SERVICE SPECIFIES TIMING REQUIREMENTS FOR DOMESTIC PARTNERSHIP WITHHOLDING ON FOREIGN PARTNERS' DISTRIBUTIVE SHARE.

Rev. Rul. 89-17

ISSUE

What is the proper time for a domestic partnershop to withhold tax on a foreign partner's distributive share of fixed or determinable annual or periodical income that is not effectively connected with a trade or business within the United States and has not been actually distributed?

FACTS

P, a domestic partnership, earns fixed or determinable annual or periodical income during the taxable year that is not effectively connected with a trade or business within the United States. P has one or more nonresident alien partners. During the taxable year, P does not make any distribution to its partners. The accounting information necessary to compute the nonresident alien partner's distributive share of P's income is not available until after the end of P's taxable year. P's foreign partners are not entitled to the benefits of an income tax treaty.

LAW AND ANALYSIS

Section 1441(a) of the Internal Revenue Code of 1986 provides for the withholding of a 30 percent tax upon items of fixed or determinable annual or periodical income of a nonresident alien individual. Section 1441(b) of the Code defines the types of income subject to withholding, providing that in the case of a nonresident alien individual who is a member of a domestic partnership, the income subject to withholding includes fixed or determinable income included in the nonresident alien`s distributive share of partnership income. Section 1.1441-3(f) of the Income Tax Regulations further states: "Domestic partnerships are required to withhold the tax at source. . . [on items of fixed or determinable annual or periodical income] that are included in the distributive share (including amounts that are not actually distributed) of a member of such partnership who is a nonresident alien. . ." Thus, items of fixed or determinable annual or periodical income included in a nonresident alien partner's distributive share, whether actually distributed or not, are subject to withholding unless an exception is provided by regulations.

Neither the Code nor the Regulations specifically state when a partnership must withhold and pay over with respect to amounts of fixed or determinable annual or periodical income that are deemed distributed on the last day of the partnership's taxable year. Under section 706(a), a partner is deemed to receive during his taxable year the partnership distributive share, as defined in section 702, for the partnership taxable year ending with or within the partner's year. Thus a distribution for section 1441 purposes is deemed to occur on the last day of the partnership's taxable year. Withholding should occur as soon as reasonably possible following the deemed receipt of the distribution. Accordingly, withholding on the distributive shares of a nonresident alien's partnership income subject to section 1411, not previously distributed to the partner, shall be made and paid over by the date on which Schedule K or K-1 is sent to that partner. In any event, withholding shall be made and paid over no later than March 15 following the close of the partnership's tax year if its accounting period is the calendar year, or in the case of a fiscal year partnership, by the fifteenth day of the third month following the close of the fiscal year.

HOLDING

A domestic partnership is required to withhold tax on a foreign partner's distributive share of fixed or determinable annual or periodical income that is subject to section 1441, but which has not actually been distributed, by the date on which partnership forms are sent to individual partner, but in any event no later than the fifteenth day of the third month after the taxable year of the partnership closes.

This ruling is not intended to address issues arising under section 1446 of the Code (regarding withholding on effectively connected income), nor does it address the application of any other section not specified.

DRAFTING INFORMATION

The principal author of this revenue ruling if Emerson Yearwood of the Office of the Associate Chief Counsel (International), Internal Revenue Service. For further information regarding this revenue ruling contact Mr. Yearwood on (202)566-3490 (not a toll-free call).