Withholding Requirements for Income Allocated to Foreign Partners (Part I) — footnotes

¹TD 9200 (5/13/05). The regulations also cover Secs. 871, 1443, 1461, 1462, 1463, 6109 and 6721.

²See Sec. 1446(c).

³Rev. Proc. 89-31, 1989-1 CB 895.

⁴Rev. Proc. 92-66, 1992-2 CB 428.

⁵See Regs. Sec. 1.1446-7.

⁶Secs. 1 and 11 specifically limit taxation of NRAs and foreign corporations. Sec. 877 applies when there is expatriation to avoid U.S. taxes.

⁷Sec. 1441 provides a special 14% withholding rate for certain scholarships paid to foreign persons. Some types of scholarships are exempt from taxation and withholding, while others qualify for special rates or exemption under applicable treaties.

⁸Sec. 873 provides that an NRA can only take deductions connected with ECI. Exceptions are made for charitable contributions, casualty losses and a personal exemption. Sec. 882(b) limits deductions for a foreign corporation to those apportioned or allocated to ECI.

⁹Withholding is required because the IRS does not have another effective means of ensuring that all foreign partners will file U.S. tax returns and pay their taxes.

¹⁰A partnership can determine the status of a foreign partner by other means.

¹¹See TD 9200, note 1 supra, at Preamble Section B.1.

¹²Congress stated in the Committee Reports to the Tax Reform Act of 1986 that regulations may provide exceptions to the withholding requirement when withholding is not required to ensure compliance with U.S. tax laws; see S Rep’t No. 99-313, 99th Cong., 2d Sess. (1986), 1986-3 CB Vol. 3, p. 414.

¹³The partner-level deductions to be considered do not include charitable contributions. Also, this relief is not available to foreign trusts (other than grantor trusts) because of the complexity of determining the extent to which the trust will be a conduit (i.e., it is difficult to determine which taxpayer (beneficiary) will actually have a tax liability for an ECTI allocation).

¹⁴See TD 9200, note 1 supra, at Preamble Section G.3.

¹⁵If a loss was shown on a prior-year Schedule K-1, but not reported on the return because it was suspended, it may be used. Losses and deductions expected to be reported on the return for the current year are not reported on the certificate of deductions and are not taken into account in computing witholding.