Section 1446 Regulations Proposed for Withholding on Effectively Connected Income Allocable to Foreign Partners

The authors analyze the regulations proposed in September 2003 and offer suggestions for making the Service's approach more workable.Proposed regulations issued in September 2003 provide rules for the implementation of Section 1446's requirement that a partnership pay to the IRS taxes on behalf of a foreign partner with respect to that partner's applicable percentage of the partnership's effectively connected income (ECTI). SECTION 1446 AND PRIOR GUIDANCE.Section 1446(a) provides that if a partnership has effectively connected taxable income for any taxable year, and any portion of such income is allocable under Section 704 to a foreign partner, the partnership "shall pay a withholding tax under this Section at such time and in such manner as the Secretary shall by regulations prescribe." For this purpose, Section 1446(c) defines ECTI as the taxable income of the partnership that is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the U.S., subject to certain adjustments The withholding tax imposed on partnerships pursuant to Section 1446 is based upon ECTI, and therefore is imposed regardless of when or whether the partnership makes distributions to its foreign partners