Prop. regs. on partnership withholding on foreign partners.On Sept. 2, 2003, the Treasury issued proposed regulations (REG-108524-00) on a partnership's obligation to withhold with·hold v. with·held , with·hold·ing, with·holds v.tr. 1. To keep in check; restrain. 2. To refrain from giving, granting, or permitting. See Synonyms at keep. 3. and pay tax under Sec. 1446 on effectively connected taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. (ECTI ECTI Echanges et Consultations Techniques Internationaux (Paris, France) ) allocable al·lo·ca·ble adj. Capable of being allocated. Adj. 1. allocable - capable of being distributed allocatable, apportionable distributive - serving to distribute or allot or disperse to its foreign partners. Until these regulations are finalized See finalization. , partnerships subject to Sec. 1446 must continue to comply with Rev. Proc. 89-31, as modified, until the partnership's first tax year starting after the date the final regulations are issued. The proposed regulations only affect partnerships engaged in a trade or business in the U.S. that have one or more foreign partners. Procedurally, they are similar to guidance issued in Rev. Procs. 89-31 and 92-66. Background Sec. 1446 originally required both domestic and foreign partnerships with any income, gain or loss effectively connected with the conduct of a U.S. trade or business to withhold a 20% tax on any amount distributed to a foreign partner. Congress revised Sec. 1446 in 1988 by imposing a withholding tax The amount legally deducted from an employee's wages or salary by the employer, who uses it to prepay the charges imposed by the government on the employee's yearly earnings. (Set. 1446 tax) on the ECTI allocable to a partnership's foreign partners, whether or not distributed. This change placed new importance on the determination of a partner's allocable share of the partnership's income. These proposed regulations incorporate this statutory change from distribution-based to allocation-based withholding Withholding Any tax that is taken directly out of an individual's wages or other income before he or she receives the funds. Notes: In other words, these funds are "withheld" from your wages. . Subchapter K Analysis A partner's allocable (or distributable) share of a partnership's income is determined under Sec. 704(b). In general, a partner's allocable share of the partnership's tax items is based on that partner's interest in the partnership, unless the partnership agreement contains a different allocation that has substantial economic effect. A partnership agreement may allocate particular items of gross income or deduction, or may allocate net income or loss (bottom-line allocations). Bottom-line allocations are deemed to consist of a pro-rata piece of every partnership tax item. In addition, a partnership allocation that includes a preferred return is usually made out of bottom-line income. Thus, for example, in a year in which a partnership earns income sufficient to cover only the preferred return, that return carries with it all of the partnership's ECTI for the year. Whether or not allocations are made out of net income or items of gross income or deduction, partnerships with foreign partners and ECTI should re-examine re·ex·am·ine also re-ex·am·ine tr.v. re·ex·am·ined, re·ex·am·in·ing, re·ex·am·ines 1. To examine again or anew; review. 2. Law To question (a witness) again after cross-examination. the nature of their Sec. 704(b) allocations to ensure compliance with Sec. 1446 withholding requirements in light of the proposed regulations. FROM BARKSDALE PENICK, WASHINGTON, DC |
|
||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion