Treasury and the IRS released on October 7 Final Regulations (Final Regulations) under Section 1446(f), which apply to both publicly traded partnerships (PTPs) and private partnerships. Beginning on January 1, 2022, the Final Regulations will require withholding under Section 1446(f) on both dispositions of and distributions by PTPs. This is a significant evolution of these rules, which to date have not been extended to PTPs due to the significant operational challenges associated with imposing withholding taxes in respect of publicly traded securities.
In addressing these challenges, the Final Regulations expand the withholding obligations to new parties (e.g., executing/clearing brokers), including qualified intermediaries (QIs), that traditionally were not withholding agents for payments of gross proceeds from the disposition of securities. In coordination with the expanded provisions under Section 1446(f), the Final Regulations further expand the definition of a “nominee” that is required to effectuate withholding under Section 1446(a) (currently applicable to PTP distributions). This Insight will focus primarily on considerations in respect of PTPs; see our companion Insight linked below for a detailed discussion of the rules regarding private partnerships.
The Final Regulations contemplate implementing a gross proceeds withholding tax, at scale, in respect of PTPs. This is a largely new approach for any publicly traded securities. They also introduce the prospect of withholding on PTP distributions under two related but distinctly separate regimes.
As a result, the Final Regulations introduce a series of new withholding and reporting requirements that have raised novel challenges relating to legal interpretation, operational implementation and execution, risk management, client communication, and other issues. These rules may impact market participants acting in a variety of different capacities. In addition, while certain technical challenges are still being considered, these new requirements are slated to be effective January 1, 2022, which means system design and build efforts may need to begin shortly.