SERVICE ISSUES GUIDANCE FOR DELAYED PAYMENTS OF TAX WITHHELD ON PARTNERSHIP DISTRIBUTIONS TO FOREIGN PARTNERS.

Rev. Proc. 88-21

SECTION 1. PURPOSE

This revenue procedure provides guidance under section 1446 of the Internal Revenue Code concerning certain withholding requirements applicable to distributions by partnerships with foreign partners. This revenue procedure provides general guidance on how to comply with section 1446, and provides for an election permitting quarterly payments of tax based on effectively connected income of a foreign partner, in lieu of withholding on distributions.

SEC. 2. BACKGROUND

Section 1446 of the Code generally applies to U.S. and foreign partnerships that have income effectively connected with the conduct of a U.S. trade or business ("effectively connected income"). Such partnerships must withhold tax when they make a distribution to a partner that is a foreign person. Under the election provided for by this revenue procedure, such partnerships may instead make quarterly payments of tax at specified rates based on the amount of effectively connected income of the partnership that is includable in the taxable income of each foreign partner. Accordingly, this revenue procedure provides guidance concerning the following matters:

(a) Description of withholding requirements under section 1446 (Section 3 -- REQUIREMENT OF WITHHOLDING);

(b) Who is responsible for withholding under section 1446 (Section 4 -- WITHHOLDING AGENTS);

(c) How to determine whether a partner is a foreign person subject to withholding (Section 5 -- DETERMINATION OF FOREIGN STATUS);

(d) Which partnership distributions are subject to withholding (Section 6 -- SECTION 1446 DISTRIBUTIONS);

(e) How much of a partnership distribution is subject to withholding (Section 7 -- EFFECTIVELY CONNECTED PERCENTAGE);

(f) Partnership election to make quarterly payments of tax on the basis of foreign partners' effectively connected income attributable to the partnership (Section 8 -- ELECTION BY PARTNERSHIP);

(g) How to report and pay over withheld amounts or quarterly payments (Section 9 -- REPORTING AND PAYING OVER OF WITHHELD AMOUNTS OR QUARTERLY PAYMENTS);

(h) How to claim a credit for taxes withheld or quarterly payments (Section 10 -- CREDITABILITY OF WITHHELD AMOUNTS OR QUARTERLY PAYMENTS);

(i) Partnerships exempt from withholding under section 1446 (Section 11 -- EXEMPT PARTNERSHIPS);

(j) Special rules for publicly traded partnerships (Section 12 -- PUBLICLY TRADED PARTNERSHIPS); and

(k) Special rules for tiered partnerships (Section 13 -- TIERED PARTNERSHIPS).

SEC. 3. REQUIREMENT OF WITHHOLDING

If at any time after December 31, 1987 a foreign or domestic partnership has income, gain, or loss effectively connected with the conduct of a U.S. trade or business, then the partnership or a withholding agent for that partnership must withhold a tax of 20 percent with respect to the effectively connected percentage of any section 1446 distribution made on or after January 1, 1988, by the partnership to any partner that is a foreign person. Tax withheld must generally be paid over to the Internal Revenue Service by the 20th day following the date of the distribution. However, tax withheld shall in no event be paid over to the Service before June 15, 1988.

If a partnership has made the election described in Section 8 of this revenue procedure, the partnership or a withholding agent for the partnership shall instead make quarterly payments of tax at rates specified with respect to the effectively connected income of each foreign partner attributable to the partnership, in accordance with the rules set forth in Sections 8 and 9. In the case of partnerships that take the election described in Section 8 by June 15, 1988, any amounts withheld from distributions made before June 15, 1988, may be used to make the quarterly payments of tax due under the election.

SEC. 4. WITHHOLDING AGENTS

01 IN GENERAL. If distributions from a partnership are subject to withholding under section 1446 of the Code then the partnership or a withholding agent for the partnership must withhold, or make quarterly payments of tax under the election described in Section 8 of this revenue procedure. The general partners of a partnership shall be jointly and severally liable as withholding agents for the partnership. In addition, the term withholding agent shall also include any other person who pays or causes to be paid a distribution to a foreign person (or to an agent of a foreign person) under the principles of section 1441(a) and section 1.1441-7(a) of the Income Tax regulations. For ease of reference, this revenue procedure refers to various requirements applicable to withholding agents as requirements applicable to partnerships themselves. This does not affect the legal incidence of liability. For special rules concerning withholding agents for publicly traded partnerships, see Section 12 of this revenue procedure.

02 PENALTY FOR FAILURE TO WITHHOLD. A partnership required to deduct and withhold tax under section 1446 of the Code is made liable for that tax under section 1461, or for a tax equal to all payments required to be made under the election described in Section 8 of this revenue procedure. Therefore, a partnership that is required to deduct and withhold tax or make quarterly payments of tax, but fails to do so, may be held liable for the payment of tax, any applicable penalties, and interest. A person failing to withhold or make quarterly payments of tax required by section 1446 may also be subject to civil and criminal penalties. Officers or other responsible persons of either a corporation that is a general partner or any other withholding agent may be subject to a civil penalty under section 6672 equal to the amount that should have been withheld from distributions and paid over or paid quarterly under the election provided in Section 8.

Partnerships that are required to withhold tax on section 1446 distributions but fail to do so shall be required to pay interest under the principles of section 1.1445-1(e) of the regulations on the amount of tax that should have been withheld and paid over. Interest is generally payable by the partnership for the period beginning on the 21st day following the date of the section 1446 distribution and ending on the date the tax is actually paid to the Internal Revenue Service. However, in the case of a failure to withhold and pay over the tax required to be withheld a section 1446 distribution made on or before June 15, 1988, interest shall be imposed beginning on the later of June 16, 1988, or the 21st day following the date of the section 1446 distribution.

A partnership that has made the election described in Section 8 of this revenue procedure, but fails to make a quarterly payment when due, shall be required to pay an additional amount beginning on the day after the due date provided in this revenue procedure for the quarterly payment. This additional amount shall be equal to the penalty imposed under section 6655 of the Code on an underpayment of estimated tax, and shall be imposed without regard to whether the partner is taxable as a corporation.

SEC. 5. DETERMINATION OF WHETHER A PARTNER IS A FOREIGN PERSON

01 IN GENERAL. Section 1446 of the Code requires withholding with respect to any partner that is a foreign person. Accordingly, a partnership must determine under the rules of this Section whether any partner is a foreign person subject to section 1446. For purposes of section 1446, a foreign person is a nonresident alien individual, foreign corporation, foreign partnership, or foreign trust or estate. A partnership may determine a partner's status by relying upon a certification of non-foreign status, under the rules of Section 5.02 of this revenue procedure, or any other means, under the rules of Section 5.03.

02 CERTIFICATION OF NON-FOREIGN STATUS.

1 IN GENERAL. This Section provides rules pursuant to which a partnership can determine that a partner is not a foreign person by obtaining a certification of non-foreign status from the partner. A partnership that has obtained such a certification may rely upon it to establish the non-foreign status of a partner, as provided in paragraph 2, below.

2 RELIANCE UPON CERTIFICATION. A partnership that has obtained a certification of non-foreign status in accordance with the rules of this Section may rely upon the certification to determine that the partner is not subject to withholding, but only if the partnership does not have actual knowledge that the certification is false. If a partnership relies in good faith upon a certification, but it is subsequently determined that the certification was false, the partnership shall not be subject to the liability imposed by Section 4.02 of this revenue procedure for a failure to withhold under section 1446 of the Code. A partnership may rely on a partner's certification of non-foreign status until the earliest of

(a) the end of the third year after the taxable year of the partnership during which the certification was obtained;

(b) the date the partnership receives notice from the partner that it has become a foreign person; or

(c) the date the partnership has actual knowledge that the partner is, or has become, a foreign person.

If a partnership has actual knowledge that a certification of non- foreign status is false, it shall not be entitled to rely on that certification at any time after obtaining that knowledge, and the partnership shall be fully liable under section 1461 for any failure to withhold or make a quarterly payment of tax as of the time it obtained that knowledge. A certification that satisfies the requirements of this revenue procedure will also satisfy the requirements for a withholding certificate under section 1445.

3 CERTIFICATION. No particular form is required for a certification of non-foreign status, nor is any particular language required. The certification must --

(a) State that the partner is not a foreign person,

(b) Set forth the partner's name, U.S. taxpayer identifying number, and home address (in the case of an individual) or office address (in the case of an entity),

(c) Provide that the partner will notify the partnership within sixty (60) days of a change to foreign status, and

(d) Be signed under penalties of perjury.

An individual's identifying number is the individual's social security number (or such other taxpayer identification number as may have been assigned to a foreign individual by the Internal Revenue Service), and any other person's identifying number is its U.S. employer identification number. A certification of non-foreign status must be verified as true and signed under penalties of perjury by a responsible corporate officer in the case of a corporation, by a general partner in the case of a partnership, and by a trustee, executor, or equivalent fiduciary in the case of a trust or estate. A certification of non-foreign status may also be signed by a person authorized under a power of attorney in proper form executed by the partner, provided the power of attorney accompanies the certification. Examples of acceptable certifications of non-foreign status are provided in Section 5.04 of this revenue procedure.

4 RETENTION OF CERTIFICATIONS. A partnership must retain a certification of non-foreign status until the end of the fifth taxable year after the last taxable year in which the partnership relied upon the certification.

5 CERTIFICATIONS UNDER SECTION 1445. A partnership may rely on a certification of non-foreign status provided by a partner under section 1445 of the Code and section 1.1445-2 or -5 of the regulations until the beginning of the partnership's first taxable year beginning after 1988. However, a partnership may not rely upon a certification of non-foreign status given by a foreign corporation that has based the certification on an election under section 897(i). A foreign corporation that has made an election under section 897(i) continues to be treated as a foreign person for all U.S. tax purposes other than sections 897, 1445, and 6039C. Thus, a distribution to such a foreign corporate partner is subject to withholding under section 1446 notwithstanding the election under section 897(i).

6 SPECIAL RULE FOR WIDELY HELD PARTNERSHIPS. A partnership that is widely held, as defined in this paragraph, may rely on statements provided to it on Form 1001, Form W-8, or Form W-9 to determine whether a partner is a foreign person, or on a certification from a nominee that a partner owning a partnership interest through the nominee is not a foreign person. For this purpose a nominee may in turn rely on a certification of non-foreign status provided by a foreign partner under the rules of Section 5.02 of this revenue procedure, or may rely on statements provided to it on Form 1001, Form W-8, or Form W-9 to determine whether a partner is a foreign person. A partnership is widely held for purposes of this paragraph if it has more than 200 partners (other than a regularly traded partnership within the meaning of section 1.1445-8T of the regulations subject to the rules in Section 12) on the date it is or may be required to withhold on a section 1446 distribution or make a quarterly payment under the election described in Section 8.

03 USE OF MEANS OTHER THAN CERTIFICATION. A partnership is not required to obtain a certification of non-foreign status under the rules of Section 5.02 of this revenue procedure; a partnership may instead rely upon other means to ascertain the non-foreign status of the partner. If, however, the partnership relies upon other means and erroneously determines that the partner was not a foreign person, then the partnership is subject to the liability described in Section 4.02. A partnership is in no event required to rely upon other means to determine the non-foreign status of a partner and may demand a certification of non-foreign status. If a certification is not provided, the partnership may withhold tax under section 1446 of the Code and will be considered, for purposes of sections 1461 through 1463, to have been required to withhold such tax.

04 SAMPLE CERTIFICATIONS. The following are examples of acceptable certifications under the rules of this revenue procedure.

(a) PARTNERS WHO ARE INDIVIDUALS. "Section 1446 of the Internal Revenue Code provides that a partnership must withhold a tax equal to 20 percent of any section 1446 partnership distribution, if the partner is a foreign person. To inform [name of partnership] that the provisions of section 1446 do not apply, I, [name of partner], hereby certify the following:

1. I am not a nonresident alien for purposes of U.S. income taxation;

2. My U.S. taxpayer identification number (social security number) is __________; and

3. My home address is __________.

I hereby agree that if I become a nonresident alien, I will notify the partnership within sixty (60) days of doing so. I understand that this certification may be disclosed to the Internal Revenue Service by the partnership and that any false statement I have made here could be punished by fine, imprisonment, or both.

Under penalties of perjury I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct, and complete.

[Signature and Date]"

(b) PARTNERS THAT ARE ENTITIES. "Section 1446 of the Internal Revenue Code provides that a partnership must withhold a tax equal to 20 percent of any section 1446 partnership distribution if the partner is a foreign person. To inform [name of partnership] that the provisions of section 1446 do not apply, the undersigned hereby certifies on behalf of [name of the entity] the following:

1. [Name of the entity] is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations);

2. [Name of the entity]'s U.S. employer identification number is __________, and

3. [Name of the entity]'s office address is __________.

[Name of the entity] hereby agrees to notify the partnership within sixty (60) days of the date [name of the entity] becomes a foreign person. [Name of entity] understands that this certification may be disclosed to the Internal Revenue Service by the partnership and that any false statement contained herein could be punished by fine, imprisonment, or both.

Under penalties of perjury I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct, and complete, and I further declare that I have authority to sign this document on behalf of [name of entity].

[Signature and Date]

[Title]"

SEC. 6. SECTION 1446 DISTRIBUTIONS

01 IN GENERAL. A foreign or domestic partnership must withhold with respect to any section 1446 distribution to a foreign partner. A section 1446 distribution consists of any actual distribution of money or property, and certain constructive distributions arising from the assumption of liabilities, as described in item (c) below. If an actual distribution is made with property other than money, the partnership shall not release the property until it has funds sufficient to enable the partnership to pay over in money the tax required to be withheld. The amount of a section 1446 distribution includes the amount of any tax required to be withheld with respect to that distribution, and must be calculated under the rules set forth below. Except as provided herein, a section 1446 distribution consists of --

(a) the gross amount of money actually distributed (prior to withholding of tax under section 1446);

(b) 125 percent of the fair market value of any property other than money actually distributed; and

(c) 125 percent of the amount of (i) any individual liability of a foreign partner that is assumed by the partnership, and (ii) any liability encumbering property that a foreign partner contributes to the partnership.

The 125 percent figure used in items (b) and (c) takes into account the fact that the section 1446 tax paid on the distribution of property (or assumption of a liability) itself constitutes a distribution by the partnership for the benefit of the partner, subject to withholding under section 1446. In such a case the total section 1446 distribution algebraically equals 125 percent of the fair market value of property distributed (or liability assumed).

02 EXCLUDED AMOUNTS. Distributions from partnerships are deemed to be paid first out of the following types of income in the order indicated, and are excluded from the term "section 1446 distribution" to the extent thereof:

1. Amounts attributable to non-effectively connected income distributed by a partnership that have been or are subject to the withholding requirements of section 1441 or 1442 of the Code (without regard to whether any amount was or is required to be withheld because of a treaty or statutory exemption); and

2. Amounts that are attributable to the disposition of a U.S. real property interest and that have been, or are, subjected to the withholding requirements of the regulations under section 1445 (without regard to whether any amount was or is required to be withheld), subject to the rule of Section 6.03 of this revenue procedure.

03 COORDINATION WITH SECTION 1445. Notwithstanding the provisions of Section 6.02 of this revenue procedure, section 1446 distributions shall include --

(a) The fair market value of a U.S. real property interest distributed to a partner and potentially subject to withholding under section 1445(e)(4) of the Code, regardless of whether amounts are in fact withheld under section 1445; and

(b) Amounts not subject to withholding under section 1445 because the distributee is a foreign corporation that has made an election under section 897(i)).

SEC. 7. EFFECTIVELY CONNECTED PERCENTAGE

01 IN GENERAL. The portion of a section 1446 distribution that is subject to withholding may be affected by the percentage of the partnership's income that is effectively connected with the conduct of a U.S. trade or business. Partnerships must withhold on the entire amount of a section 1446 distribution when the effectively connected percentage of the partnership is 80 percent or greater. When a partnership's effectively connected percentage is less than 80 percent, the partnership must withhold on only the effectively connected percentage of a section 1446 distribution.

02 COMPUTATION OF THE EFFECTIVELY CONNECTED PERCENTAGE. The effectively connected percentage is equal to a fraction, the numerator of which is the amount of the partnership's gross income from all sources during the measuring period that is effectively connected with the conduct of a trade or business within the United States (under section 864 of the Code and section 1.864-3 of the regulations), and the denominator of which is the amount of the partnership's gross income from all sources during the measuring period. However, in determining the effectively connected percentage, neither the numerator nor the denominator of the fraction shall include amounts of non-effectively connected income that were received during the measuring period but excludable from the amount of a section 1446 distribution under Section 6.02 of this revenue procedure.

03 MEASURING PERIOD. The measuring period for the effectively connected percentage consists of the three taxable years preceding the taxable year in which a partnership makes a section 1446 distribution, or such part of that three year period as the partnership has been carrying on a trade or business in the United States within the meaning of section 1.6031-1 of the regulations (relating to the duty to file partnership returns).

SEC. 8. ELECTION BY PARTNERSHIP TO MAKE QUARTERLY PAYMENTS OF TAX ON THE BASIS OF FOREIGN PARTNER'S EFFECTIVELY CONNECTED INCOME ATTRIBUTABLE TO THE PARTNERSHIP INSTEAD OF WITHHOLDING ON ACTUAL DISTRIBUTIONS

01 IN GENERAL. Withholding under section 1446 of the Code shall not be required on section 1446 distributions to a foreign partner if the partnership makes an election to instead make quarterly payments of tax at the rates specified in Section 8.025 of this revenue procedure, infra, for each foreign partner based on the foreign partner's effectively connected taxable income attributable to the partnership ("the ECI election") in accordance with the rules of this Section.

A partnership that makes an ECI election must retain and pay over, as set forth below, an amount based on each foreign partner's effectively connected taxable income attributable to the partnership. Because amounts may be required to be paid over under an ECI election at a time other than the time of an actual distribution, a partnership that makes such an election must exercise care to retain funds adequate to meet its obligations under the election.

02 CALCULATION OF QUARTERLY PAYMENTS OF TAX.

1 IN GENERAL. A partnership that has made the ECI election must make quarterly payments of tax at the appropriate rate specified in Section 8.025 of this revenue procedure, based on the effectively connected income of each foreign partner attributable to the partnership for the partner's current year. Thus, the partnership must estimate each foreign partner's effectively connected income attributable to the partnership for the partner's taxable year, and make quarterly payments equal to 25 percent of that estimate multiplied by the appropriate tax rate specified in Section 8.025. A partner's liability for the tax imposed under section 884 of the Code and the partner's distributive share of the partnership's tax credits shall not be taken into account in determining the amount of the partner's quarterly payments. Certain timing issues may be presented because a partner may have a different taxable year than its partnership; these issues are addressed in Section 8.03, below.

2 COORDINATION WITH ESTIMATED TAX LIABILITY. Amounts paid under the ECI election shall be credited against the estimated tax liability of the foreign partner.

3 PARTNER'S EFFECTIVELY CONNECTED INCOME. For purposes of calculating quarterly payments of tax under the ECI election, a foreign partner's effectively connected income is the distributive share of gross effectively connected income of the partnership for the taxable year of the partnership ending within the partner's taxable year properly that is allocable to the partner under section 704 of the Code, reduced by the distributive share of deductions of the partnership for such year that are properly allocable to the partner under section 704 and connected with such income under section 873 or section 882(c)(1).

4 PARTNERSHIP'S EFFECTIVELY CONNECTED INCOME. For purposes of the ECI election, a partnership's gross effectively connected income is based upon the income derived by the partnership that is effectively connected with the conduct of a U.S. trade or business during the partnership's relevant taxable year, as determined under section 864 of the Code and the regulations thereunder, and generally includes the sum of all items of income set forth in section 702(a), to the extent determined to be effectively connected. However, net operating losses and charitable contributions shall not be taken into account in determining a partnership's effectively connected income for this purpose. For purposes of the ECI election, the effectively connected income of a partnership includes income subject to a partner's election under section 871(d) or 882(d) of the Code, and also includes any amount treated as effectively connected with the conduct of a U.S. trade or business pursuant to section 897.

5 TAX RATE. The amount required to be paid by a partnership under the ECI election with respect to a foreign partner shall be determined by multiplying the foreign partner's effectively connected income attributable to the partnership, as determined under paragraph 3 of this Section, by the applicable tax rate. In the case of a foreign partner that is not taxable as a corporation, the tax rate is the highest rate of tax specified in section 1 of the Code (28% for taxable years beginning in 1988). In the case of a foreign partner that is taxable as a corporation, the tax rate is the highest rate of tax specified in section 11(b) (34% for taxable years beginning in 1988). If a partner is itself a partnership, or if it cannot be determined whether or not a foreign partner is a corporation, the applicable tax rate shall be the maximum rate specified in section 11 (b).

03 TIMING OF ECI QUARTERLY PAYMENT.

1 IN GENERAL. Under the ECI election, the payments of tax for a foreign partner must be made no later than the estimated tax payment dates for that foreign partner. Estimated tax payment dates for a corporation are the 15th day of the fourth, sixth, ninth, and twelfth months of its taxable year. However, in the case of foreign partners that are individuals, four quarterly payments must be made under the ECI election, notwithstanding section 6654(j) of the Code which requires only three payments of estimated tax by a nonresident alien partner described in section 6072(c). For example, in the case of individual foreign partners who have a calendar taxable year, quarterly amounts must be paid over by April 15, June 15, September 15, and January 15 of the following year. The partnership shall assume that all foreign partners have a calendar taxable year unless the partnership is notified by the partner of the partner's fiscal taxable year.

2 TRANSITION RULE FOR 1988. The first quarterly payment in 1988 shall not be due before June 15, 1988. In the case of a calendar year partner, for its 1988 calendar year only three quarterly payments shall be due, and the amount due as the partner's first payment by June 15, 1988, shall be the sum of the amount that would otherwise have been due on April 15, 1988 and June 15, 1988 if four quarterly payments had been required in 1988 for such a partner. In the case of a partner with a fiscal taxable year (i.e., a year that does not end on December 31), the amount of the quarterly payment due to be paid to the Internal Revenue Service on June 15, 1988, shall be the sum of all payments that the partnership would otherwise be required to make after December 31, 1987 but on or before June 15, 1988, on behalf of the partner. All subsequent quarterly payments for that partner are due on the date subsequent estimated tax payments for the partner are due.

3 PARTNERSHIP INCOME TO BE TAKEN INTO ACCOUNT. The amount required to be paid on a quarterly basis under the ECI election is based on partnership income includable by the partner in the partner's taxable year to which an estimated tax payment on that date by a U.S. resident would relate. Accordingly, if the partner and the partnership are both calendar year taxpayers, the amount to be paid for each quarter of the partner must be calculated by reference to the income of the current taxable year of the partnership (except that the January 15 payment for an individual partner is based on the income of the partnership for the year that ended on the immediately preceding December 31). However, if the partner and partnership have non-conforming taxable years, the partnership income to be taken into account in making quarterly payments for the partner under the ECI election will relate to the taxable year of the partnership that ends within the relevant taxable year of the partner.

04 CORRECTION OF ESTIMATES AND SAFE HARBOR.

1 IN GENERAL. If amounts paid over by the partnership in prior quarters for the same taxable year under the ECI election are greater or less than the amount necessary based on current estimates of partnership income, then appropriate adjustments may be made to the amount of subsequent payments of tax.

2 SAFE HARBOR. The principles of section 6654(d)(1) and 6655(d) of the Code shall be applied in determining whether the quarterly payments for the current taxable year of the partnership made by the partnership for individual and corporate foreign partners, respectively, are greater or less than the amount necessary. In the case of quarterly payments for a foreign corporate partner that satisfies the definition of a large corporation in section 6655(i)(2) based upon its distributive share of a partnership's effectively connected taxable income, the principles of section 6655(i) shall be applied in determining whether the quarterly payments are greater or less than the amount necessary. The partner's distributive share of the partnership's effectively connected taxable income for the preceding taxable year of the partnership, shall be used when applying the principles of section 6654(d)(1) and 6655. However, the preceding taxable year of the partnership shall not be used with respect to any quarterly payment made after the date specified in section 6031(b) on which the partnership must report to its partners the partnership's tax return information; in this situation the amount of the quarterly payment must be based on the taxable year of the partnership to which the payment actually relates.

2 TRANSITION RULE. Quarterly payments of tax for a partner that are made during 1988 under the ECI election are not to be adjusted under paragraph .041 of this Section for prior quarters for which the estimated tax payment dates occurred prior to January 1, 1988.

3 EXAMPLES.

EXAMPLE 1. If a partnership has a fiscal taxable year that begins on February 1, 1987, and ends on January 31, 1988, and an individual foreign partner has a calendar taxable year, the quarterly payments that must be made during the 1988 taxable year of the partner under the ECI election with respect to that partner must be based upon the income of the partnership's 1987-1988 taxable year, and the first quarterly payment by the partnership will be due on June 15, 1988.

EXAMPLE 2. The facts are the same as in Example 1, except the individual foreign partner and the partnership both have a fiscal taxable year ending on January 31. In this situation, the partnership must make one quarterly payment in 1988 (on June 15, 1988 for the partner's February 15, 1988 quarterly payment date) with respect to that partner that is based upon the partnership's 1987-1988 taxable year. The amount of that payment will be the sum of two amounts. The first amount is equal to 25 percent of the tax liability of the foreign partner with respect to the effectively connected income attributable to the partnership's 1987-1988 taxable year, computed as provided in Section 8.02 of this revenue procedure (although the safe harbor rules in Section 8.042 may prevent the partnership from incurring liability to pay additional amounts if less than 25 percent is paid). The second amount reflected in the June 15, 1988 quarterly payment by the partnership will be equal to an amount based on the first payment of estimated tax due for the foreign partner on May 15, 1988, with respect to that partner's effectively connected income attributable to the partnership's 1988-1989 taxable year. The partner should adjust its subsequent estimated tax payments to the extent that it made an estimated tax payment on May 15, 1988 which was duplicated by the partnership in the partnership's June 15, 1988 payment.

05 COORDINATION WITH OTHER WITHHOLDING RULES.

1 INTEREST, DIVIDENDS, ETC. Fixed or determinable, annual or periodical income subject to tax only under section 871(a) or 881 of the Code is not included in the partnership's effectively connected taxable income under Section 8.02 of this revenue procedure for purposes of the ECI election. However, such amounts are independently subject to withholding pursuant to the requirements of sections 1441 and 1442 and the regulations thereunder.

2 REAL PROPERTY GAINS. A partnership that makes the ECI election shall be exempt from the requirements of section 1445(e) of the Code with respect to its dispositions of U.S. real property interests that occur during taxable years of the partnership during which the election is in effect.

06 TIME, MANNER AND EFFECTIVE DATE OF ECI ELECTION.

1 IN GENERAL. The ECI election shall be effective as of January 1, 1988. An election shall be deemed to have been made if the partnership makes quarterly payments of tax in accordance with the rules of this Section beginning on June 15, 1988. The ECI election shall apply to the taxable year of the partnership in which the election was made, and to all subsequent taxable years. An ECI election may be revoked only with the consent of the Commissioner.

2 RETROACTIVE ECI ELECTION. A partnership that has not made an ECI election as of June 15, 1988, may nevertheless make such an election at any later date if the partnership pays over, together with interest imposed on underpayments of tax accrued thereon, all amounts that should have been withheld pursuant to the ECI election on and after January 1, 1988. In such case, amounts previously withheld and paid over with respect to section 1446 distributions may be credited against the amount required to be paid over pursuant to this paragraph.

SEC. 9. REPORTING AND PAYING OVER WITHHELD TAX

01 IN GENERAL. The tax withheld on a distribution under section 1446 of the Code must be reported and paid over to the Internal Revenue Service by the partnership by the 20th day following the distribution. Quarterly payments of tax due under the ECI election must be made by a partnership by the appropriate quarterly payment date described in Section 8.03 of this revenue procedure. However, no amounts shall be due before the later of June 15, 1988.

Until a change is announced in a future administrative pronouncement by the Internal Revenue Service, the tax withheld on distributions, the quarterly payments of tax shall be:

(a) made payable to the Internal Revenue Service; and

(b) sent to the Internal Revenue Service, P.O. Box 21086, Philadelphia, PA 19114.

Until official Internal Revenue Service forms are available and obtained by a partnership, payments made to the Internal Revenue Service under section 1446 of the Code must be accompanied by the information prescribed in Section 9.02 and Section 9.03. Pursuant to section 7502 and the regulations thereunder, the timely mailing of the tax withheld or the quarterly payment with the information specified in Section 9.02 and 9.03 shall be treated as timely filing.

02 INFORMATION REQUIRED CONCERNING DISTRIBUTING PARTNERSHIPS AND WITHHOLDING AGENT. Payments to the Internal Revenue Service of amounts withheld from section 1446 distributions and quarterly payments of tax must be accompanied by an attachment in the format and order specified below. The attachment must contain the following heading and information: WITHHOLDING ON INCOME OF FOREIGN PARTNERS UNDER SECTION 1446 --

                           WITHHOLDING AGENT

03 INFORMATION REQUIRED TO BE REPORTED FOR EACH FOREIGN PARTNER. An attachment to the summary described above in Section 9.02 of this revenue procedure must be supplied for each foreign partner for whom tax is withheld or a quarterly payment of tax is made. The attachment must contain the following heading and information in the format and order specified: WITHHOLDING ON INCOME OF FOREIGN PARTNERS UNDER SECTION 1446 --

                            FOREIGN PARTNER

05 PAYMENT WITHOUT IDENTIFYING NUMBER. A partnership that has not been assigned a U.S. identifying number (an Employer Identification Number ("EIN")) must obtain one, and must in any event withhold and pay over any tax withheld, or quarterly payment, to the Internal Revenue Service, P.O. Box 21086, Philadelphia, PA 19114, by the time provided in this revenue procedure. Accompanying any payment must be a statement containing the relevant information described above in Section 9.02 and 9.03 and indicating the date the EIN was applied for. Upon receipt of its EIN, the partnership must immediately provide that number to the Internal Revenue Service, P.O. Box 21086, Philadelphia, PA 19114.

06 TAXPAYER IDENTIFICATION NUMBERS OF PARTNERS. To assure appropriate crediting of withheld amounts or quarterly payments, when reporting to the Internal Revenue Service, a partnership must provide a U.S. taxpayer identification number or an EIN for each foreign partner and should therefore notify each foreign partner of the necessity of obtaining U.S. identifying numbers. See Rev. Rul. 84- 158, 1984-2 C.B. 262 (partnership must request partner to furnish taxpayer identification number), CLARIFIED, Rev. Rul. 85-61, 1985-1 C.B. 355. A partnership must withhold or make quarterly payments with respect to a foreign partner even if the partnership does not have a taxpayer identification number for that partner.

SEC. 10. CREDITING OF WITHHELD AMOUNTS OR QUARTERLY PAYMENTS

01 IN GENERAL. Amounts withheld and paid over under section 1446 of the Code or paid quarterly under the ECI election relate to the partner's U.S. income tax liability for the taxable year of the partner in which the tax was withheld, or the taxable year to which an estimated tax payment on that date by a U.S. person would relate, and are thus creditable by the partner against its U.S. income tax liability for that taxable year. The early refund procedures of section 1.1445-6(g) of the regulations shall not apply under section 1446.

Amounts withheld and paid over during a taxable year of a partner or paid quarterly under the ECI election may not be applied against the partner's liability for a previous taxable year until the partner has filed a return establishing its U.S. tax liability for the taxable year in which the withholding took place, or to which the quarterly payment relates. The amount withheld and paid over under section 1446 of the Code or paid quarterly under the ECI election that is in excess of the partner's U.S. income tax liability as established on a tax return for that entire year may be credited against the partner's U.S. income tax liability for other years.

02 PROCEDURAL RULE. A partner that seeks a credit against its U.S. income tax liability for amounts withheld and paid over under section 1446 of the Code or paid quarterly under the ECI election must attach proof of payment to its U.S. income tax return for the taxable year in which it claims the credit. Proof of payment consists of a copy of all statements that the partnership is required to furnish under Section 9.04 of this revenue procedure, or copies of any official Internal Revenue Service form that may be prescribed.

SEC. 11. EXEMPT PARTNERSHIPS

Under section 1446(c)(2) of the Code a partnership is exempt from the requirements of section 1446 if 90 percent of the U.S. source income of the partnership and 90 percent of the effectively connected income of the partnership is properly allocated to U.S. persons, but only with respect to each foreign partner whose distributive share of effectively connected income for the partnership's taxable year, under a valid allocation pursuant to section 704(b), equals less than ten percent of the partner's entire distributive share of partnership income. Under section 1446(c)(2), a partnership must withhold on a foreign partner whose distributive share of effectively connected income is greater than or equal to ten percent of the partner's entire distributive share of partnership income for the taxable year of the partnership.

SEC. 12. PUBLICLY TRADED PARTNERSHIPS

Partnerships that are publicly traded on an established securities market within the meaning of section 1.1445-8T(a)(l) of the regulations may not make the ECI election described in Section 8 of this revenue procedure, and must withhold on section 1446 distributions under the rules of this revenue procedure. Such partnerships may designate nominees as withholding agents in accordance with the provisions of section 1.1445-8T, however, for purposes of withholding on distributions.

SEC. 13. TIERED PARTNERSHIPS

01 IN GENERAL. Any amount withheld under section 1446 of the Code or paid quarterly by a subsidiary partnership with respect to a foreign partnership (or a partnership that is a direct or indirect partner of such a foreign partnership) that is a partner in the subsidiary partnership shall be credited against the foreign partnership's liability to withhold under section 1446 or make quarterly payments under the ECI election. Such withholding or quarterly payments may occur because withholding is required under section 1446 with respect to a partner of any partnership that is itself a foreign partnership (since a foreign partnership is a foreign person). Such a foreign partnership (or another foreign or domestic partnership that is a direct or indirect partner in such a foreign partnership) may either receive a distribution which has already been subject to withholding by the subsidiary partnership in which it is a partner, or take into income a distributive share of effectively connected income on which a quarterly payment has been made under the ECI election. In addition, such a foreign partnership is itself subject to the requirements of section 1446, and potentially required to either withhold with respect to distributions it makes or elect to make quarterly payments with respect to the distributive share of effectively connected income of its foreign partners.

02 REPORTING REQUIREMENTS. A partnership that is a direct or indirect partner in a subsidiary partnership must comply with the reporting requirements of Section 9.04 of this revenue procedure (which applies in the absence of official Internal Revenue Service forms), with respect to its foreign partners. To the extent that a partnership is a direct or indirect partner in a subsidiary partnership and has had amounts withheld from distributions to it under section 1446 of the Code, or has had quarterly payments made on its behalf, it will receive a copy of the statements required under Section 9.04 of this revenue procedure to be sent to partners, and must in turn file the statements required under Sections 9.02 and 9.03 to the extent it is subject to section 1446, treating the amount withheld by the subsidiary partnership as a credit against its liability to withhold or make quarterly payments of tax. The foreign partnership must attach to the statement it must file under Sections 9.02 and 9.03 for itself, a copy of the statement it receives from the subsidiary partnership in which it is a partner, and must in turn provide its partners with a copy of any statements it receives from the subsidiary partnership along with the information described in Section 9.04. These statements will enable the partners of the foreign partnership to obtain appropriate credit for withheld amounts or paid quarterly by the foreign partnership and the lower tier partnership.

EFFECTIVE DATE

This revenue procedure is effective January 1, 1988.

DRAFTING INFORMATION

The principal author of this revenue procedure is David F. Chan, Office of Associate Chief Counsel (International). For further information on the procedure, call Mr. Chan on (202) 634-5404 (not a toll-free number).

COUNTRY CODES

Enter the code from the list below, for the country of which the recipient is a resident for tax purposes. These codes are used by IRS to provide information to all tax treaty countries for purposes of their tax administration. Generally, the recipient's country for both tax and mailing purposes will be the same. In some cases, however, two different countries are involved.

                Country                       Code