Tax News

CCH (cch.taxgroup.com) reports:

The IRS has issued final regulations that explain when a partnership may take deductions and losses of a foreign partner into account for the purpose of reducing or eliminating its duty to withhold tax under Code Sec. 1446
on effectively connected income allocable to the foreign partner. The regulations generally apply to partnership tax years that begin after December 31, 2007.
Certification requirements . A qualifying foreign partner may certify to the partnership that specified deductions and losses should be taken into account to reduce the Code Sec. 1446 tax that is otherwise required to be withheld and paid by the partnership with respect to that partner's effectively connected income. A nonresident alien partner may certify that the partnership investment is its only activity that gives rise to effectively connected income. In such a case, the partnership is not required to pay the Code Sec. 1446 tax if the annualized or actual tax due is less than $1,000. These certifications should be made on Form 8804-C, Certificate of Partner-Level Items to Reduce Section 1446 Withholding.
The final regulations reduce the number of previous tax returns that a foreign partner must have timely filed in order to be eligible for making a certification from four tax years to three years. The regulations further clarify that each of the prior-year returns must have reported income, gain, deductions, or losses effectively connected to a U.S. trade or business. The requirement that a certificate must be submitted to the partnership by the partner no later than 30 days before an installment due date or the annual Form 8804 filing due date has been eliminated. Timing requirements for filing updated certificates have also been removed.
Partnership's resubmission requirement eliminated. Under the final regulations, a partnership is only required to submit to the IRS a partner's certificate for the first installment period for which it is considered. For subsequent installment periods in the tax year, the partnership may attach a list of the name, taxpayer identification number, and the amount of certified deductions of each foreign partner whose certificate was previously considered during the tax year.
A reasonable cause standard applies to determine whether a partnership that fails to file a certificate and relevant Code Sec. 1446 tax computation with the IRS is eligible for an extension to comply with its filing requirements.
Trusts and estates. No change has been made to the rule that prohibits foreign estates and domestic or foreign trusts (other than grantor trusts) from certifying deductions and losses to partnerships.
Tiered partnerships. The final regulations add several rules designed to ensure that deductions and losses certified by a lower-tier partnership are not taken into account by the upper-tier partnership or another lower-tier partnership.
Special limitations on deductions and losses.
The final regulations clarify that a partner must identify any certified deductions and losses that are subject to special limitations at the partner level, such as the passive activity and at-risk rules. The certifying partner must provide the partnership with information that will allow the partnership to take the special limitation into account.
State and local income taxes. The final regulations now allow a partnership to reduce a partner's effective connected taxable income by 90 percent of state and local taxes withheld and remitted by the partnership on behalf of the partner. The taxes must be paid with respect to the partner's allocable share of effective connected income. The partner does not need to submit a certificate for these taxes.
T.D. 9394, 2008FED ¶47,030
Other References:
Code Sec. 1443
CCH Reference - 2008FED ¶32,741
Code Sec. 1446
CCH Reference - 2008FED ¶32,800B
CCH Reference - 2008FED ¶32,800D
CCH Reference - 2008FED ¶32,800F
CCH Reference - 2008FED ¶32,800H
CCH Reference - 2008FED ¶32,800L
CCH Reference - 2008FED ¶32,800M
CCH Reference - 2008FED ¶32,800N
Code Sec. 1464
CCH Reference - 2008FED ¶32,881
Code Sec. 6071
CCH Reference - 2008FED ¶36,701
Code Sec. 6091
CCH Reference - 2008FED ¶36,801
Code Sec. 6151
CCH Reference - 2008FED ¶37,081
Code Sec. 6302
CCH Reference - 2008FED ¶38,062
Code Sec. 6402
CCH Reference - 2008FED ¶38,517
Code Sec. 6414
CCH Reference - 2008FED ¶38,782
Code Sec. 6722
CCH Reference - 2008FED ¶40,232
Tax Research Consultant
CCH Reference - TRC EXPAT: 15,100
CCH Reference - TRC EXPAT: 15,106.05
CCH Reference - TRC INTLIN: 6,112.20
CCH Reference - TRC INTLIN: 6,118
CCH Reference - TRC PART:18,404.10