Prop. regs. on partnership withholding on foreign partners.

• Author: Penick, Barksdale

On Sept. 2, 2003, the Treasury issued proposed regulations (REG-108524-00) on a partnership's obligation to withhold and pay tax under Sec. 1446 on effectively connected taxable income (ECTI) allocable to its foreign partners. Until these regulations are finalized, partnerships subject to Sec. 1446 must continue to comply with Rev. Proc. 89-31, as modified, until the partnership's first tax year starting after the date the final regulations are issued.

The proposed regulations only affect partnerships engaged in a trade or business in the U.S. that have one or more foreign partners. Procedurally, they are similar to guidance issued in Rev. Procs. 89-31 and 92-66.

Background

Sec. 1446 originally required both domestic and foreign partnerships with any income, gain or loss effectively connected with the conduct of a U.S. trade or business to withhold a 20% tax on any amount distributed to a foreign partner. Congress revised Sec. 1446 in 1988 by imposing a withholding tax (Set. 1446 tax) on the ECTI allocable to a partnership's foreign partners, whether or not distributed. This change placed new importance on the determination of a partner's allocable share of the partnership's income. These proposed regulations incorporate this statutory change from distribution-based to allocation-based withholding.

Subchapter K Analysis

A partner's allocable (or distributable) share of a partnership's income is determined...