FAQ 2

Section 4.01(A) of the WP agreement provides that a WP must obtain a Form W-8 or Form W-9 (or documentary evidence when permitted under the WP agreement) from every direct partner that receives a distribution or distributive share of a reportable amount. Section 10.03(A) of the WP agreement provides that a WP’s WP agreement will terminate automatically if the WP’s reviewer or the IRS discovers that the WP was not in possession of a Form W-8 or W-9 (or documentary evidence, as permitted Section 4.01(A) of WP agreement) for any direct partner at any time that withholding and reporting was required under Section 3.02 of the WP. For PTPs, however, missing or invalid documentation was a common occurrence due to their ownership structure and unitholder population. Even a minor WP documentation failure would cause a WP that is a PTP to experience an event of default and face immediate termination of its WP agreement. 

FAQ 2 provides that the IRS will grant a WP that is a PTP, which does not include a PTP treated as a corporation, relief from the automatic termination under Section 10.03(A) of the WP agreement when the WP uses its best efforts to obtain the documentation permitted under the WP agreement from direct partners that receive a distribution or distributable share of a reportable amount from the WP and applies the applicable presumption rules set forth in Section 9.03(C) of the WP agreement. This “best effort” standard is similar to the documentation standard applied for qualified intermediaries (QIs) pursuant to the QI agreement in Rev. Proc. 2022-43 (and predecessor QI agreements). 

FAQ 2 provides that a WP is treated as using its best efforts when:

• The WP makes a written solicitation (initial solicitation) for the direct partner’s documentation in the calendar year for which the direct partner receives a distribution or distributive share of a reportable amount, and 
• If a direct partner’s documentation is not provided based on the initial solicitation, the WP makes an additional written solicitation for the direct partner’s documentation in the calendar year following the calendar year of the initial solicitation, and, if necessary, every subsequent calendar year after the additional solicitation until the documentation is obtained or the direct partner disposes of all of its direct PTP interests. 

As a condition for relief from the automatic termination, the WP must apply the presumption rules set forth in Section 9.03(C) of the WP agreement (which are based in part on the presumption rules found in Chapter 3 regulations) and withhold and report in accordance with those rules until the documentation for the partner is obtained. 

Any PTP with WP status that is applying FAQ 2 to the documentation of its direct partners must complete the Responsible Officer’s Certification of Internal Controls in the IRS’s Qualified Intermediary, Withholding Foreign Partnership, Withholding Foreign Trust Application and Accounts Management System (QAAMS) as follows: 

1. Certification in QAAMs must be a Qualified Certification. 
2. An attachment must be uploaded and signed by the responsible officer on company letterhead stating that the WP is applying FAQ 2 to the documentation of its direct partners. The letter also must include in detail the steps taken to document every direct partner. 

Observation: The modification to the WP documentation requirement in FAQ 2 provides much needed relief because a WP’s status as a PTP makes it impracticable to obtain a Form W-8 or Form W-9 from every direct partner because interests in a PTP are publicly held. PTPs therefore lack effective control over their investor base and cannot be confident that every unitholder will be conscientious and responsive to requests for documentation. In many cases, direct unitholders also may be less sophisticated in US tax law and unable to properly provide valid documentation. In these cases, failure to meet the strict documentation requirement contained in the current WP agreement results in an event of default triggering an automatic termination of the WP agreement. WPs that are PTPs that comply with FAQ 2 may continue operating with the understanding that such undocumented unitholders should not adversely impact their ability to maintain their WP status and PTPs that may seek to obtain WP status can do so with a defined set of documentation requirements that may be more achievable.