IRS MODIFIES WITHHOLDING RULES ON FOREIGN PARTNERS' SHARES OF EFFECTIVELY CONNECTED INCOME.

Rev. Proc. 92-66

SECTION 1. PURPOSE

This revenue procedure modifies Rev. Proc. 89-31, 1989-1 C.B. 895, to increase the applicable percentage for publicly traded partnerships to 31 percent of all distributions made to foreign partners on or after November 16, 1992, to allow a refund to a withholding agent under certain circumstances, and to limit the amount of tax withheld under section 1445(a) of the Internal Revenue Code that a foreign partnership may credit against its section 1446 withholding liability.

SEC. 2. BACKGROUND

Section 1446 of the Code imposes a withholding tax on some partnerships. Rev. Proc. 89-31, 1989-1 C.B. 895, provides general rules for withholding under section 1446 and special rules for publicly traded partnerships. Generally, partnerships with effectively connected income allocable to foreign partners must pay a withholding tax equal to the applicable percentage of the effectively connected taxable income that is allocable to its foreign partners, without regard to whether distributions are made during the partnership's taxable year. For partners taxable as corporations, the applicable percentage is the highest rate of tax specified in section 11(b); for other partners, it is the highest rate of tax specified in section 1. A partnership must pay the withholding tax to the Internal Revenue Service on or before the 15th day of the fourth, sixth, ninth, and twelfth months of the partnership's taxable year for U.S. income tax purposes. Any additional amounts determined to be due are to be paid with the filing of the annual return.

A publicly traded partnership (excluding a partnership treated as a corporation under the general rule of section 7704(a) of the Code) is required to withhold on distributions unless it elects to pay a withholding tax under the general rules in section 1446. Section 10 of Rev. Proc. 89-31 provides that the amount of the withholding tax on distributions equals the applicable percentage of any distribution to a foreign partner, and that this percentage equals 28 percent regardless of whether the partner is a corporation or individual.

A partnership that is required to pay a withholding tax under section 1446 of the Code, but fails to do so, may be held liable under section 1461 for the payment of the tax and any applicable penalties and interest. The general partners are jointly and severally liable as withholding agents for the partnership. A person who is required, but falls, to pay the withholding tax required by section 1446 may also be subject to civil and criminal penalties.

SEC. 3. CHANGES AFFECTING REV. PROC. 89-31

01 APPLICABLE PERCENTAGE. For all distributions made to foreign partners by publicly traded partnerships on or after November 16, 1992, the applicable percentage is the highest rate of tax imposed under section 1 of the Code, currently 31 percent. For distributions made to foreign partners on or after June 16, 1989 but before November 16, 1992, the applicable percentage remains 28 percent. For distributions made prior to June 16, 1989, the applicable percentage is 20 percent.

02 REFUNDS TO WITHHOLDING AGENTS WHO WITHHOLD ON ECI. Under Rev. Proc. 89-31, if a partner's withholding tax paid under section 1446 of the Code exceeds the partner's tax liability, that partner can file for a refund or credit the excess amount against the partner's U.S. income tax liability for subsequent years.

Section 9.01 of Rev. Proc. 89-31 does not allow the withholding agent (that is, the partnership) to file for a refund or receive a credit for amounts paid over to the Internal Revenue Service, but not allocated to a partner on Form 8805 (Foreign Partner's Information Statement of Section 1446 Withholding Tax). The Internal Revenue Service will now allow a portion of the section 1446 tax to be refunded to the withholding agent. In general, the amount refundable is 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 credit for any amount of tax shown on that form. If a partnership incorrectly withholds upon a United States person under section 1446 of the Code and issues a Form 8805 to that person, the withholding agent may not file for a refund of the amount incorrectly withheld; rather, that United States person may file for a refund of that amount on its annual return.

03 COORDINATION WITH SECTION 1445(a). Section 7.02(2)(iii) of Rev. Proc. 89-31 allows a foreign partnership that is subject to withholding under section 1445(a) of the Code during a taxable year to credit the amount withheld under section 1445(a) against its liability to pay the section 1446 withholding tax for that year. This revenue ruling modifies section 7.02(2)(iii) of Rev. Proc. 89-31, to provide as follows: A foreign partnership that is subject to withholding under section 1445(a) during a taxable year shall be allowed to credit the amount withheld under section 1445(a), to the extent such amount is allocable to foreign partners (as defined in section 1446(e)), against its liability to pay the section 1446 withholding tax for that year.

04 REFUNDS TO WITHHOLDING AGENTS WHO WITHHOLD FROM DISTRIBUTIONS. For rules concerning refunds to withholding agents (that is, Publicly Traded Partnerships, or the appropriate nominee) who withhold from distributions, see sections 1.1461-4 and 1.1464 of the Income Tax Regulations.

SEC. 4. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 89-31 is modified to allow a refund to a withholding agent as discussed above, to increase the applicable percentage to the highest rate of tax imposed under section 1 of the Code (currently 31 percent) for all distributions from a publicly traded partnership made to foreign partners on or after November 16, 1992, and to limit the amount of tax withheld under section 1445(a) that a foreign partnership may credit against its section 1446 withholding liability.

SEC. 5. EFFECTIVE DATE

This revenue procedure is effective on and after November 16, 1992, which is 90 days after the date this revenue procedure was published.

DRAFTING INFORMATION

The principal author of this revenue ruling is Thomas L. Ralph of the Office of Associate Chief Counsel (International). For further information regarding this revenue ruling contact Mr. Ralph at (202) 622-3880 (not a toll-free call).