IRS filing obligations for tiered real estate partnerships.

Recent tax changes make using tiered partnerships to hold U.S. real property advantageous. While some may argue against the structure because of the estate tax uncertainties, few will question the Federal income tax benefits it can provide to individual investors who are relatively young and in good health, and who expect not to hold the investment long after the one-year, long-term capital gain holding period.

Regs. Sec. 1.1446-3(a)(2)(ii) changed the withholding regime for foreign investments in U.S. real estate held through a partnership, by allowing the partnership to withhold at the highest tax rate applicable to a particular type of income, instead of at the highest percentage in Secs. 1 and ll. This change is positive for individual foreign investors, who will be taxed at 15%. As a result, the tax benefit has generated substantial interest in using tiered partnerships for investment in U.S. real estate.

Federal filing requirements for tiered partnerships are complex, and the IRS will probably strictly enforce them. They are relatively intricate, particularly for the lower-tier partnership's (LTP's) obligation to reliably associate income with a partner of the upper-tier partnership (UTP).

The exhibit on pp. 582-583 is a checklist that will help a foreign person who invests in U.S. real estate through a domestic LTP and a foreign UTP, to comply with the filing regulations.

Exhibit: Filing obligation checklist for tiered partnerships

Filing requirements for LTPs

1. Form 1065 (U.S. Return of Partnership Income)

[] File on or before the 15th day of the 4th month following the close
of the partnership's tax year (e.g., April 15th).

[] Send to: Internal Revenue Service Center, Ogden, UT 84201-0011; see
the Form 1065 instructions if total assets are less than $10 million or
the partnership's principal business or office is in a foreign county
or U.S. possession.

2. Form 8813 (Partnership Withholding Tax Payment Voucher (Section
1446))

[] File with each installment on or before the 15th day of the 4th,
6th, 9th and 12th months of the partnership's tax year (April, June,
September and December for a calendar-year partnership). When the date
falls on a weekend or a legal holiday, use the next business day.

[] Mail the voucher with a check or money order payable to the "United
States Treasury." Write the partnership's employer identification
number, tax year and "Form 8813" on the check or money order.

[] Send to: Internal Revenue Service Center, Philadelphia, PA 19255.

3. Notice

Within 10 days of the installment payment due date:

[] Furnish to UTP; see Regs. Sec. 1.1446-5(b)(1).

[] Include the partnership's name, taxpayer identification number (TIN)
and address; the partner's name, TIN and address; the estimated,
annualized, effectively connected taxable income (ECTI) allocable to
the foreign partner; and the tax paid on the partner's behalf for both
the current and any prior installment periods during the partnership's
tax year.

4. Form 8805 (Foreign Partner's Information Statement of Section 1446
Withholding Tax) and Form 8804 (Annual Return for Partnership
Withholding Tax (Section 1446))

[] File on or before the 15th day of the 4th month following the close
of the partnership's tax year (e.g., April 15th).

[] File Forms 8804 and 8805 separately from Form 1065. Obtain
extensions by filing Form 7004, Application for Automatic 6-Month
Extension of Time To File Certain Business Income Tax, Information, and
Other Returns. Furnish the respective Form 8805 to each foreign
partner.

[] Send to: Internal Revenue Service Center, Philadelphia, PA 19255.

[] Provide a copy to the UTP; see Regs. Sec. 1.1446-5(b)(1).

5. Form W-9 (Request for Taxpayer Identification Number and
Certification)

[] Request from a domestic UTP, if any (e.g., when the LTP is owned by
two UTPs, a domestic and a foreign one). The form serves to identify
the UTP as a domestic UTP. Sec. 1446 imposes a withholding tax
liability on only the foreign partner's share of ECTI. If the form is
not provided, the LTP must presume the partner is a foreign partner;
see Regs. Sec. 1.1446-1(c)(3).

Filing requirements for UTPs

1. Form 1065

[] File on or before the 15th day of the 4th month following the close
of the partnership's tax year (e.g., April 15th). If a UTP keeps its
accounts, books and records outside the U.S. and Puerto Rico, an
extension to file and pay is granted until the 15th day of the 6th
month following the end of the tax year (e.g., June 15th for
calendar-year taxpayers). Depending on the location of the principal
office, send Form 1065 to:

--Internal Revenue Service Center, Ogden, UT 84201-0011 (if in Florida,
for example); see instructions if total assets ore less than $10
million.

--Internal Revenue Service Center, Philadelphia, PA 19255-0011 (if
foreign).

However, do not file Form 1065 if there is no effectively connected
income and no U.S.-source income. Not filing a return when required may
affect the partners adversely. Sec. 6231(f) provides that, for any
partnership, if the tax matters partner resides outside the U.S. or the
books are maintained outside the U.S., no deduction, loss or credit is
allowable to any partner unless the partnership files a return.

2. Forms 8805 and 8804

[] File on or before the 15th day of the 4th month following the close
of the partnership's tax year (e.g., April 15th).

[] Send to: Internal Revenue Service Center, Philadelphia, PA 19255.

[] Provide a copy to a foreign partner.

3. Form W-8IMY (Certificate of Foreign Intermediary, Foreign
Flow-Through Entity, or Certain U.S. Branches for United States Tax
Withholding)

[] Furnish before paying, crediting or allocating any income. However,
because the LTP must be able to "reliably associate" income with a
partner of the UTP before it pays any Sec. 1446 tax, the UTP must
furnish the form to the LTP before it withholds and pays any tax to the
IRS (e.g., before the first installment, April 15th).

[] Furnish to the LTP.

[] Do not file with the IRS.

4. Allocation Statement

[] Furnish before paying, crediting or allocating any income. However,
because the LTP must be able to "reliably associate" income with a
partner of the UTP before it pays any Sec. 1446 tax, the UTP must
furnish the statement to the LTP before the LTP withholds and pays any
tax to the IRS (e.g., before the first installment, April 15th).

[] Attach Form W-8IMY, when furnishing the statement to the LTP.

Filing requirements far a UTP's foreign partner

1. Sec. 871(d) election statement (if the UTP's foreign partner makes
the election)

[] File with his or her annual tax return. However, the partner may
elect, without the IRS's consent, within the statute of limitations
prescribed for filing a refund claim; see Regs. Sec. 1.6012-1(b)(2)(i).
In filing the Sec. 871(d) election, the partner, in effect, triggers
the requirement for electing foreign partners of the UTP to file Form
1040NR, U.S. Nonresident Alien Tax Return, regardless of the fact that
they may not be currently engaged in an actual U.S. trade or business;
see Regs. Sec. 1.6012-1(b)(2)(i). According to Regs. Sec.
1.871-10(d)(1)(ii), the statement must include:

--A schedule of all U.S. real properly (or an interest therein) in
which the taxpayer owns a beneficial interest.

--The extent of the taxpayer's direct or beneficial interest in each
item of U.S. real properly.

--The location of each item of U.S. real properly.

--A description of any substantial improvements on each item of U.S.
real property.

--An identification of the tax year(s) in which a revocation or new
election has previously occurred.

[] Send to: Internal Revenue Service Center, Philadelphia, PA
19255-0215.

2. Form W-8ECI (Certificate of Foreign Person's Claim That Income Is
Effectively Connected With the Conduct of a Trade or Business in the
United States)

[] Furnish before paying, crediting or allocating any income. However,
because the LTP must be able to "reliably associate" income with a
partner of the UTP before it pays any Sec. 1446 lax, the UTP's foreign
partner must furnish this form to the LTP before the LTP withholds and
pays any tax to the IRS (e.g., before the first installment, April
15th).

[] Furnish one copy to the UTP and one copy to the LTP. The UTP
furnishes an executed copy to the LTP, attached to Form W-8IMY.

[] If a foreign partner of the UTP chooses not to make the Sec. 871(d)
election, he or she must file Form W-8BEN, Certificate of Foreign
Status of Beneficial Owner for United States Tax Withholding, rather
than Form W-8ECI.

3. Copy of the Sec. 871(d) election

[] Furnish before paying, crediting or allocating any income. However,
because the LTP must be able to "reliably associate" income with a
partner of the UTP before it pays any Sec. 1446 tax, the UTP's foreign
partner must furnish this form before the LTP withholds and pays any
tax to the IRS (e.g., before the first installment, April 15th).

[] Attach to Form W-8ECI and give to the UTP and the LTP.

[] If an election has not yet been made, provide a statement indicating
that a foreign partner of the UTP will make the election.

4. Copy of Form 8805

[] Attach to form 1040NR.

The form is required so that the UTP's foreign partner can receive a
credit for any withholding tax paid.

FROM MICHAEL KOSNITZKY, ESQ., BOIES, SCHILLER & FLEXNER LLP, MIAMI, FL (NOT AFFILIATED WITH DFK INTERNATIONAL). THE AUTHOR GRATEFULLY ACKNOWLEDGES THE HELP OF IVAN MITEV.