section. However, except as set forth in §1.1446-3(c)(3) (regarding certain tax-exempt organizations described in section 501(c)), the submission of Form W-8EXP will have no effect on whether there is a 1446 tax due with respect to such partner’s allocable share of partnership ECTI. For example, a partnership must still pay 1446 tax with respect to a foreign government partner’s allocable share of ECTI because such partner is treated as a foreign corporation under section 892(a)(3). If no Form W-8 is submitted for purposes of withholding under sections 1441 through 1443, then such government, tax-exempt organization, or person must generally submit Form W-8BEN.

(H) Foreign corporations, certain foreign trusts, and foreign estates. Consistent with the rules of this paragraph (c)(2) and paragraph (c)(3) of this section, a foreign corporation, a foreign trust (other than a foreign grantor trust described in paragraph (c)(2)(ii)(E) of this section), or a foreign estate may generally submit any appropriate Form W-8 (e.g., Form W-8BEN) to the partnership to establish its foreign status for purposes of section 1446.

(iii) Effect of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, W-9, and statement—(A) Partnership reliance on withholding certificate. In general, for purposes of this section, a partnership may rely on a valid Form W-8 (e.g., Form W-8BEN) or Form W-9, or statement described in this paragraph (c)(2) from a partner, beneficial owner, or grantor trust to determine whether that person, beneficial owner, or the owner of a grantor trust, is a non-foreign or foreign partner for purposes of computing 1446 tax, and if such person is a foreign partner, to determine whether or not such person is a corporation for U.S. tax purposes. The rules of paragraph (c)(3) of this section shall apply to a partnership that receives a Form W-8IMY from a foreign grantor trust or a statement described in this paragraph (c)(2) from a domestic grantor trust, but does not receive a Form W-8 (e.g., Form W-8BEN) or Form W-9 identifying such grantor or other person. Further, a partnership may not rely on a Form W-8 or Form W-9, or statement described in this paragraph (c)(2), and such form or statement is therefore not valid for any installment period or Form 8804 filing date during which the partnership has actual knowledge or has reason to know that any information on the withholding certificate or statement is incorrect or unreliable and, if based on such knowledge or reason to know, the partnership should pay 1446 tax in an amount greater than would be the case if it relied on the certificate or statement.

(B) Reason to know. A partnership has reason to know that information on a withholding certificate or statement is incorrect or unreliable if its knowledge of relevant facts or statements contained on the form or other documentation is such that a reasonably prudent person in the position of the withholding agent would question the claims made. See §§1.1441-1(e)(4)(viii) and 1.1441-7(b)(1) and (2).

(C) Subsequent knowledge and impact on penalties. If the partnership does not have actual knowledge or reason to know that a Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement received from a partner, beneficial owner, or grantor trust contains incorrect or unreliable information, but it subsequently determines that the certificate or statement contains incorrect or unreliable information, and, based on such knowledge the partnership should pay 1446 tax in an amount greater than would be the case if it relied on the certificate or statement, then the partnership will not be subject to penalties for its failure to pay the 1446 tax in reliance on such certificate or statement for any installment payment date prior to the date that the determination is made. See §§1.1446-1(c)(4) and 1.1446-3 concerning penalties for failure to pay the withholding tax when a partnership knows or has reason to know that a withholding certificate or statement is incorrect or unreliable.

(iv) Requirements for certificates to be valid. Except as otherwise provided in this paragraph (c), for purposes of this section, the validity of a Form W-9 shall be determined under section 3406 and §31.3406(h)-3(e) of this chapter which establish when such form may be reasonably relied upon. A Form W-8BEN, Form W-8IMY, Form W-8ECI, or Form W-8EXP is only valid for purposes of this section if its validity period has not expired, the partner submitting the form has signed it under penalties of perjury, and it contains all the required information.

(A) When period of validity expires. For purposes of this section, a Form W-8BEN, Form W-8IMY, Form W-8ECI, or Form W-8EXP submitted by a partner shall be valid until the end of the period of validity determined for such form under §1.1441-1(e). With respect to a foreign partnership submitting Form W-8IMY, the period of validity of such form shall be determined under §1.1441-1(e) as if such foreign partnership submitted the form required of a nonwithholding foreign partnership. See §1.1441-1(e)(4)(ii).

(B) Required information for Forms W-8BEN, W-8IMY, W-8ECI, and W-8EXP. Forms W-8BEN, W-8IMY, W-8ECI, and W-8EXP submitted under this section must contain the partner’s name, permanent address and Taxpayer Identification Number (TIN), the country under the laws of which the partner is formed, incorporated or governed (if the person is not an individual), the classification of the partner for U.S. Federal tax purposes (e.g., partnership, corporation), and any other information required to be submitted by the forms or instructions for such form, as applicable.

(v) Partner must provide new withholding certificate when there is a change in circumstances. The principles of §1.1441-1(e)(4)(ii)(D) shall apply when a change in circumstances has occurred (including situations where the status of a U.S. person changes) that requires a partner to provide a new withholding certificate.

(vi) Partnership must retain withholding certificates. A partnership or nominee who has responsibility for paying 1446 tax under this section or §1.1446-4 must retain each withholding certificate, statement, and other information received from its direct and indirect partners for as long as it may be relevant to the determination of the withholding agent’s 1446 tax liability under section 1461 and the regulations thereunder.

(3) Presumptions in the absence of valid Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement. Except as otherwise provided in this paragraph (c)(3), a partnership that does not receive a valid Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement required by paragraph (c)(2) of this section from a partner, beneficial owner, or grantor trust, or a partnership that receives a withholding certificate or statement but has actual knowledge or reason to know that the information on the certificate or statement is incorrect or unreliable, must presume that the partner is a foreign person. Except as provided in §1.1446-3(a)(2) and §1.1446-5(c)(2), a partnership that knows that a partner is an individual shall treat the partner as a nonresident alien. Except as provided in §1.1446-3(a)(2) and §1.1446-5(c)(2), a partnership that knows that a partner is an entity shall treat the partner as a corporation if the entity is a corporation as defined in §301.7701-2(b)(8) of this chapter. See §1.1446-3(a)(2) which prohibits a partnership in certain circumstances from considering preferential tax rates in computing its 1446 tax when the presumption and rules of this paragraph (c)(3) apply. In all other cases, the partnership shall treat the partner as either a nonresident alien or a foreign corporation, whichever classification results in a higher 1446 tax being due, and shall pay the 1446 tax in accordance with this presumption. Except as provided in §1.1446-5(c)(2), the presumption set forth in this paragraph (c)(3) that a partner is a foreign person shall not apply to the extent that the partnership relies on other means to ascertain the non-foreign status of a partner and the partnership is correct in its determination that such partner is a U.S. person. A partnership is in no event required to rely upon other means to determine the non-foreign status of a partner and may demand that a partner furnish an acceptable certificate under this section. If a certificate is not provided in such circumstances, the partnership may presume that the partner is a foreign partner, and for purposes of sections 1461 through 1463, will be considered to have been required to pay 1446 tax on such partner’s allocable share of partnership ECTI.

(4) Consequences when partnership knows or has reason to know that Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, or Form W-9 is incorrect or unreliable and does not withhold. If a partnership has actual knowledge or has reason to know that a Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement required by paragraph (c)(2) of this section submitted by a partner, beneficial owner, or grantor trust contains incorrect or unreliable information (either because the certificate or statement when given to the partnership contained incorrect information or because there has been a change in facts that makes information on the certificate or statement incorrect), and the partnership pays less than the full amount of 1446 tax due on ECTI allocable to that partner, the partnership shall be fully liable under section 1461 and §1.1461-3 (§1.1461-1 for publicly traded partnerships subject to §1.1446-4) and §1.1446-3, and for all applicable penalties and interest, for any failure to pay the 1446 tax for the period during which the partnership has such knowledge or reason to know that the certificate contained incorrect or unreliable information and for all subsequent installment periods. If a partner, beneficial owner, or grantor trust submits a new valid Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement, as applicable, the partnership may rely on that documentation when paying 1446 tax (or any installment of such tax) for any payment date that has not passed at the time such form is received.

(5) Acceptable substitute form. A partnership or withholding agent responsible for paying 1446 tax (or any installment of such tax) may substitute its own form for the official version of Form W-8 (e.g., Form W-8BEN) that is recognized under this section to ascertain the identity of its partners, provided such form is consistent with §1.1441-1(e)(4)(vi). All references under this section or §§1.1446-2 through 1.1446-6T to a Form W-8 (e.g., Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP) shall include the acceptable substitute form recognized under this paragraph (c)(5).

(a) In general. A partnership’s effectively connected taxable income (ECTI) is generally the partnership’s taxable income as computed under section 703, with adjustments as provided in section 1446(c) and this section, and computed with consideration of only those partnership items which are effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States. For purposes of determining the section 1446 withholding tax (1446 tax) or any installment of such tax under §1.1446-3, partnership ECTI allocable under section 704 to foreign partners is the sum of the allocable shares of ECTI of each of the partnership’s foreign partners as determined under paragraph (b) of this section. See §1.1446-6T (special rules permitting the partnership to consider partner-level deductions and losses to reduce the partnership’s 1446 tax). The calculation of partnership ECTI allocable to foreign partners as set forth in paragraph (b) of this section and the partnership’s withholding tax obligation are partnership-level computations solely for purposes of determining the 1446 tax. Therefore, any deduction that is not taken into account in calculating a partner’s allocable share of partnership ECTI (e.g., percentage depletion), but which is a deduction that under U.S. tax law the foreign partner is otherwise entitled to claim, can still be claimed by the foreign partner when computing its U.S. tax liability and filing its U.S. income tax return, subject to any restriction or limitation that otherwise may apply.

(b) Computation—(1) In general. A foreign partner’s allocable share of partnership ECTI for the partnership’s taxable year that is allocable under section 704 to a particular foreign partner is equal to that foreign partner’s distributive share of partnership gross income and gain for the partnership’s taxable year that is effectively connected and properly allocable to the partner under section 704 and the regulations thereunder, reduced by the foreign partner’s distributive share of partnership deductions for the partnership taxable year that are connected with such income under section 873(a) or 882(c) and properly allocable to the partner under section 704 and the regulations thereunder, in each case, after application of the rules of this section. See §1.1446-6T (special rules permitting the partnership to consider partner-level deductions and losses to reduce the partnership’s 1446 tax). For these purposes, a foreign partner’s distributive share of effectively connected gross income and gain and the deductions connected with such income shall be computed by considering allocations that are respected under the rules of section 704 and §1.704-1(b)(1), including special allocations in the partnership agreement (as defined in §1.704-1(b)(2)(ii)(h)), and adjustments to the basis of partnership property described in section 743 pursuant to an election by the partnership under section 754 (see §1.743-1(j)). The character of effectively connected partnership items (capital versus ordinary) shall be separately considered only to the extent set forth in paragraph (b)(3)(v) of this section and, when applicable, sections 1.1446-3(a)(2) (consideration of preferential rates when computing 1446 tax) and section 1.1446-6T (special rules permitting the partnership to consider partner-level deductions and losses to reduce the partnership’s 1446 tax).

(2) Income and gain rules. For purposes of computing a foreign partner’s allocable share of partnership ECTI under this paragraph (b), the following rules shall apply with respect to partnership income and gain.

(i) Application of the principles of section 864. The determination of whether a partnership’s items of gross income are effectively connected shall be made by applying the principles of section 864 and the regulations thereunder.

(ii) Income treated as effectively connected. A partnership’s items of gross income that are effectively connected include any income that is treated as effectively connected income, including partnership income subject to a partner’s election under section 871(d) or section 882(d), any partnership income treated as effectively connected with the conduct of a U.S. trade or business pursuant to section 897, and any other items of partnership income treated as effectively connected under another provision of the Internal Revenue Code, without regard to whether those amounts are taxable to the partner. A partner that makes the election under section 871(d) or section 882(d) shall furnish to the partnership a statement that indicates that such election has been made. See §1.871-10(d)(3). If a partnership receives a valid Form W-8ECI from a partner, the partner is deemed, for purposes of section 1446, to have effectively connected income subject to withholding under section 1446 to the extent of the items identified on the form.

(iii) Exempt income. A foreign partner’s allocable share of partnership ECTI does not include income or gain exempt from U.S. tax by reason of a provision of the Internal Revenue Code. A foreign partner’s allocable share of partnership ECTI also does not include income or gain exempt from U.S. tax by operation of any U.S. income tax treaty or reciprocal agreement. In the case of income excluded by reason of a treaty provision, such income must be derived by a resident of an applicable treaty jurisdiction, the resident must be the beneficial owner of the item, and all other requirements for benefits under the treaty must be satisfied. The partnership must have received from the partner a valid withholding certificate, that is, Form W-8BEN (see §1.1446-1(c)(2)(iii) regarding when a Form W-8BEN is valid for purposes of this section), containing the information necessary to support the claim for treaty benefits required in the forms and instructions. In addition, for purposes of this section, the withholding certificate must contain the beneficial owner’s taxpayer identification number.

(3) Deductions and losses. For purposes of computing a foreign partner’s allocable share of partnership ECTI under this paragraph (b), the following rules shall apply with respect to deductions and losses.

(i) Oil and gas interests. The deduction for depletion with respect to oil and gas wells shall be allowed, but the amount of such deduction shall be determined without regard to sections 613 and 613A.

(ii) Charitable contributions. The deduction for charitable contributions provided in section 170 shall not be allowed.

(iii) Net operating losses and other suspended or carried losses. Except as provided in §1.1446-6T, the net operating loss deduction of any foreign partner provided in section 172 shall not be taken into account. Further, except as provided in §1.1446-6T, the partnership shall not take into account any suspended losses (e.g., losses in excess of a partner’s basis in the partnership, see section 704(d)) or any capital loss carrybacks or carryovers available to a foreign partner.

(iv) Interest deductions. The rules of this paragraph (b)(3)(iv) shall apply for purposes of determining the amount of interest expense that is allocable to income which is (or is treated as) effectively connected with the conduct of a trade or business for purposes of calculating a foreign partner’s allocable share of partnership ECTI. In the case of a non-corporate foreign partner, the rules of §1.861-9T(e)(7) shall apply. In the case of a corporate foreign partner, the rules of §1.882-5 shall apply by treating the partnership as a foreign corporation and using the partner’s pro-rata share of the partnership’s assets and liabilities for these purposes. For these purposes, the rules governing elections under §1.882-5(a)(7) shall be made at the partnership level.

(v) Limitation on capital losses. Losses from the sale or exchange of capital assets allocable under section 704 to a partner shall be allowed only to the extent of gains from the sale or exchange of capital assets allocable under section 704 to such partner.

(vi) Other deductions. No deduction shall be allowed for personal exemptions provided in section 151 or the additional itemized deductions for individuals provided in part VII of subchapter B of the Internal Revenue Code (section 211 and following).

(vii) Limitations on deductions. Except as provided in §1.1446-6T and this paragraph (b)(3), any limitations on losses or deductions that apply at the partner level when determining ECTI allocable to a foreign partner shall not be taken into account.

(4) Other rules—(i) Exclusion of items allocated to U.S. partners. Except as provided in §1.1446-5(e), in computing partnership ECTI, the partnership shall not take into account any item of income, gain, loss, or deduction to the extent allocable to any partner that is not a foreign partner, as that term is defined in §1.1446-1(c).

(ii) Partnership credits. See §1.1446-3(a) providing that the 1446 tax is computed without regard to a partner’s distributive share of the partnership’s tax credits.

(5) 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). The examples are as follows:

Example 1. Limitation on capital losses. PRS partnership has two equal partners, A and B. A is a nonresident alien and B is a U.S. citizen. A provides PRS with a valid Form W-8BEN, and B provides PRS with a valid Form W-9. PRS has the following annualized tax items for the relevant installment period, all of which are effectively connected with its U.S. trade or business and are allocated equally between A and B: $100 of long-term capital gain, $400 of long-term capital loss, $300 of ordinary income, and $100 of ordinary deductions. Assume that these allocations are respected under section 704(b) and the regulations thereunder. Accordingly, A’s allocable share of PRS’s effectively connected items includes $50 of long-term capital gain, $200 of long-term capital loss, $150 of ordinary income, and $50 of ordinary deductions. In determining A’s allocable share of partnership ECTI, the amount of the long-term capital loss that may be taken into account pursuant to paragraph (b)(3)(v) of this section is limited to A’s allocable share of gain from the sale or exchange of capital assets. Accordingly, A’s share of partnership ECTI allocable under section 704 pursuant to §1.1446-2 is $100 ($150 of ordinary income less $50 of ordinary deductions, plus $50 of capital gain less $50 of capital loss).

Example 2. Limitation on capital losses—special allocations. PRS partnership has two equal partners, A and B. A and B are both nonresident aliens. A and B each provide PRS with a valid Form W-8BEN. PRS has the following annualized tax items for the relevant installment period, all of which are effectively connected with its U.S. trade or business: $200 of long-term capital gain, $200 of long-term capital loss, and $400 of ordinary income. A and B have equal shares in the ordinary income, however, pursuant to the partnership agreement, capital gains and losses are subject to special allocations. The long-term capital gain is allocable to A, and the long-term capital loss is allocable to B. Assume that these allocations are respected under section 704(b) and the regulations thereunder. Pursuant to paragraph (b)(3)(v) of this section, A’s allocable share of partnership ECTI under §1.1446-2 is $400 (consisting of $200 of ordinary income and $200 of long-term capital gain), and B’s allocable share of partnership ECTI is $200 (consisting of $200 of ordinary income).

Example 3. Withholding tax obligation where partner has net operating losses. PRS partnership has two equal partners, FC, a foreign corporation, and DC, a domestic corporation. FC and DC provide a valid Form W-8BEN and Form W-9, respectively, to PRS. Both FC and PRS are on a calendar taxable year. PRS is engaged in the conduct of a trade or business in the United States and for its first installment period during its taxable year has $100 of annualized ECTI that is allocable to FC. As of the beginning of the taxable year, FC had an unused effectively connected net operating loss carryover in the amount of $300. FC’s net operating loss carryover is not taken into account in determining FC’s allocable share of partnership ECTI under §1.1446-2 and, absent the application of §1.1446-6T (permitting a foreign partner to certify deductions and losses reasonably expected to be available to reduce the partner’s U.S. income tax liability on the effectively connected income or gain allocable from the partnership), is not considered in computing the 1446 tax installment payment due on behalf of FC. Accordingly, PRS must pay 1446 tax with respect to the $100 of ECTI allocable to FC.

(a) In general—(1) Calculating 1446 tax. This section provides rules for calculating, reporting, and paying over the section 1446 withholding tax (1446 tax). A partnership’s 1446 tax equals the amount determined under this section and shall be paid in installments during the partnership’s taxable year (see paragraph (d)(1) of this section for installment payment due dates), with any remaining tax due paid with the partnership’s annual return required to be filed pursuant to paragraph (d) of this section. For these purposes, a partnership shall not take into account either a partner’s liability for any other tax imposed under any other provision of the Internal Revenue Code (e.g., section 55 or 884) or a partner’s distributive share of the partnership’s tax credits when determining the amount of the partnership’s 1446 tax.

(2) Applicable percentage—(i) In general. Except as provided in this paragraph (a)(2), in the case of a foreign partner that is a corporation for U.S. tax purposes, the applicable percentage is the highest rate of tax specified in section 11(b)(1) for such taxable year. Except as provided in this paragraph (a)(2) and §1.1446-5, in the case of a foreign partner that is not a corporation for U.S. tax purposes (e.g., a partnership, individual, trust or estate), the applicable percentage is the highest rate of tax specified in section 1.

(ii) Special types of income or gain. Except as otherwise provided, a partnership is permitted to consider as the applicable percentage under this paragraph (a)(2) the highest rate of tax applicable to a particular type of income or gain allocable to a partner (e.g., long-term capital gain allocable to a non-corporate partner, unrecaptured section 1250 gain, collectibles gain under section 1(h)), to the extent of a partner’s allocable share of such income or gain. Consideration of the highest rate of tax applicable to a particular type of income or gain under the previous sentence shall be made without regard to the amount of such partner’s income. A partnership is not permitted to consider the highest rate of tax applicable to a particular type of income or gain under this paragraph (a)(2)(ii) if the application of the preferential rate depends upon the corporate or non-corporate status of the person reporting the income or gain and, either no documentation has been provided to the partnership under §1.1446-1 to establish the corporate or non-corporate status of the partner required to pay tax on the income or gain, or the partnership is otherwise required to compute and pay 1446 tax on such portion of the income or gain using the highest applicable percentage under section 1446(b). See e.g., §§1.1446-1(c)(3) (presumption of foreign status in the absence of documentation) and 1.1446-5(c)(2) (requirement to pay 1446 tax at higher of rates in section 1446(b) where a lower-tier partnership cannot reliably associate income with a partner of the upper-tier partnership).

(b) Installment payments—(1) In general. Except as provided in §1.1446-4 for certain publicly traded partnerships, a partnership must pay its 1446 tax by making installment payments of the 1446 tax based on the amount of partnership ECTI allocable under section 704 to its foreign partners, without regard to whether the partnership makes any distributions to its partners during the partnership’s taxable year. The amount of the installment payments is determined in accordance with this paragraph (b), and the tax must be paid at the times set forth in paragraph (d) of this section. Subject to paragraphs (b)(2)(v) and (b)(3)(ii) of this section, in computing its first installment of 1446 tax for a taxable year, a partnership must decide whether it will pay its 1446 tax for the entire taxable year by using the safe harbor set forth in paragraph (b)(3)(i) of this section, or by using one of several annualization methods available under paragraph (b)(2)(ii) of this section for computing partnership ECTI allocable to foreign partners. In the case of a partnership’s underpayment of an installment of 1446 tax, the partnership shall be subject to an addition to the tax equal to the amount determined under section 6655, as modified by this section, as if such partnership were a corporation, as well as any other applicable interest and penalties. See §1.1446-3(f). Section 6425 (permitting an adjustment for an overpayment of estimated tax by a corporation) shall not apply to a partnership’s payment of its 1446 tax.

(2) Calculation—(i) General application of the principles of section 6655. Installment payments of 1446 tax required during the partnership’s taxable year are based upon partnership ECTI for the portion of the partnership taxable year to which they relate, and, except as set forth in this paragraph (b)(2) or paragraph (b)(3) of this section, shall be calculated using the principles of section 6655. Under the principles of section 6655, the partnership’s effectively connected items of income, gain, loss and deduction are annualized to determine each foreign partner’s allocable share of partnership ECTI under §1.1446-2. To the extent applicable, §1.1446-6T may be considered for purposes of this section to reduce the amount of the partner’s allocable share of partnership ECTI to an amount that is subject to tax under section 1446. Each foreign partner’s allocable share of partnership ECTI that is subject to tax under section 1446, or portion thereof, is then multiplied by the relevant applicable percentage for the type of income allocable to the foreign partner under paragraph (a)(2) of this section. The respective tax amounts are then added for each foreign partner. This computation will yield an annualized 1446 tax with respect to such partner. The installment of 1446 tax due with respect to a foreign partner’s allocable share of partnership ECTI subject to tax under section 1446 equals the excess of the section 6655(e)(2)(B)(ii) percentage of the annualized 1446 tax for that partner (or, if applicable, the adjusted seasonal amount) for the relevant installment period, over the aggregate of any amounts paid under section 1446 with respect to that partner in prior installments during the partnership’s taxable year. Therefore, the total amount of a partnership’s 1446 tax installment payment is equal to the sum of the installment payments due for such period on behalf of all the partnership’s foreign partners.

(ii) Annualization methods. A partnership that decides to annualize its income for the taxable year shall use one of the annualization methods set forth in section 6655(e) and the regulations thereunder, and as described in the forms and instructions for Form 8804, “Annual Return for Partnership Withholding Tax (Section 1446),” Form 8805, “Foreign Partner’s Information Statement of Section 1446 Withholding Tax,” and Form 8813, “Partnership Withholding Tax Payment Voucher (Section 1446).”

(iii) Partner’s estimated tax payments. In computing its installment payments of 1446 tax, a partnership may not take into account a partner’s estimated tax payments.

(iv) Partner whose interest terminates during the partnership’s taxable year. If a partner’s interest in the partnership terminates prior to the end of the partnership’s taxable year, the partnership shall take into account the income that is allocable to the partner for the portion of the partnership taxable year that the person was a partner.

(v) Exceptions and modifications to the application of the principles under section 6655. To the extent not otherwise modified in §§1.1446-1 through 1.1446-7 or inconsistent with those rules, the principles of section 6655 apply to the calculation of the installment payments of 1446 tax made by a partnership as set forth in this paragraph (b)(2)(v).

(A) Inapplicability of special rules for large corporations. The principles of section 6655(d)(2), concerning large corporations (as defined in section 6655(g)(2)), shall not apply.

(B) Inapplicability of special rules regarding early refunds. The principles of section 6655(h), applicable to amounts excessively credited or refunded under section 6425, shall not apply. See paragraph (b)(1) of this section providing that section 6425 shall not apply for purposes of the 1446 tax. This paragraph (b)(2)(v)(B) shall apply to 1446 tax paid by a partnership or nominee, as well as to amounts that a partner is deemed to have paid for estimated tax purposes by reason of the partnership’s or nominee’s 1446 tax payments under §1.1446-3(d)(1)(i).

(C) Period of underpayment. The period of the underpayment set forth in section 6655(b)(2) shall end on the earlier of the 15^th day of the 4^th month following the close of the partnership’s taxable year (or, in the case of a partnership described in §1.6081-5(a)(1) of this chapter, the 15^th day of the 6^th month following the close of the partnership’s taxable year), or with respect to any portion of the underpayment, the date on which such portion is paid.

(D) Other taxes. Section 6655 shall be applied without regard to any references to alternative minimum taxable income and modified alternative minimum taxable income.

(E) 1446 tax treated as tax under section 11. The principles of section 6655(g)(1) shall be applied to treat the 1446 tax as a tax imposed by section 11, and any partnership required to pay such tax shall be treated as a corporation.

(F) Application of section 6655(f). A partnership subject to section 1446 shall apply section 6655(f) after aggregating the 1446 tax due (or any installment of such tax) for all its foreign partners. See §1.1446-6T for an exception to this rule when a nonresident alien partner certifies to the partnership that the partnership investment is the nonresident alien partner’s only activity giving rise to effectively connected items.

(G) Application of section 6655(i). If a partnership has a taxable year of less than 12 months, the partnership is required to pay 1446 tax (including installments of such tax) in accordance with this section §1.1446-3, if the partnership has ECTI allocable under section 704 to foreign partners. In such a case, the partnership shall adjust its installment payments of 1446 tax in a reasonable manner (e.g., the annualized amounts of ECTI estimated to be allocable to a foreign partner, and the section 6655(e)(2)(B)(ii) percentage to be applied to each installment) to account for the short-taxable year. However, if the partnership’s taxable year is a period of less than 4 months, the partnership shall not be required to make installment payments of 1446 tax, but will only be required to file Forms 8804 and 8805 in accordance with this section §1.1446-3, and report and pay the appropriate 1446 tax for the short-taxable year.

(H) Current year tax safe harbor. The safe harbor set forth in section 6655(d)(1)(B)(i) shall apply to a partnership subject to section 1446.

(I) Prior year tax safe harbor. The safe harbor set forth in section 6655(d)(1)(B)(ii) shall not apply and instead the safe harbor set forth in paragraph (b)(3) of this section applies.

(3) 1446 tax safe harbor—(i) In general. The addition to tax under section 6655 shall not apply to a partnership with respect to a current installment of 1446 tax if—

(A) The average of the amount of the current installment and prior installments during the taxable year is at least 25 percent of the total 1446 tax that would be payable on the amount of the partnership’s ECTI allocable under section 704 to foreign partners (without regard to §1.1446-6T) for the prior taxable year;

(B) The prior taxable year consisted of twelve months;

(C) The partnership timely files (including extensions) an information return under section 6031 for the prior year; and

(D) The amount of ECTI for the prior taxable year is not less than 50 percent of the ECTI shown on the annual return of section 1446 withholding tax that is (or will be) timely filed for the current year.

(ii) Permission to change to standard annualization method. Except as otherwise provided in this paragraph (b)(3)(ii), if a partnership decides to pay its 1446 tax for the first installment period based upon the safe harbor method set forth in paragraph (b)(3)(i), the partnership must use the safe harbor method for each installment payment made during the partnership’s taxable year. Notwithstanding the previous sentence, if a partnership paying over 1446 tax during the taxable year pursuant to this paragraph (b)(3) determines during an installment period (based upon the standard option annualization method set forth in section 6655(e) and the regulations thereunder, as modified by the forms and instructions to Forms 8804, 8805, and 8813) that it will not qualify for the safe harbor in this paragraph (b)(3) because the prior year’s ECTI will not meet the 50-percent threshold in paragraph (b)(3)(i)(D) of this section, then the partnership is permitted, without being subject to the addition to the tax under section 6655 (as applied through this section), to pay over its 1446 tax for the period in which such determination is made, and all subsequent installment periods during the taxable year, using the standard option annualization method. A change pursuant to this paragraph shall be disclosed in a statement attached to the Form 8804 the partnership files for the taxable year and shall include information to allow the IRS to determine whether the change was appropriate.

(c) Coordination with other withholding rules—(1) Fixed or determinable, annual or periodical income. Fixed or determinable, annual or periodical income subject to tax under section 871(a) or section 881 is not subject to withholding under section 1446, and such income is subject to the withholding requirements of sections 1441 and 1442 and the regulations thereunder.

(2) Real property gains—(i) Domestic partnerships. Except as otherwise provided in this paragraph (c)(2), a domestic partnership that is otherwise subject to the withholding requirements of sections 1445 and 1446 will be subject to the payment and reporting requirements of section 1446 only and not section 1445(e)(1) and the regulations thereunder, with respect to partnership gain from the disposition of a U.S. real property interest (as defined in section 897(c)). A partnership that has complied with the requirements of section 1446 will be deemed to satisfy the withholding requirements of section 1445 and the regulations thereunder. However, a domestic partnership that would otherwise be exempt from section 1445 withholding by operation of a nonrecognition provision must continue to comply with the requirements of §1.1445-5(b)(2). In the event that amounts are withheld under section 1445(e) at the time of the disposition of a U.S. real property interest, such amounts may be credited against the partnership’s 1446 tax. A partnership that fails to comply fully with the requirements of section 1446 pursuant to this paragraph (c)(2) shall be liable for any unpaid 1446 tax and subject to any applicable addition to the tax, interest, and penalties under section 1446. See §1.1446-4(f)(4) for rules coordinating the withholding liability of publicly traded partnerships under sections 1445 and 1446.

(ii) Foreign partnerships. A foreign partnership that is subject to withholding under section 1445(a) during its taxable year may credit the amount withheld under section 1445(a) against its section 1446 tax liability for that taxable year only to the extent such amount is allocable to foreign partners.

(3) Coordination with section 1443. A partnership that has ECTI allocable under section 704 to a foreign organization described in section 501(c) shall be required to pay 1446 tax on such ECTI only to the extent such ECTI is includible under section 512 and section 513 in computing the organization’s unrelated business taxable income. The certificate procedure available under §1.1441-9(b)(1) by which a partner may set forth the amounts it believes will and will not be includible in its computation of unrelated business taxable income under section 512 and section 513 shall also apply to a partner in a partnership subject to section 1446. Such certificate shall be made by a partner in the same manner as under §1.1441-9(b)(2). A partnership that determines that the partner’s certificate as to certain partnership items is unreliable or lacking must presume, consistent with §1.1441-9(b)(3) (regarding amounts includible under section 512 in computing the organization’s unrelated business taxable income), that such partnership items would be includible in computing the partner’s UBTI.

(d) Reporting and crediting the 1446 tax—(1) Reporting 1446 tax. This paragraph (d) sets forth the rules for reporting and crediting the 1446 tax paid by a partnership. To the extent that 1446 tax is paid on ECTI allocable to a domestic trust (including a grantor or other person treated as an owner of a portion of such trust) or a grantor or other person treated as the owner of a portion of a foreign trust, the rules of this paragraph (d) applicable to a foreign trust or its beneficiaries shall be applied to such domestic or foreign trust and its beneficiaries or owners, as applicable, so that appropriate credit for the 1446 tax may be claimed by the trust, beneficiary, grantor, or other person.

(i) Reporting of installment tax payments and notification to partners of installment tax payments. Each partnership required to make an installment payment of 1446 tax must file Form 8813, “Partnership Withholding Tax Payment Voucher (Section 1446),” in accordance with the instructions to that form. Form 8813 is generally used to transmit an installment payment of 1446 tax to the IRS with respect to partnership ECTI estimated to be allocated to foreign partners. However, see §1.1446-6T (relating to circumstances where a partnership must file Form 8813 when no payment is required under section 1446). Except as provided in this section, a partnership must notify each foreign partner of the 1446 tax paid on the partner’s behalf when the partnership makes an installment payment of 1446 tax. The notice required to be given to a foreign partner under the previous sentence must be provided within 10 days of the installment payment due date, or, if paid later, the date such installment payment is made. A foreign partner generally may credit an installment of 1446 tax paid by the partnership on the partner’s behalf against the partner’s estimated tax that the partner must pay during the partner’s own taxable year. See §1.1446-5(b) (relating to tiered partnership structures). However, a foreign partner may not obtain an early refund of such amounts under the estimated tax rules. See §1.1446-3(b)(2)(v)(B). See paragraph (d)(2) of this section for the amount of 1446 tax a partner may credit against its U.S. income tax liability. No particular form is required for a partnership’s notification to a foreign partner, but each notification must include the partnership’s name, the partnership’s Taxpayer Identification Number (TIN), the partnership’s address, the partner’s name, the partner’s TIN, the partner’s address, the annualized ECTI estimated to be allocated to the foreign partner (or prior year’s safe harbor amount, if applicable), and the amount of tax paid on behalf of the partner for both the current and any prior installment periods during the partnership’s taxable year. Notwithstanding any other provision of this paragraph (d), a withholding agent is not required to notify a partner of an installment of 1446 tax paid on the partner’s behalf, unless requested by the partner, if—

(A) The partnership’s agent responsible for providing notice pursuant to this paragraph is the same person that acts as an agent of the foreign partner for purposes of filing the partner’s U.S. Federal income tax return for the partner’s taxable year that includes the installment payment date; or

(B) The partnership has at least 500 foreign partners and the total 1446 tax that the partnership determines will be required to be paid for the partnership taxable year on behalf of such partner (based on paragraph (b)(2)(ii) or (3) of this section) with respect to the partner’s allocable share of ECTI is less than $1,000.

(ii) Payment due dates. The 1446 tax is calculated based on partnership ECTI allocable under section 704 to foreign partners during the partnership’s taxable year, as determined under section 706. Installment payments of the 1446 tax generally must be made during the partnership’s taxable year in which such income is derived. A partnership must pay to the Internal Revenue Service a portion of its estimated annual 1446 tax in installments on or before the 15^th day of the fourth, sixth, ninth, and twelfth months of the partnership’s taxable year as provided in section 6655. Any additional amount determined to be due is to be paid with the filing of the annual return of tax required under paragraph (d)(1)(iii) of this section and clearly designated as for the prior taxable year. Form 8813 should not be submitted for a payment made under the preceding sentence.

(iii) Annual return and notification to partners. Every partnership (except a publicly traded partnership subject to §1.1446-4) that has effectively connected gross income for the partnership’s taxable year allocable under section 704 to one or more of its foreign partners (or is treated as having paid 1446 tax under §1.1446-5(b)), must file Form 8804, “Annual Return for Partnership Withholding Tax (Section 1446).” Additionally, every partnership that is required to file Form 8804 also must file Form 8805, “Foreign Partner’s Information Statement of Section 1446 Withholding Tax,” for each of its foreign partners on whose behalf it paid 1446 tax, and furnish Form 8804 and the Forms 8805 to the Internal Revenue Service and the respective Form 8805 to each of its partners. Notwithstanding the previous sentence, a partnership that considers a foreign partner’s certificate under §1.1446-6T when computing its 1446 tax on Form 8804 is required to furnish such partner and the Internal Revenue Service a Form 8805, even if the form submitted to the partner shows no payment of 1446 tax on behalf of the partner. Forms 8804 and 8805 are separate from Form 1065, “U.S. Return of Partnership Income,” and the attachments thereto, and are not to be filed as part of the partnership’s Form 1065. A partnership must generally file Forms 8804 and 8805 on or before the due date for filing the partnership’s Form 1065. See §1.6031(a)-1(c) for rules concerning the due date of a partnership’s Form 1065. However, with respect to partnerships described in §1.6081-5(a)(1), Forms 8804 and 8805 are not due until the 15^th day of the sixth month following the close of the partnership’s taxable year.

(iv) Information provided to beneficiaries of foreign trusts and estates. A foreign trust or estate that is a partner in a partnership subject to withholding under section 1446 shall be provided Form 8805 by the partnership. The foreign trust or estate must provide to each of its beneficiaries a copy of the Form 8805 furnished by the partnership. In addition, the foreign trust or estate must provide a statement for each of its beneficiaries to inform each beneficiary of the amount of the credit that may be claimed under section 33 (as determined under this section) for the 1446 tax paid by the partnership. Until an official Internal Revenue Service form is available, the statement from a foreign trust or estate that is described in this paragraph (d)(1)(iv) shall contain the following information—

(A) Name, address, and TIN of the foreign trust or estate;

(B) Name, address, and TIN of the partnership;

(C) The amount of the partnership’s ECTI allocated to the foreign trust or estate for the partnership taxable year (as shown on the Form 8805 provided to the trust or estate);

(D) The amount of 1446 tax paid by the partnership on behalf of the foreign trust or estate (as shown on Form 8805 to the trust or estate);

(E) Name, address, and TIN of the beneficiary of the foreign trust or estate;

(F) The amount of the partnership’s ECTI allocated to the trust or estate for purposes of section 1446 that is to be included in the beneficiary’s gross income; and

(G) The amount of 1446 tax paid by the partnership on behalf of the foreign trust or estate that the beneficiary is entitled to claim on its return as a credit under section 33.

(v) Attachments required of foreign trusts and estates. The statement furnished to each foreign beneficiary under this paragraph (d)(1) must also be attached to the foreign trust or estate’s U.S. Federal income tax return filed for the taxable year that includes the installment periods to which the statement relates.

(vi) Attachments required of beneficiaries of foreign trusts and estates. The beneficiary of the foreign trust or estate must attach the statement provided by the trust or estate pursuant to paragraph (d)(1)(iv) of this section, along with a copy of the Form 8805 furnished by the partnership to such trust or estate, to its U.S. income tax return for the year in which it claims a credit for the 1446 tax. See §1.1446-3(d)(2)(ii) for additional rules regarding a partner or beneficial owner claiming a credit for the 1446 tax.

(vii) Information provided to beneficiaries of foreign trusts and estates that are partners in certain publicly traded partnerships. A statement similar to the statement required by paragraph (d)(1)(iv) of this section shall be provided by trusts or estates that hold interests in publicly traded partnerships subject to §1.1446-4.

(2) Crediting 1446 tax against a partner’s U.S. tax liability—(i) In general. A partnership’s payment of 1446 tax on the portion of ECTI allocable to a foreign partner generally relates to the partner’s U.S. income tax liability for the partner’s taxable year in which the partner is subject to U.S. tax on that income. Subject to paragraphs (d)(2)(ii) and (iii) of this section, a partner may claim as a credit under section 33 the 1446 tax paid by the partnership with respect to ECTI allocable to that partner. The partner may not claim an early refund of these amounts under the estimated tax rules. See paragraph (d)(1)(i) of this section regarding a partner’s ability to credit an installment of 1446 tax paid on the partner’s behalf against the partner’s estimated tax payments due for the taxable year. See also §1.1446-5(b) (relating to tiered partnership structures).

(ii) Substantiation for purposes of claiming the credit under section 33. A partner may credit the amount paid under section 1446 with respect to such partner against its U.S. income tax liability only if it attaches proof of payment to its U.S. income tax return for the partner’s taxable year in which the items comprising such partner’s allocable share of partnership ECTI are included in the partner’s income. Except as provided in the next sentence, proof of payment consists of a copy of the Form 8805 the partnership provides to the partner (or in the case of a beneficiary of a foreign trust or estate, the statement required under paragraph (d)(1)(iv) or (vii) of this section to be provided by such trust or estate and a copy of the related Form 8805 furnished to such trust or estate), but only if the name and TIN on the Form 8805 (or the statement provided by a foreign trust or estate) match the name and TIN on the partner’s U.S. tax return, and such form (or statement) identifies the partner (or beneficiary) as the person entitled to the credit under section 33. In the case of a partner of a publicly traded partnership that is subject to withholding on distributions under §1.1446-4, proof of payment consists of a copy of the Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” provided to the partner by the partnership.

(iii) Special rules for apportioning the tax credit under section 33—(A) Foreign trusts and estates. Section 1446 tax paid on the portion of ECTI allocable under section 704 to a foreign trust or estate that the foreign trust or estate may claim as a credit under section 33 shall bear the same ratio to the total 1446 tax paid on behalf of the trust or estate as the total ECTI allocable to such trust or estate and not distributed (or treated as distributed) to the beneficiaries of such trust or estate, and, accordingly not deducted under section 651 or section 661 in calculating the trust or estate’s taxable income, bears to the total ECTI allocable to such trust or estate. The 1446 tax that a foreign trust or estate is not entitled to claim as a credit under this paragraph (d)(2) may be claimed as a credit by the beneficiary of such trust or estate that includes the partnership ECTI allocated to the trust or estate in gross income under section 652 or section 662 (whether distributed or deemed to be distributed and with the same character as effectively connected income as in the hands of the trust or estate). In the case of a foreign trust or estate with multiple beneficiaries, each beneficiary may claim a portion of the 1446 tax that may be claimed by all beneficiaries under the previous sentence as a credit in the same proportion as the amount of ECTI included in such beneficiary’s gross income bears to the total amount of ECTI included by all beneficiaries. The trust or estate must provide each beneficiary with a copy of the Form 8805 provided to it by the partnership and prepare the statement required by paragraph (d)(1)(iv) of this section.

(B) Use of domestic trusts to circumvent section 1446. This paragraph (d)(2)(iii)(B) shall apply if a partnership knows or has reason to know that a foreign person holds its interest in the partnership through a domestic trust, and such domestic trust was formed or availed of with a principal purpose of avoiding the 1446 tax. The use of a domestic trust may have a principal purpose of avoiding the 1446 tax even though the tax avoidance purpose is outweighed by other purposes when taken together. In such case, a partnership is required to pay 1446 tax under this paragraph as if the domestic trust was a foreign trust for purposes of section 1446 and the regulations thereunder. Accordingly, all applicable additions to the tax, interest, and penalties shall apply to the partnership for its failure to pay 1446 tax under this paragraph (d)(2)(iii)(B), commencing with the installment period during which the partnership knows or has reason to know that this paragraph (d)(2)(iii)(B) applies. A publicly traded partnership within the meaning of §1.1446-4 (or a nominee required to pay 1446 tax under §1.1446-4) will not be considered to know or have reason to know a domestic trust is being used to avoid the 1446 tax under this paragraph (d)(2)(iii)(B), provided the interest held in such entity by the domestic trust is publicly traded.

(iv) Refunds to withholding agent. A withholding agent (i.e., the partnership) may obtain a refund of the 1446 tax paid (or deemed paid under §1.1446-5(b)) to the extent of the excess of the amount paid to the Internal Revenue Service by the partnership, over the partnership’s section 1446 tax liability as determined by the sum of the total tax creditable to each partner indicated on all Forms 8805 for the taxable year. If a partnership issues Form 8805 to a partner, then the partnership may not claim a refund for any amount of tax shown on that form as paid on behalf of the partner. If a partnership incorrectly withholds upon a United States person under section 1446 of the Internal Revenue Code and issues a Form 8805 to that person, the partnership may not file for a refund of the amount incorrectly withheld. Instead, the United States person may file for a refund of that amount on its annual return. For rules concerning refunds to withholding agents who pay 1446 tax on distributions of effectively connected income or gain under §1.1446-4 (i.e., publicly traded partnerships or nominees), see §1.1464-1.

(v) 1446 tax treated as cash distribution to partners. Except as otherwise provided in this paragraph (d)(2)(v), a partnership’s payment of 1446 tax on behalf of a foreign partner is treated under section 1446(d) and this section as a deemed distribution of money to the partner on the earliest of the day on which the partnership paid the tax, the last day of the partnership’s taxable year for which the amount was paid, or the last day on which the partner owned an interest in the partnership during the taxable year for which the tax was paid. However, a deemed distribution of money under section 1446(d) resulting from a partnership’s installment payment of 1446 tax on behalf of a partner is treated as an advance or drawing of money under §1.731-1(a)(1)(ii) to the extent of the partner’s distributive share of income for the partnership taxable year. The rule treating a deemed distribution as an advance or drawing of money under this paragraph (d)(2)(v) applies only for purposes of determining the tax results of the deemed distribution to the partner under sections 705, 731, and 733, and does not affect the date that the partnership is considered to have paid any installment of 1446 tax for purposes of section 6655 (as applied through this section) or the date a foreign partner is deemed to have paid estimated tax by reason of such installment payment. See paragraph (d)(1)(i) of this section (permitting a partner to credit 1446 tax paid on the partner’s behalf against the partner’s estimated tax obligation). An amount treated as an advance or drawing of money is taken into account at the end of the partnership taxable year or the last day during the partnership’s taxable year on which the partner owned an interest in the partnership. Any 1446 tax paid after the close of the partnership’s taxable year, including amounts paid with the filing of Form 8804, that are on account of partnership ECTI allocated to partners for the prior taxable year shall be treated under section 1446(d) and this section as a distribution from the partnership on the earlier of the last day of the partnership’s prior taxable year for which the tax is paid, or the last day in such prior taxable year on which such foreign partner held an interest in the partnership.

(vi) Examples. The following examples illustrate the application of this section. In considering the examples, disregard the potential application of paragraph (b)(2)(v)(F) of this section (relating to the de minimis exception to paying 1446 tax). The examples are as follows:

Example 1. Simple trust that reports entire amount of ECTI. PRS is a partnership that has two partners, FT, a foreign trust, and A, a U.S. person. FT is a simple trust under section 651. FT and A each provide PRS with a valid Form W-8BEN and Form W-9, respectively. FT has one beneficiary, NRA, a nonresident alien. PRS and FT each maintain a calendar taxable year. PRS estimated for each installment period during the partnership’s taxable year that FT would be allocated $100 of ECTI for the taxable year, and that all such ECTI would be ordinary in character. Assume that the allocation of the $100 would be respected under section 704(b) and the regulations thereunder. PRS pays installments of 1446 tax based upon its estimates and timely pays a total of $35 of 1446 tax over the course of the partnership’s taxable year ($100 ECTI x .35). Assume that PRS’ estimates of ECTI allocable to FT during the taxable year equal the actual amount of ECTI allocable to FT for the taxable year. Assume also that FT’s only income for the taxable year is the $100 of income from PRS, and that, pursuant to the terms of the trust’s governing instrument and local law, the $100 of ECTI is not included in FT’s fiduciary accounting income and the deemed distribution of the $35 withholding tax paid under paragraph (d)(2)(v) of this section is not included in FT’s fiduciary accounting income. Accordingly, the $100 of ECTI is not income required to be distributed by FT, and FT may not claim a deduction under section 651 for this amount. FT must report the $100 of ECTI in its gross income and may claim a credit under section 33 as determined under paragraph (d)(2)(iii) of this section of $35 for the 1446 tax paid by PRS. NRA is not required to include any of the ECTI in gross income and accordingly may not claim a credit for any amount of the $35 of 1446 tax PRS paid.

Example 2. Simple trust that distributes a portion of ECTI to the beneficiary. Assume the same facts as in Example 1, except that PRS distributes $60 to FT, which FT includes in its fiduciary accounting income under local law. FT will report the $100 of ECTI in its gross income and may claim a deduction for the $60 required to be distributed under section 651(a) to NRA. Pursuant to paragraph (d)(2)(iii) of this section, FT may claim a $14 credit under section 33 for the 1446 tax PRS paid ($40/$100 multiplied by $35). NRA is required to include the $60 of the ECTI in gross income under section 652 (as ECTI) and may claim a $21 credit under section 33 for the 1446 tax PRS paid ($35 less $14 or $60/$100 multiplied by $35).

Example 3. Complex trust that distributes entire ECTI to the beneficiary. Assume the same facts as in Example 1, except that FT is a complex trust under section 661. PRS distributes $60 to FT, which FT includes in its fiduciary accounting income. FT distributes the $60 of fiduciary accounting income to NRA and also properly distributes an additional $40 to NRA from FT’s principal. FT will report the $100 of ECTI in its gross income and may deduct the $60 required to be distributed to NRA under section 661(a)(1) and may deduct the $40 distributed to NRA under section 661(a)(2). Pursuant to paragraph (d)(2)(iii) of this section, FT may not claim a credit under section 33 for any of the $35 of 1446 tax paid by PRS. NRA is required to include $100 of the ECTI in gross income under section 662 (as ECTI) and may claim a $35 credit under section 33 for the 1446 tax paid by PRS ($35 less $0).

(e) Liability of partnership for failure to withhold—(1) In general. Every partnership required to pay 1446 tax is made liable for that tax by section 1461. Therefore, a partnership that is required to pay 1446 tax but fails to do so, or pays less than the amount required under this section, is liable under section 1461 for the payment of the tax required to be withheld under chapter 3 of the Internal Revenue Code and the regulations thereunder unless, and to the extent, the partnership can demonstrate pursuant to paragraph (e)(2) of this section, to the satisfaction of the Commissioner or his delegate, that a foreign partner has paid the full amount of tax required to be paid by such partner to the Internal Revenue Service. See paragraph (e)(3) of this section and section 1463 regarding a partnership’s liability for penalties and interest even though a foreign partner has satisfied the underlying tax liability. See also §1.1461-3 for applicable penalties when a partnership fails to pay 1446 tax. See paragraph (b) of this section for an addition to the tax under section 6655 when there is an underpayment of 1446 tax.

(2) Proof that tax liability has been satisfied and deemed payment of 1446 tax. Proof of payment of tax may be established for purposes of paragraph (e)(1) of this section consistent with §1.1445-1(e)(3). Under that standard, a partnership must provide sufficient information to the IRS to determine that the partner’s tax liability was satisfied or established to be zero in accordance with the rules of this section. Under this section, a partnership’s liability for 1446 tax shall be deemed to have been satisfied (deemed payment), to the extent of the 1446 tax due with respect to the ECTI allocable to a foreign partner, on the later of the date that such partner is considered to have paid all tax that is required to be shown on such partner’s U.S. income tax return under section 6513(a) and (b)(2) (prescribing the date tax is considered paid for purposes of sections 6511(b)(2), (c), and 6512), or the last date for payment of the 1446 tax without extensions (the unextended due date for Form 8804). The deemed payment rule of this paragraph (e)(2) shall apply for purposes sections of 1446, 1461, and 1463, and any additions to the tax, interest, or penalties potentially applicable to such partnership under section 1446, including sections 6601, 6651, and 6655. Any deemed payment of 1446 tax under this paragraph (e)(2) shall not be treated as a deemed distribution under section 1446(d) and this section.

(3) Liability for interest, penalties, and additions to the tax—(i) Partnership. Notwithstanding paragraph (e)(2) of this section, a partnership that fails to pay 1446 tax is not relieved from liability under section 6655 (as applied through this section) or for interest under section 6601, when applicable. See §1.1463-1. Such liability may exist even if there is no underlying tax liability due from a foreign partner on its allocable share of partnership ECTI. The addition to the tax under section 6655 or the interest charge under section 6601 that is required by those sections shall be imposed as set forth in those sections, as modified by this section. The section 6601 interest charge shall accrue beginning on the last date prescribed for payment of the 1446 tax due under section 1461 (which is the due date, without extensions, for filing Form 8804). The section 6601 interest charge shall stop accruing on the 1446 tax liability on the date, and to the extent, that the unpaid tax liability under section 1446 is satisfied (or is deemed satisfied under this paragraph (e)). Further, a partnership’s liability under section 6655 (as applied through this section) for any underpaid installment payment shall accrue beginning on the relevant installment payment date, and shall stop accruing on the earlier of the date (and to the extent) that the 1446 tax liability is actually satisfied or the date prescribed in paragraph (b)(2)(v)(C) of this section. See paragraph (e)(4) of this section for examples illustrating that a partner’s payment of estimated tax has no effect on the partnership’s calculation of its addition to the tax under section 6655 and this section. See §1.1461-3 for a list of the additions to tax, interest, and penalties that may apply to a partnership that fails to comply with section 1446. See §1.1446-6T for exceptions to the application of the addition to the tax under section 6655 (as applied through this section) when a partnership reasonably relies on a foreign partner’s certificate to reduce 1446 tax.

(ii) Foreign partner. A foreign partner is permitted to reduce any addition to the tax under section 6654 or section 6655 by the amount of any section 6655 addition to the tax paid by the partnership with respect to the partnership’s failure to pay adequate installment payments of the 1446 tax on ECTI allocable to the foreign partner.

(4) Examples. The following examples illustrate the application of this section. In considering the examples, disregard the potential application of paragraph (b)(2)(v)(F) of this section (relating to the de minimis exception to paying 1446 tax). Further, in each of the examples where a partnership is deemed to have paid 1446 tax with respect to ECTI allocable to a partner, it is assumed that the partnership has presented to the IRS the appropriate information under paragraph (e)(2) of this section for the IRS to conclude that the deemed payment is appropriate. The examples are as follows:

Example 1. Foreign partnership fails to pay 1446 tax and sole foreign partner fails to pay all tax required to be shown on partner’s U.S. income tax return.

(i) PRS is a foreign partnership engaged in a trade or business in the United States and has two equal partners, A, a U.S. person, and B, a nonresident alien. PRS is described in §1.6081-5(a) (PRS keeps its books and records outside the United States and Puerto Rico) and, therefore, is required to file Form 8804 by the 15^th day of the 6^th month following the close of its taxable year. Both partners and PRS are calendar year taxpayers. PRS has received a valid Form W-9 and W-8BEN from A and B, respectively, but has not received any other documents or certificates. B is engaged in multiple trades or businesses (including the PRS partnership) that give rise to effectively connected income. PRS will use an acceptable annualization method under this section for computing its 1446 tax.

(ii) In PRS’s first year of operations (Year 1), PRS estimates for each installment period described in §1.1446-3 that B will be allocated $100 of ordinary ECTI for the taxable year. Therefore, for each installment period PRS is required to pay one fourth of the tax on the annualized ECTI allocable to B, or $8.75 (.25 x ($100 x .35)). PRS fails to make any installment payments. PRS’s operations actually result in $100 of ECTI allocated to B. Therefore, PRS was required to have paid 1446 tax of $35 on or before the due date, without extensions, for filing its Form 8804 which is June 15, Year 2 (the last date prescribed for payment of the 1446 tax). PRS does not file Forms 8804 or 8805.

(iii) B pays estimated taxes and makes the following payments on the following dates: June 15, Year 1 - $20, September 15, Year 1 - $15, and January 15, Year 2 - $10. B’s total estimated tax payments equal $45. B files its U.S. Federal income tax return timely on June 15, Year 2, and reports all effectively connected income required to be shown on its return. Assume that B’s total correct tax liability as shown on the return is $50. B does not make a payment with its return and so B still owes $5 to the Internal Revenue Service (excluding any interest, penalties, and additions to the tax that may apply). Assume that B is not subject to an addition to the tax under section 6654.

(iv) Under the rules of paragraph (e)(2) of this section, for purposes of sections 1446, 1461, and 1463, PRS is not considered to have paid any 1446 tax because B has not paid all of B’s U.S. income tax liability.

(v) Further, under the principles of section 6655 and the rules of §1.1446-3(e), a partner’s estimated tax payments will not affect the calculation of a partnership’s addition to the tax. Accordingly, PRS will be liable under the principles of section 6655 and §1.1446-3 for failing to withhold for each installment payment. The addition to the tax will accrue beginning with the due date of each installment payment on the $8.75 underpayment for each respective installment period and will continue to accrue until June 15, Year 2 (the date prescribed in paragraph (b)(2)(v)(C) of this section).

(vi) Further, beginning on June 15, Year 2 (the last date prescribed for payment of 1446 tax without extensions), PRS will be liable for interest under section 6601 with respect to the unpaid 1446 tax, $35. This interest will stop accruing on the earlier of the date that the 1446 tax is paid by PRS or is deemed paid under paragraph (e)(2) of this section by reason of B’s payment of its full tax liability.

(vii) Further, beginning on June 15, Year 2 (the due date for filing Form 8804), PRS will be liable for the addition to the tax under section 6651(a)(1) for failing to file Form 8804. This addition to the tax accrues on the amount required to be shown as the 1446 tax liability on Form 8804, $35. This addition to the tax will accrue at the rate of 5 percent per month until the date that PRS files Form 8804 for Year 1, or the maximum accrual of the penalty (25 percent of the tax required to be shown on the return) under that section has been reached.

(viii) PRS may be liable for other penalties and additions to the tax for its failure to withhold or to furnish statements to its foreign partner B. See §1.1461-3 for a list of the penalties that may apply.

Example 2. Foreign partnership fails to pay 1446 tax but sole foreign partner pays all tax required to be shown on the partner’s U.S. income tax return. The facts are the same as Example 1, except that B pays $5 with the filing of B’s return and has therefore paid all tax required to be shown on B’s return within the meaning of paragraph (e)(2) of this section.

(i) For purposes of sections 1446, 1461, and 1463, PRS is deemed to have paid its 1446 tax liability under paragraph (e)(2) of this section as of the later of the date that B is considered to have paid its tax under section 6513(a) and (b)(2) (June 15, Year 2) and the last date for PRS to pay its 1446 tax without extensions (also June 15, Year 2). Therefore, PRS is deemed to have paid all of its 1446 tax liability as of June 15, Year 2. PRS has no continuing liability for 1446 tax under section 1461, however, additions to the tax, interest, and penalties may apply.

(ii) For purposes of section 6655 and §1.1446-3, under paragraph (e)(2) PRS is deemed to have paid its 1446 tax on June 15, Year 2. Even if B had fully paid its tax liability as of March 15, Year 2, the rule in paragraph (e)(2) of this section would not deem PRS to have paid its 1446 tax until June 15, Year 2. As a result, B’s estimated tax payments will have no effect on PRS’s calculation of its addition to the tax. The addition to the tax under 6655 and §1.1446-3 shall begin to accrue on each installment date with respect to the underpaid installment ($8.75), and will stop accruing on June 15, Year 2, the date prescribed in paragraph (b)(2)(v)(C) of this section.

(iii) Because PRS is deemed to have paid its full 1446 tax liability as of June 15, Year 2 (the last date prescribed for payment of 1446 tax without extensions), PRS is not subject to an interest charge under section 6601, or a failure to file penalty under section 6651 (see section 6651(b)(1)).

(iv) PRS may be liable for other penalties and additions to the tax for its failure to withhold or to furnish statements to its foreign partner B. See §1.1461-3 for a list of the penalties that may apply.

(v) If PRS had several foreign partners, PRS would conduct the same analysis as set forth above with respect to each partner. That is, under paragraph (e) of this section, PRS may be deemed to have paid 1446 tax with respect to the ECTI allocable to some but not all of its foreign partners.

Example 3. Domestic partnership fails to pay 1446 tax but sole foreign partner fully pays all tax required to be shown on partner’s U.S. income tax return. The facts are the same as Example 2, except that PRS is a domestic partnership whose last date prescribed for paying 1446 tax without extensions (i.e., generally the unextended due date for Form 8804) is April 15, Year 2.

(i) For purposes of sections 1446, 1461, and 1463, PRS is deemed to have paid its 1446 tax liability on the later of the date that B is considered to have paid tax under section 6513(a) and (b)(2) (June 15, Year 2) and the last date for paying 1446 tax without extensions (i.e., the unextended due date for Form 8804, April 15, Year 2). Accordingly, PRS is not considered to have fully paid its 1446 tax liability until June 15, Year 2. PRS has no continuing liability for 1446 tax under section 1461, however, additions to the tax, interest, and penalties may apply.

(ii) For purposes of section 6655 and §1.1446-3, PRS is subject to an underpayment addition to the tax that accrues on the same amount as in Example 1 and Example 2 because PRS is not deemed to have paid 1446 tax under paragraph (e)(2) of this section until June 15, Year 2. The addition to the tax will stop accruing on the date prescribed in paragraph (b)(2)(v)(C) of this section (i.e., April 15, Year 2, the due date, without extensions, for filing Form 8804).

(iii) For purposes of section 6601, as of the last date prescribed for paying 1446 tax without extensions (April 15, Year 2), PRS has not paid or been deemed to have paid any 1446 tax. Accordingly, the interest charge under section 6601 shall begin to accrue on April 15, Year 2, and shall accrue until the 1446 liability is paid or deemed to have been paid. In this case, the interest charge will accrue until June 15, Year 2, the date that PRS is deemed to have paid its 1446 tax under paragraph (e)(2) of this section.

(iv) For purposes of section 6651(a)(1), as of April 15, Year 2, PRS’s amount required to be shown as tax on its Form 8804 is $35. This amount cannot be reduced under section 6651(b)(1) because PRS is not deemed to have paid 1446 tax under paragraph (e)(2) of this section until June 15, Year 2, a date falling after the last date for PRS to pay its 1446 tax, April 15, Year 2. Accordingly, the failure to file penalty will begin to accrue on April 15, Year 2 (filing due date for Form 8804), and shall stop accruing on the earlier of the date that PRS files Form 8804 or the maximum accrual of the penalty (25 percent of the amount required to be shown as tax on the return) is reached.

(v) PRS may be liable for other penalties and additions to the tax for its failure to withhold or to furnish statements to its foreign partner B. See §1.1461-3 for a list of the penalties that may apply.

(f) Effect of withholding on partner. The payment of the 1446 tax by a partnership does not excuse a foreign partner to which a portion of ECTI is allocable from filing a U.S. tax or informational return, as appropriate, with respect to that income. Information concerning installment payments of 1446 tax paid during the partnership’s taxable year on behalf of a foreign partner shall be provided to such foreign partner in accordance with paragraph (d) of this section and such information may be taken into account by the foreign partner when computing the partner’s estimated tax liability during the taxable year. Form 1040NR, “U.S. Nonresident Alien Income Tax Return,” Form 1065, “U.S. Return of Partnership Income,” Form 1120F, “U.S. Income Tax Return of a Foreign Corporation,” or such other return as appropriate, must be filed by the partner, and any tax due must be paid, by the filing deadline (including extensions) generally applicable to such person. Pursuant to paragraph (d) of this section, a partner may generally claim a credit under section 33 for its share of any 1446 tax paid by the partnership against the amount of income tax (or 1446 tax in the case of tiers of partnerships) as computed in such partner’s return. See §1.1446-3(e)(3)(ii) for rules permitting a partner to reduce its addition to tax under section 6654 or section 6655.

(a) In general. This section sets forth rules for applying the section 1446 withholding tax (1446 tax) to publicly traded partnerships. A publicly traded partnership (as defined in paragraph (b) of this section) that has effectively connected gross income, gain or loss must pay 1446 tax by withholding from distributions to a foreign partner. Publicly traded partnerships that withhold on distributions must pay over and report any 1446 tax as provided in paragraph (c) of this section, and generally are not to pay over and report the 1446 tax under the rules in §1.1446-3. The amount of the withholding tax on distributions, other than distributions excluded under paragraph (f) of this section, that are made during any partnership taxable year, equals the applicable percentage (defined in paragraph (b)(2) of this section) of such distributions. For penalties and additions to the tax for failure to comply with this section, see §§1.1461-1 and 1.1461-3.

(b) Definitions—(1) Publicly traded partnership. For purposes of this section, the term publicly traded partnership has the same meaning as in section 7704 (including the regulations thereunder), but does not include a publicly traded partnership treated as a corporation under that section.

(2) Applicable percentage. For purposes of this section, applicable percentage shall have the meaning as set forth in §1.1446-3(a)(2), except that the partnership or nominee required to pay 1446 tax may not consider a preferential rate in computing the 1446 tax due with respect to a partner.

(3) Nominee. For purposes of this section, the term nominee means a domestic person that holds an interest in a publicly traded partnership on behalf of a foreign person.

(4) Qualified notice. For purposes of this section, a qualified notice is a notice given by a publicly traded partnership regarding a distribution that is attributable to effectively connected income, gain or loss of the partnership, and in accordance with the notice requirements with respect to dividends described in 17 CFR 240.10b-17(b)(1) or (3) issued pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a). See paragraph (d) of this section regarding when a nominee is considered to have received a qualified notice.

(c) Paying and reporting 1446 tax. The withholding tax required under this section is to be paid pursuant to the rules and procedures of section 1461, §§1.1461-1, 1.1461-2, and 1.6302-2, as supplemented by the rules of this section. However, the reimbursement and set-off procedures set forth in §1.1461-2 shall not apply. A withholding agent under this section must use Form 1042, “Annual Withholding Tax Return for U.S. Source Income of Foreign Persons,” and Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” to report withholding from distributions under this section. See §1.1461-1(b). Further, a withholding agent under this section may obtain a refund for 1446 tax paid in accordance with section 1464 and the regulations thereunder. See §1.1446-3(d)(1)(iv) and (vii) (relating to a foreign trust or estate that holds an interest in a publicly traded partnership) and §1.1446-5(d) (relating to a publicly traded partnership that is part of a tiered partnership structure) for additional guidance.

(d) Rules for designation of nominees to withhold tax under section 1446. A nominee that receives a distribution from a publicly traded partnership subject to withholding under this section, and which is to be paid to (or for the account of) any foreign person, may be treated as a withholding agent under this section. A nominee is treated as a withholding agent under this section only to the extent of the amount specified in the qualified notice (as defined in paragraph (b)(4) of this section) received by the nominee. A nominee is treated as receiving a qualified notice at the time such notice is published in accordance with 17 CFR 240.10b-17(b)(1) or (3). Where a nominee is designated as a withholding agent with respect to a foreign partner of the partnership, the obligation to withhold on distributions to such foreign partner in accordance with the rules of this section shall be imposed solely on the nominee. A nominee responsible for withholding under the rules of this section shall be subject to liability under sections 1461 and 6655, as well as all applicable penalties and interest, as if such nominee was a partnership responsible for withholding under this section.

(e) Determining foreign status of partners. The rules of §1.1446-1 shall apply in determining whether a partner of a publicly traded partnership is a foreign partner for purposes of the 1446 tax. A partnership or nominee obligated to withhold under this section shall be entitled to rely on any of the forms acceptable under §1.1446-1 received from persons on whose behalf it holds interests in the partnership to the same extent a partnership is entitled to rely on such forms under those rules.

(f) Distributions subject to withholding—(1) In general. Except as provided in this paragraph (f)(1), a publicly traded partnership must withhold at the applicable percentage with respect to any actual distribution made to a foreign partner. The amount of a distribution subject to 1446 tax includes the amount of any 1446 tax required to be withheld on the distribution. In the case of a partnership (upper-tier partnership) that receives a partnership distribution from another partnership in which it is a partner (lower-tier partnership)(i.e., a tiered structure described in §1.1446-5), any 1446 tax that was paid by the lower-tier partnership may be credited by the upper-tier partnership and shall be treated as a distribution under section 1446. For example, a foreign publicly traded partnership, UTP, owns an interest in domestic publicly traded partnership, LTP. LTP makes a distribution subject to section 1446 of $100 to UTP during its taxable year beginning January 1, 2005, and withholds 35 percent (the highest rate in section 1) ($35) of that distribution under section 1446. UTP receives a net distribution of $65 which it immediately redistributes to its partners. UTP has a liability to pay 35 percent of the total actual and deemed distribution it makes to its foreign partners as a section 1446 withholding tax. UTP may credit the $35 withheld by LTP against this liability as if it were paid by UTP. See §1.1462-1(b) and §1.1446-5(b)(1). When UTP distributes the $65 it actually receives from LTP to its partners, UTP is treated for purposes of section 1446 as if it made a distribution of $100 to its partners ($65 actual distribution and $35 deemed distribution). UTP’s partners (U.S. and foreign) may claim a credit against their U.S. income tax liability for their allocable share of the $35 of 1446 tax paid on their behalf.

(2) In-kind distributions. If a publicly traded partnership distributes property other than money, the partnership shall not release the property until it has funds sufficient to enable the partnership to pay over in money the required 1446 tax.

(3) Ordering rule relating to distributions. Distributions from publicly traded partnerships are deemed to be paid out of the following types of income in the order indicated—

(i) Amounts attributable to income described in section 1441 or 1442 that are not effectively connected, without regard to whether such amounts are subject to withholding because of a treaty or statutory exemption;

(ii) Amounts effectively connected with a U.S. trade or business, but not subject to withholding under section 1446 (e.g., amounts exempt by treaty);

(iii) Amounts subject to withholding under section 1446; and

(iv) Amounts not listed in paragraphs (f)(3)(i) through (iii) of this section.

(4) Coordination with section 1445(e)(1). Except as otherwise provided in this section, a publicly traded partnership that complies with the requirements of withholding under section 1446 and this section will be deemed to have satisfied the requirements of section 1445(e)(1) and the regulations thereunder. Notwithstanding the excluded amounts set forth in paragraph (f)(3) of this section, distributions subject to withholding at the applicable percentage shall include the following—

(i) Amounts subject to withholding under section 1445(e)(1) upon distribution pursuant to an election under §1.1445-5(c)(3) of the regulations; and

(ii) Amounts not subject to withholding under section 1445 because the distributee is a partnership or is a foreign corporation that has made an election under section 897(i).

(a) In general. The rules of this section shall apply in cases where a partnership (lower-tier partnership) that has effectively connected taxable income (ECTI), has a partner that is a partnership (upper-tier partnership). Except as provided in paragraph (e) of this section, if an upper-tier domestic partnership directly owns an interest in a lower-tier partnership, the lower-tier partnership is not required to pay the section 1446 withholding tax (1446 tax) with respect to the upper-tier partnership’s allocable share of net income, regardless of whether the upper-tier domestic partnership’s partners are foreign. Paragraph (b) of this section prescribes the reporting requirements for upper-tier and lower-tier partnerships subject to section 1446. Paragraph (c) of this section prescribes rules requiring a lower-tier partnership to look through an upper-tier foreign partnership to a partner of such upper-tier partnership to the extent it has sufficient documentation to determine the status of such partner and determine such partner’s indirect share of the lower-tier partnership’s effectively connected taxable income (ECTI). Paragraph (d) of this section prescribes rules applicable to a publicly traded partnership in a tiered partnership structure. Paragraph (e) of this section prescribes rules permitting a domestic upper-tier partnership to elect to apply the look through rules of paragraph (c) of this section. Paragraph (f) of this section sets forth examples illustrating the rules of this section.

(b) Reporting requirements—(1) In general. Notwithstanding paragraph (c) of this section, to the extent that an upper-tier partnership that is a foreign partnership is a partner in a lower-tier partnership, and the lower-tier partnership has paid 1446 tax (including installment payments of such tax) with respect to ECTI allocable to the upper-tier partnership, the lower-tier partnership shall comply with §§1.1446-1 through 1.1446-3 and provide the upper-tier partnership notice of such payments and a copy of the statements and forms filed with respect to the upper-tier partnership’s interest in the lower-tier partnership (e.g., Form 8805, “Foreign Partner’s Information Statement of Section 1446 Withholding Tax”). The upper-tier partnership may treat the 1446 tax (or any installment of such tax) paid by the lower-tier partnership on its behalf as a credit against its liability to pay 1446 tax (or any installment of such tax), as if the upper-tier partnership actually paid over the amounts at the time that the amounts were paid by the lower-tier partnership. See §1.1462-1(b) and §1.1446-3(d). To the extent required in §1.1446-3(d)(1)(iii), the upper-tier partnership will file Form 8804, “Annual Return for Partnership Withholding Tax (Section 1446),” and Form 8805, “Foreign Partner’s Information Statement of Section 1446 Withholding Tax,” for each of its foreign partners with respect to its 1446 tax obligation. To the extent the upper-tier partnership does not claim a refund of the 1446 tax it paid (or is considered to have paid), the upper-tier partnership will pass the credit for the 1446 tax paid to its partners on the Forms 8805 it issues. See §1.1446-3(d). The rules of this paragraph (b) shall apply to an upper-tier and lower-tier partnership to the extent that an election has been made and consented to under paragraph (e) of this section.

(2) Publicly traded partnerships. In the case of an upper-tier foreign partnership that is a publicly traded partnership, the rules of §1.1446-4(c) shall apply. See also paragraph (d) of this section.

(c) Look through rules for foreign upper-tier partnerships. For purposes of computing the 1446 tax obligation of a lower-tier partnership, if an upper-tier foreign partnership owns an interest in the lower-tier partnership, the upper-tier partnership’s allocable share of ECTI from the lower-tier partnership shall be treated as allocable to a partner of the upper-tier partnership, to the extent of such partner’s indirect share of such ECTI (as if such partner were a direct partner in the lower-tier partnership), if—

(1) The upper-tier foreign partnership furnishes the lower-tier partnership a valid Form W-8IMY, “Certificate of Foreign Intermediary, Flow Through Entity, or Certain U.S. Branches for United States Tax Withholding,” indicating that it is a look-through foreign partnership for purposes of section 1446; and

(2) The lower-tier partnership can reliably associate (within the meaning of §1.1441-1(b)(2)(vii)) effectively connected partnership items allocable to the upper-tier partnership (and indirectly to such partner) with a Form W-8 (e.g., Form W-8BEN), Form W-9, “Request for Taxpayer Identification Number and Certification,” or other form acceptable under §1.1446-1, establishing the status of such partner provided by the upper-tier partnership. The principles of §1.1441-1(b)(2)(vii) shall apply to determine whether a lower-tier partnership can reliably associate effectively connected partnership items allocable to the upper-tier partnership with a partner of the upper-tier partnership. To the extent the lower-tier partnership receives a valid Form W-8IMY from the upper-tier partnership but cannot reliably associate a portion of the upper-tier partnership’s allocable share of effectively connected partnership items with a partner of such upper-tier partnership, then the lower-tier partnership shall pay 1446 tax on such portion at the higher of the applicable percentages in section 1446(b). See §1.1446-3(a)(2) for the treatment of any income or gain potentially subject to a preferential rate. If a lower-tier partnership has not received a valid Form W-8IMY from the upper-tier partnership, the lower-tier partnership shall withhold on the upper-tier partnership’s entire allocable share of ECTI at the higher of the applicable percentages in section 1446(b). The look through regime set forth in this paragraph (c) is for purposes of computing the lower-tier partnership’s 1446 tax obligation only and does not alter the persons considered to be partners in the lower-tier partnership for partnership reporting purposes (e.g., issuing Form 8805, Schedule K-1).

(d) Publicly traded partnerships—(1) Upper-tier publicly traded partnership. The rules set forth in paragraph (c) shall not apply to look through an upper-tier partnership whose interests are publicly traded (as defined in §1.1446-4(b)(1)).

(2) Lower-tier publicly traded partnership. The look through rules of paragraph (c) of this section shall apply, if the requirements of that paragraph are met, to a lower-tier partnership that is a publicly traded partnership within the meaning of §1.1446-4(b)(1) only if the upper-tier partnership is not described in paragraph (d)(1) of this section. For example, a lower-tier publicly traded partnership (or nominee) shall look through an upper-tier foreign partnership (or domestic partnership to the extent an election is made and consented to under paragraph (e) of this section) when computing its 1446 tax liability, provided the upper-tier partnership is not a publicly traded partnership and the appropriate documentation needed to satisfy the standards set forth in §1.1441-1(b)(2)(vii) and paragraph (c) of this section have been furnished.

(e) Election by a domestic upper-tier partnership to apply look through rules—(1) In general. Subject to the rules of this paragraph (e), a domestic partnership that is a partner in a lower-tier partnership may elect to apply the rules of this section 1.1446-5 and have the lower-tier partnership look through such upper-tier partnership to the partners of such domestic partnership for purposes of computing the lower-tier partnership’s 1446 tax liability. A domestic partnership shall make this election by attaching to the Form W-9 submitted to the lower-tier partnership, a written statement and information (described in paragraph (e)(2) of this section) that identifies the upper-tier partnership as a domestic partnership and that states that such partnership is making the election under this paragraph (e). This paragraph (e)(1) shall not apply to a publicly traded partnership described in §1.1446-4(b)(1). See paragraph (d)(1) of this section.

(2) Information required for valid election statement. In addition to the requirements of paragraphs (e)(1) and (3) of this section, the election statement submitted under this paragraph (e)(2) is not valid and cannot be accepted by the lower-tier partnership pursuant to paragraph (e)(3) of this section unless the upper-tier partnership attaches valid documentation pursuant to §1.1446-1 (e.g., Form W-8BEN) with respect to one or more of its foreign partners. The information and documentation submitted with the election must comply with the rules of this section to permit the lower-tier partnership to reliably associate (within the meaning of §1.1441-1(b)(2)(vii)) at least a portion of the upper-tier partnership’s allocable share of ECTI with one or more foreign partners of the upper-tier partnership. The election statement must identify the upper-tier partnership by name, address, and TIN, and specify the percentage interest the domestic partnership holds in the lower-tier partnership. The statement may also include such information the upper-tier partnership deems necessary to enable the lower-tier partnership to apply the provisions of this section. If at any time the upper-tier partnership determines that the information or documentation previously provided to the lower- tier partnership is no longer correct, the upper-tier partnership shall update such information and documentation. Except as provided in paragraph (e)(3) of this section, an election that is effective under this paragraph (e) shall apply for subsequent taxable years until such upper-tier partnership revokes the election in writing. A revocation under this section shall be effective for any installment due date arising more than 15 days subsequent to the date that the lower-tier partnership receives such revocation.

(3) Consent of lower-tier partnership. An election made under this paragraph (e) is not effective until the lower-tier partnership consents in writing to the upper-tier partnership that it agrees to apply the provisions of this section. A lower-tier partnership may not consent to an election submitted under this paragraph (e) for any installment date or Form 8804 filing date arising within 15 days of the lower-tier partnership’s receipt of such election. The lower-tier partnership’s written consent must specify the extent to which it will look through the upper-tier partnership in computing its 1446 tax (or any installment of such tax). To the extent that the lower-tier partnership does not consent to an election to apply the look through provisions of paragraph (c) of this section, the lower-tier partnership shall consider such portion of the upper-tier partnership’s allocable share of ECTI as allocable to a domestic person for purposes of computing its 1446 tax obligation. A lower-tier partnership that has consented to an election under this paragraph (e) may revoke or modify its consent, in writing, at any time.

(f) Examples. The following examples illustrate the provisions of this section. In considering the examples, disregard the potential application of §1.l446-3(b)(2)(v)(F) (relating to the de minimis exception to paying 1446 tax). The examples are as follows:

Example 1. Sufficient documentation—tiered partnership structure. (i) Nonresident alien (NRA) and foreign corporation (FC) are partners in PRS, a foreign partnership, and share profits and losses in PRS 70 and 30 percent, respectively. All of PRS’s partnership items are allocated based upon each partner’s respective ownership interest and it is assumed that these allocations are respected under section 704(b) and the regulations thereunder. NRA and FC each furnish PRS with a valid Form W-8BEN establishing themselves as a foreign individual and foreign corporation, respectively. PRS holds a 40 percent interest in the profits, losses and capital of LTP, a lower-tier partnership. NRA holds the remaining 60 percent interest in profits, losses and capital of LTP. All of LTP’s partnership items are allocated based upon each partner’s respective ownership interest and it is assumed that these allocations are respected under section 704(b) and the regulations thereunder. LTP has $100 of annualized ECTI for the relevant installment period. All of this income is ordinary income and there is no potential application of a preferential rate applicable percentage under §1.1446-3(a)(2). Further, §1.1446-6T does not apply. PRS has no income other than the income allocated from LTP. PRS provides LTP with a valid Form W-8IMY indicating that it is a foreign partnership and attaches the valid Form W-8BENs executed by NRA and FC, as well as a statement describing the allocation of PRS’s effectively connected items among its partners. The information that PRS submits to LTP is sufficient to permit LTP to reliably associate (within the meaning of §1.1441-1(b)(2)(vii)) PRS’s allocable share of effectively connected items with NRA and FC pursuant to this section. Further, NRA provides a valid Form W-8BEN to LTP.

(ii) LTP must pay 1446 tax on the $60 allocable to its direct partner NRA using the applicable percentage for non-corporate partners (the highest rate in section 1).

(iii) With respect to the effectively connected partnership items that LTP can reliably associate with NRA through PRS (70 percent of PRS’s 40 percent allocable share ($40), or $28), LTP will pay 1446 tax on NRA’s allocable share of LTP’s ECTI (as determined by looking through PRS) using the applicable percentage for non-corporate partners (the highest rate in section 1).

(iv) With respect to the effectively connected partnership items that LTP can reliably associate with FC through PRS (30 percent of PRS’s 40 percent allocable share ($40), or $12), LTP will pay 1446 tax on FC’s allocable share of LTP’s ECTI (as determined by looking through PRS) using the applicable percentage for corporate partners (the highest rate in section 11).

(v) LTP’s payment of the 1446 tax is treated as a distribution to NRA and PRS, its direct partners, that those partners may credit against their respective tax obligations. PRS will report its 1446 tax obligation with respect to its direct foreign partners, NRA and FC, on the Form 8804 and Forms 8805 that it files with the Internal Revenue Service pursuant to paragraph (b) of this section and will credit the amount withheld by LTP on its Form 8804. This credit will satisfy PRS’s 1446 tax liability as reported on the Form 8804 it files because PRS’s only income is from LTP, and LTP paid 1446 tax with respect to all of PRS’s allocable share in LTP by looking through to PRS’s partners NRA and FC. Further, PRS will pass along the credit for the 1446 tax withheld by LTP to its partners, NRA and FC on the Form 8805 issued to each partner. The credit passed to each partner on Form 8805 will be treated as a distribution to the respective partners under section 1446(d).

Example 2. Insufficient documentation—tiered partnership structure. (i) LTP is a domestic partnership that has two equal partners A and PRS. A is a nonresident alien and PRS is a foreign partnership that has two equal foreign partners, C and D. Neither A nor PRS provides LTP with a valid Form W-8 or Form W-9. Neither C nor D provides PRS with a valid Form W-8 or Form W-9. Pursuant to §1.1446-1(c)(3), LTP must presume that PRS is a foreign person subject to withholding under section 1446 at the higher of the highest rate under section 1 or section 11(b)(1). LTP has also not received any documentation with respect to A. LTP must presume that A is a foreign person, and, if LTP knows that A is an individual, compute and pay 1446 tax, subject to §1.1446-3(a)(2), based on that knowledge.

(ii) Assume a change of facts where C provides a form W-8 (e.g., Form W-8BEN) to PRS, and PRS in turn, furnishes that form to LTP along with its Form W-8IMY, and information regarding how effectively connected items are allocated to C and D. Based upon the additional facts, LTP can reliably associate one-half of PRS’s allocable share of ECTI with documentation related with C. Therefore, under paragraph (c)(2) of this section, LTP will look through PRS to C when computing its 1446 tax to the extent of C’s indirect share and will not look through with respect to the remainder of PRS’s allocable share (D’s indirect share).

(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 16^th for the partnership to consider it for its first installment due date of 1446 tax on April 15^th. If the foreign partner’s first certificate for the partnership’s current taxable year is received on April 10^th, the partnership may not consider such certificate until the partnership’s second installment due date of June 15^th. 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 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 16^th (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) x .35 (withholding tax rate) x .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 10^th 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)) x .35 (1446 tax applicable percentage) x .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) x .35 (withholding tax rate) x .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 x .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) x .35 (1446 tax applicable percentage) x .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 x .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.l446-3) 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 x .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 file 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 5^th 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.

Sections 1.1446-1 through 1.1446-5 shall apply to partnership taxable years beginning after May 18, 2005. However, a partnership may elect to apply all of the provisions of §§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 §§1.1446-1 through §1.1446-5 and attaching a statement to the Form 8804 or Form 1042 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.

Par. 5. Section 1.1461-1 is amended as follows:

1. Paragraph (a)(1) is amended by adding three sentences at the end of the paragraph.

2. The second sentence of paragraph (c)(1)(i) is removed and two sentences are added in its place.

3. Paragraph (c)(1)(ii)(A)(8) is redesignated as paragraph (c)(1)(ii)(A)(9), and a new paragraph (c)(1)(ii)(A)(8) is added.

4. The first sentence of paragraph (c)(2)(i) is removed and two sentences are added in its place.

5. The first sentence of paragraph (c)(3) is removed and two sentences are added in its place.

6. Paragraph (i) is revised.

The additions and revisions read as follows:

(a) * * *

(1) * * * With respect to withholding under section 1446, this section shall only apply to publicly traded partnerships. See §1.1461-3 for penalties applicable to partnerships that fail to withhold under section 1446 on effectively connected taxable income allocable to foreign partners. The previous two sentences shall apply to partnership taxable years beginning after May 18, 2005, or such earlier time as the regulations under §§1.1446-1 through 1.1446-5 apply by reason of an election under §1.1446-7.

* * * * *

(c) * * *

(1) * * *

(i) * * * Notwithstanding the preceding sentence, any person that withholds or is required to withhold an amount under sections 1441, 1442, 1443, or §1.1446-4(a) (applicable to publicly traded partnerships required to pay tax under section 1446 on distributions) must file a Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” for the payment withheld upon whether or not that person is engaged in a trade or business and whether or not the payment is an amount subject to reporting. The reference in the previous sentence to withholding under §1.1446-4 shall apply to partnership taxable years beginning after May 18, 2005, or such earlier time as the regulations under §§1.1446-1 through 1.1446-5 apply by reason of an election under §1.1446-7.* * *

(ii) * * *

(A) * * *

(8) A partner receiving a distribution from a publicly traded partnership subject to withholding under section 1446 and §1.1446-4 on distributions of effectively connected income. This paragraph (c)(1)(ii)(A)(8) shall apply to partnership taxable years beginning after May 18, 2005, or such earlier time as the regulations under §§1.1446-1 through 1.1446-5 apply by reason of an election under §1.1446-7.

* * * * *

(2) Amounts subject to reporting—(i) In general. Subject to the exceptions described in paragraph (c)(2)(ii) of this section, amounts subject to reporting on Form 1042-S are amounts paid to a foreign payee or partner (including persons presumed to be foreign) that are amounts subject to withholding as defined in §1.1441-2(a) or §1.1446-4(a) (addressing publicly traded partnerships required to pay withholding tax under section 1446 on distributions of effectively connected income). The reference in the previous sentence to withholding under §1.1446-4 shall apply to partnership taxable years beginning after May 18, 2005, or such earlier time as the regulations under §§1.1446-1 through 1.1446-5 apply by reason of an election under §1.1446-7. * * *

* * * * *

(3) Required information. The information required to be furnished under this paragraph (c)(3) shall be based upon the information provided by or on behalf of the recipient of an amount subject to reporting (as corrected and supplemented based on the withholding agent’s actual knowledge) or the presumption rules of §§1.1441-1(b)(3), 1.1441-4(a); 1.1441-5(d) and (e); 1.1441-9(b)(3), 1.1446-1(c)(3) (as applied to publicly traded partnerships required to pay tax under section 1446 on distributions of effectively connected income) or 1.6049-5(d). The reference in the previous sentence to presumption rules applicable to withholding under section 1446 shall apply to partnership taxable years beginning after May 18, 2005, or such earlier time as the regulations under §§1.1446-1 through 1.1446-5 apply by reason of an election under §1.1446-7. * * *

* * * * *

(i) Effective date. Unless otherwise provided in this section, this section shall apply to returns required for payments made after December 31, 2000.

Par. 6. Section 1.1461-2 is amended by:

1. Removing the first sentence of paragraph (a)(1) and adding two sentences in its place.

2. Revising paragraphs (b) and (d).

The revisions and addition read as follows:

(a) Adjustments of overwithheld tax—(1) In general. Except for partnerships or nominees required to withhold under section 1446, a withholding agent that has overwithheld under chapter 3 of the Internal Revenue Code, and made a deposit of the tax as provided in §1.6302-2(a) may adjust the overwithheld amount either pursuant to the reimbursement procedure described in paragraph (a)(2) of this section or pursuant to the set-off procedure described in paragraph (a)(3) of this section. References in the previous sentence excepting from this section certain partnerships withholding under section 1446 shall apply to partnership taxable years beginning after May 18, 2005, or such earlier time as the regulations under §§1.1446-1 through 1.1446-5 apply by reason of an election under §1.1446-7. * * *

* * * * *

(b) Withholding of additional tax when underwithholding occurs. A withholding agent may withhold from future payments (or distributions of effectively connected income under section 1446) made to a beneficial owner the tax that should have been withheld from previous payments (or distributions subject to section 1446) to such beneficial owner under chapter 3 of the Internal Revenue Code. In the alternative, the withholding agent may satisfy the tax from property that it holds in custody for the beneficial owner or property over which it has control. Such additional withholding or satisfaction of the tax owed may only be made before the date that the Form 1042 is required to be filed (not including extensions) for the calendar year in which the underwithholding occurred. See §1.6302-2 for making deposits of tax or §1.1461-1(a) for making payment of the balance due for a calendar year. See also §§1.1461-1, 1.1461-3, and 1.1446-1 through 1.1446-7 for rules relating to withholding under section 1446. References in this paragraph (b) to withholding under section 1446 shall apply to partnership taxable years beginning after May 18, 2005, or such earlier time as the regulations under §§1.1446-1 through 1.1446-5 apply by reason of an election under §1.1446-7.

* * * * *

(d) Effective date. Unless otherwise provided in this section, this section applies to payments made after December 31, 2000.

Par. 7. Section 1.1461-3 is added to read as follows.

For rules relating to the withholding tax liability of a partnership or nominee under section 1446, see §§1.1446-1 through 1.1446-7. For interest, penalties, and additions to the tax for failure to timely pay the tax required to be paid under section 1446, see sections 6601, 6651, 6655 (in the case of publicly traded partnerships, see section 6656), 6672, and 7202 and the regulations under those sections. For additional penalties and additions to the tax for failure to comply with the regulations under section 1446, see sections 6651, 6662, 6663, 6721, 6722, 6723, 6724(c), 7201, 7203, and the regulations under those sections. This section shall apply to partnership taxable years beginning after May 18, 2005, or such earlier time as the regulations under §§1.1446-1 through 1.1446-5 apply by reason of an election under §1.1446-7.

Par. 8. Section 1.1462-1 is amended by revising paragraphs (b) and (c) to read as follows:

* * * * *

(b) Amounts paid to persons who are not the beneficial owner. Amounts withheld at source under chapter 3 of the Internal Revenue Code on payments to (or effectively connected taxable income allocable to) a fiduciary, partnership, or intermediary are deemed to have been paid by the taxpayer ultimately liable for the tax upon such income. Thus, for example, if a beneficiary of a trust is subject to the taxes imposed by section 1, 2, 3, or 11 upon any portion of the income received from a foreign trust, the part of any amount withheld at source which is properly allocable to the income so taxed to such beneficiary shall be credited against the amount of the income tax computed upon the beneficiary’s return, and any excess shall be refunded. See §1.1446-3 for examples applying this rule in the context of a partnership interest held by a foreign trust or estate. Further, if a partnership withholds an amount under chapter 3 of the Internal Revenue Code with respect to the allocable share of a partner that is a partnership (upper-tier partnership) or with respect to the allocable share of partners in an upper-tier partnership, such amount is deemed to have been withheld by the upper-tier partnership. See §1.1446-5 for rules applicable to tiered partnership structures. References in this paragraph (b) to withholding under section 1446 shall apply to partnership taxable years beginning after May 18, 2005, or such earlier time as the regulations under §§1.1446-1 through 1.1446-5 apply by reason of an election under §1.1446-7.

(c) Effective date. Unless otherwise provided in this section, this section applies to payments made after December 31, 2000.

Par. 9. Section 1.1463-1 is amended by:

1. Adding two sentences at the end of paragraph (a).

2. Revising paragraph (b).

The addition and revision read as follows:

(a) * * * See §1.1446-3(e) and (f) for application of the rule of this paragraph (a), and for additional rules, where the withholding tax was required to be paid under section 1446. The previous sentence shall apply to partnership taxable years beginning after May 18, 2005, or such earlier time as the regulations under §§1.1446-1 through 1.1446-5 apply by reason of an election under §1.1446-7.

(b) Effective date. Unless otherwise provided in this section, this section applies to failures to withhold occurring after December 31, 2000.

* * * * *

(b) * * *

(2) * * *

(viii) A foreign person that furnishes a withholding certificate described in §1.1446-1(c)(2) or (3) of this chapter or whose taxpayer identification number is required to be furnished on any return, statement, or other document as required by the income tax regulations under section 1446. This paragraph (b)(2)(viii) shall apply to partnership taxable years beginning after May 18, 2005, or such earlier time as the regulations under §§1.1446-1 through 1.1446-5 of this chapter apply by reason of an election under §1.1446-7 of this chapter.

(c) Requirement to furnish another’s number. Every person required under this title to make a return, statement, or other document must furnish such taxpayer identifying numbers of other U.S. persons and foreign persons that are described in paragraph (b)(2)(i), (ii), (iii), (vi), (vii), or (viii) of this section as required by the forms and the accompanying instructions. The taxpayer identifying number of any person furnishing a withholding certificate referred to in paragraph (b)(2)(vi) or (viii) of this section shall also be furnished if it is actually known to the person making a return, statement, or other document described in this paragraph (c). If the person making the return, statement, or other document does not know the taxpayer identifying number of the other person, and such other person is one that is described in paragraph (b)(2)(i), (ii), (iii), (vi), (vii), or (viii) of this section, such person must request the other person’s number. * * * References in this paragraph (c) to paragraph (b)(2)(viii) of this section shall apply to partnership taxable years beginning after May 18, 2005, or such earlier time as the regulations under §§1.1446-1 through 1.1446-5 of this chapter apply by reason of an election under §1.1446-7 of this chapter.

* * * * *

Par. 12. In §301.6721-1, paragraph (g)(4) is revised to read as follows:

* * * * *

(g) ***

(4) Other items. The term information return also includes any form, statement, or schedule required to be filed with the Internal Revenue Service with respect to any amount from which tax is required to be deducted and withheld under chapter 3 of the Internal Revenue Code (or from which tax would be required to be so deducted and withheld but for an exemption under the Internal Revenue Code or any treaty obligation of the United States), generally Forms 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” and 8805, “Foreign Partner’s Information Statement of Section 1446 Withholding Tax.” The provisions of this paragraph (g)(4) referring to Form 8805, shall apply to partnership taxable years beginning after May 18, 2005, or such earlier time as the regulations under §§1.1446-1 through 1.1446-5 of this chapter apply by reason of an election under §1.1446-7 of this chapter.

* * * * *

(b) * * *

Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.

Approved May 3, 2005.

Eric Solomon,
Acting Assistant Secretary of the Treasury.

[The text of this proposed section is the same as the text of §1.1446-6T published elsewhere in this issue of the Bulletin].

Par. 3. In §1.1464-1, paragraph (a) is amended by adding three sentences at the end of the paragraph to read as follows:

(a) * * * With respect to section 1446, this section shall only apply to a publicly traded partnership described in §1.l446-4. See §1.1446-3(d)(2)(iv) for rules permitting a withholding agent to obtain a refund of tax paid under section 1446. The previous two sentences shall apply to partnership taxable years beginning after the date these regulations are published as final regulations in the Federal Register.

* * * * *

Par. 4. In §1.6071-1, paragraph (c)(15) is revised to read as follows:

* * * * *

(c) * * *

(15) For provisions relating to the time for filing an annual information return on Form 1042-S or Form 8805 of the tax withheld under chapter 3 of the Internal Revenue Code (relating to withholding of tax on nonresident aliens and foreign corporations and tax-free covenant bonds), see §1.1461-1(c) and §1.1446-3(d). The references in the previous sentence to Form 8805 and §1.1446-3(d) shall apply to partnership taxable years beginning after the date these regulations are published as final regulations in the Federal Register.

* * * * *

Par. 5. In §1.6091-1, paragraph (b)(17) is added to read as follows:

* * * * *

(b) * * *

(17) For the place for filing information returns on Form 8805 with respect to certain amounts paid on behalf of foreign partners, see the instructions to the form.

* * * * *

Par. 6. In §1.6151-1, paragraph (d)(2) is revised to read as follows:

* * * * *

(d) * * *

(2) For provisions relating to the use of such financial institutions for the deposit of taxes required to be withheld under chapter 3 of the Internal Revenue Code on nonresident aliens and foreign corporations and tax-free covenant bonds, see §1.6302-2. With respect to section 1446, the previous sentence shall apply only to a publicly traded partnership described in §1.1446-4. This paragraph shall apply to publicly traded partnerships described in the previous sentence only for partnership taxable years beginning after the date these regulations are published as final regulations in the Federal Register.

* * * * *

Par. 7. In §1.6302-2, paragraphs (a)(1)(i) and (2) are revised to read as follows:

(a) * * *

(1) * * *

(i) Monthly deposits. Except as provided in paragraphs (a)(1)(ii) and (iv) of this section, every withholding agent who, pursuant to chapter 3 of the Internal Revenue Code, has accumulated at the close of any calendar month beginning on or after January 1, 1973, an aggregate amount of undeposited taxes of $200 or more shall deposit such aggregate amount with an authorized financial institution (see paragraph (b)(1)(ii) of this section) within 15 days after the close of such calendar month. However, the preceding sentence shall not apply if the withholding agent has made a deposit of taxes pursuant to paragraph (a)(1)(ii) of this section with respect to a quarter monthly period which occurred during such month. With respect to section 1446, this section shall only apply to a publicly traded partnership described in §1.1446-4. The previous sentence shall apply to partnership taxable years beginning after the date these regulations are published as final regulations in the Federal Register.

* * * * *

(2) Cross reference. For rules relating to the adjustment of deposits, see §1.1461-2(b) and §1.6414-1. For rules requiring payment of any undeposited tax, see §1.1461-1.

* * * * *

Par. 8. Section 1.6414-1 is amended by:

1. Adding three sentences at the end of the undesignated text following paragraph (a)(2).

2. Revising the third sentence of paragraph (b).

The addition and revision read as follows:

(a) * * * With respect to the payment of withholding tax under section 1446, this section shall only apply to a publicly traded partnership described in §1.1446-4. See §1.1446-3(d)(2)(iv) for rules regarding refunds to a withholding agent under section 1446. The previous two sentences shall apply to partnership taxable years beginning after the date these regulations are published as final regulations in the Federal Register.

(b) * * * The amount so claimed as a credit may be applied, to the extent it has not been applied under paragraph (b) of §1.1461-2, by the withholding agent to reduce the amount of a payment or deposit of tax required by §1.1461-1 or paragraph (a) of §1.6302-2 for any payment period occurring in the calendar year following the calendar year of overwithholding. * * *

* * * * *

* * * * *

(b) * * *

(2) For provisions relating to the use of Federal Reserve banks or authorized commercial banks in depositing the tax required to be withheld under chapter 3 of the Internal Revenue Code on nonresident aliens and foreign corporations and tax-free covenant bonds, see §1.6302-2 of this chapter. The previous sentence shall include payment of withholding tax under section 1446 and §1.1446-4. References in this paragraph (b)(2) to payment of withholding tax under section 1446, shall apply to partnership taxable years beginning after the date these regulations are published in the Federal Register.

Par. 11. In §301.6402-3, the second and third sentences of paragraph (e) are revised, and a sentence is added at the end of the paragraph to read as follows:

* * * * *

(e) * * * Also, if the overpayment of tax resulted from the withholding of tax at source under chapter 3 of the Internal Revenue Code, a copy of the Form 1042-S, Form 8805, or other statement (see §1.1446-3(d)(2)) required to be provided to the beneficial owner or partner pursuant to §1.1461-1(c)(1)(i) or §1.1446-3(d) of this chapter must be attached to the return. For purposes of claiming a refund, the Form 1042-S, Form 8805, or other statement must include the taxpayer identification number of the beneficial owner or partner even if not otherwise required. * * * References in this paragraph to Form 8805 or other statements required under §1.1446-3(d)(2) shall apply to partnership taxable years beginning after the date these regulations are published as final regulations in the Federal Register.

Par. 12. In §301.6722-1, paragraph (d)(3) is revised to read as follows:

* * * * *

(d) * * *

(3) Other items. The term payee statement also includes any form, statement, or schedule required to be furnished to the recipient of any amount from which tax is required to be deducted and withheld under chapter 3 of the Internal Revenue Code (or from which tax would be required to be so deducted and withheld but for an exemption under the Internal Revenue Code or any treaty obligation of the United States), generally the recipient copy of Form 1042-S or Form 8805. The reference in the previous sentence to Form 8805 shall apply to partnership taxable years beginning after the date that these regulations are published as final regulations in the Federal Register.

Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.