August 2, 2018

Mr. Chip Harter
Deputy Assistant Secretary (International Tax Affairs)
Department of the Treasury
1400 Pennsylvania Avenue, NW
Washington, DC 20224

Mr. Daniel Winnick
Attorney-Advisor (Office of Tax Policy)
Department of the Treasury
1400 Pennsylvania Avenue, NW
Washington, DC 20224

Mr. Jason Smyczek
Office of Associate (Chief Counsel), International
Senior Technical Reviewer, Branch 4
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Mr. Ronald Gootzeit
Office of Associate (Chief Counsel), International
Attorney, Branch 4
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Re: Recommendations on implementation of section 1446(f)

Dear Gentlemen:

The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates the opportunity to submit comments on Notices 2018-08 2 and 2018-29 3 (the “Notices”) regarding the withholding under new section 1446(f) of the Internal Revenue Code 4 on dispositions of certain partnership interests by foreign persons. Both Notices requested comments on the challenges that apply to transfers of publicly traded partnerships (“PTPs”) under section 1446(f). Notice 2018-29 provides proposed rules for withholding on dispositions of non-PTP interests, but it does not apply to PTPs and it is not clear whether the Treasury Department (Treasury) and Internal Revenue Service (“IRS”) intend, by regulation, to extend the rules in the notice to dispositions of interests in PTPs. While there are some common challenges to implementing the withholding requirements on sales of PTP interests and non-publicly traded partnership interests, there is a need for different rules for withholding on PTPs because of the relationships of the parties, the lack of information to make withholding determinations, and the frequency of dispositions. Accordingly, this letter seeks to highlight the differences when the transfer is with respect to a PTP and make recommendations for rules that are operationally feasible. This letter also provides recommendations on the guidance for non-PTPs based on Notice 2018-29.

Section I of this letter provides background on sections 864(c)(8) and 1446(f). Section II discusses the current withholding requirements on PTP distributions. Section III provides recommendations for addressing the operational challenges of withholding on PTP dispositions. Section IV requests certainty on the lending or holding as collateral a PTP interest. Lastly, Section V of this letter makes recommendations on the certification-based withholding exceptions provided in Notice 2018-29, divided into recommendations related to PTPs, recommendations related to non-PTPs, and recommendations related to both PTPs and non-PTPs. SIFMA is seeking to provide the Treasury and the IRS with recommendations, in response to the Notice, that are administrable for taxpayers and the IRS alike.

I. Background

The Tax Cuts and Jobs Act (P.L. 115-97) added two new provisions to the Code concerning sales of partnership interests by foreign persons. Section 864(c)(8) treats a foreign partner’s gain (or loss) from the disposition of an interest in a partnership as effectively connected income subject to US net income tax to the extent that the partner would have had effectively connected gain (or loss) had the partnership sold all of its assets at fair market value on the disposition date. Section 1446(f) requires that a transferee of a partnership interest from a foreign person withhold 10 percent of the “amount realized” by the outgoing partner “if any portion of the gain (if any) on any disposition of an interest in a partnership would be” subject to tax under section 864(c)(8). If the transferee fails to withhold the correct amount of tax under section 1446(f), the partnership has the obligation to withhold from future distributions to the transferee partner. Section 1446(f) applies to dispositions of partnership interests after December 31, 2017. Because the tax resulting from section 864(c)(8) is a net income tax and the withholding under section 1446(f) is on gross basis, one can anticipate that both overwithholding and underwithholding will be common.

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1 SIFMA is the voice of the US securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the US, serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the US regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.

2 Notice 2018-08, 2018-7 IRB 352.

3 Notice 2018-29, 2018-16 IRB 495.

4 Except as otherwise expressly provided herein, all references to a “section” are to sections of the Internal Revenue Code of 1986, as amended (the “Code”), and all references to “Treas. Reg. §” or “Regulations” are to Treasury Regulations issued pursuant to the Code. Furthermore, all references to the “IRS” or the “Service” are to the Internal Revenue Service.