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TAX CLINIC

and Jan. 3, 2023, if it would benefit in the first installment as 50% of the Background
from doing so. For example, if corporate total tax that could have been deferred Sec. 864(c)(8) treats gain or loss from
income tax rates are higher in 2022 than for all of 2020 (that is, an annualized the disposition of an interest in a part-
in 2021, a corporate employer with a cal- approach), or instead 50% of the tax nership that is engaged in a U.S. trade or
endar tax year might benefit from paying that could have been deferred for each business by a nonresident alien individ-
its first installment of deferred employ- quarter. The IRS has informally indi- ual or foreign corporation as effectively
ment tax on Jan. 3, 2022, rather than in cated that it expects employers to use the connected with the conduct of that U.S.
2021. Because taxpayers are not required quarterly approach. For example, under trade or business to the extent the gain
to apply Sec. 7503, the employer could an annualized approach, an employer or loss is allocable to the partnership’s
later decide whether to make the second with $4,030,000 in deferrable Social Se- U.S. business assets.
installment payment in 2022 or 2023. curity tax liability would owe $1,705,000 Sec. 1446(f) is a collection mecha-
Some employers may wish to pay by Jan. 3, 2022; under a quarterly nism for Sec. 864(c)(8). It generally
their deferred employment taxes well approach, the employer would owe a requires transferees purchasing interests
before these deadlines. For example, an different amount depending on what in such partnerships from non-U.S.
employer with a calendar tax year may was deferrable and actually deferred transferors to deduct and withhold a
benefit from claiming an income tax in each quarter. Thus, if the employer 10% tax from the amount realized. The
deduction for the deferred taxes on its were to use the annualized approach regulations on transfers of PTP interests
2020 return. Despite the general rule instead and pay only $1,705,000 by the require the tax to be withheld by the
that taxes are deductible in the year paid, Jan. 3, 2022 deadline, it seems the IRS transferor’s broker. Sec. 1446(f)(4) re-
taxes paid within 8½ months after the would treat the entire $4,030,000 that quires partnerships to withhold tax from
end of the tax year may be deducted in was deferred from 2020 as ineligible for future distributions (backstop withhold-
the prior tax year if the recurring-item deferral and assert a $403,000 failure- ing) to transferees that were required
exception under Sec. 461(h)(3) applies. to-deposit penalty under Sec. 6656 to withhold tax on the amount realized
In sum, employers may have flex- (10% of $4,030,000) if the amount paid by the non-U.S. transferor but failed to
ibility to deduct at least some portion is less than what would be due when withhold all the tax due. Backstop with-
of their deferred taxes in 2020, 2021, computing the liability using a quar- holding continues until the amount not
2022, or 2023, depending on when they terly approach. withheld, plus interest, is recovered.
choose to pay them. On the other hand, From Christa Bierma, J.D., and The IRS released final regulations
if an employer does not pay the full Stephen Lagarde, J.D., Washington, D.C. (T.D. 9926) under Sec. 1446(f) in Octo-
amount due by each of the two install- ber 2020. The regulations were supposed
ment deadlines, significant penalties may to apply to withholding on certain trans-
apply to the entire amount of employ- Foreign Income & Taxpayers fers and distributions on and after Jan.
ment tax deferred from 2020. 1, 2022. The IRS said it received com-
Repayment timing and amounts: IRS extends withholding date ments that taxpayers faced significant
A separate payment must be made for for certain PTP transfers, challenges to comply by that date.
each quarter in which the taxes are distributions
deferred. Half of the Social Security tax The IRS announced in Notice Dates extended
that could have been deferred, with- 2021-51 that it will amend the regula- In response to the comments, the IRS
out regard to how much was actually tions under Secs. 1446(a) and 1446(f) intends to amend the regulations to
deferred, must be paid by Jan. 3, 2022. to defer the applicability date of certain extend the applicability date for the fol-
For an employer that deferred less than provisions by one year to Jan. 1, 2023. lowing provisions:
the eligible amount for a quarter, Social The affected provisions relate to with- ■ Withholding and reporting on
Security taxes already paid count toward holding (1) on transfers of interests in transfers of PTP interests under Sec.
the repayment. For example, an em- publicly traded partnerships (PTPs); (2) 1446(f)(1) that occur on or after Jan.
ployer that could have deferred $20,000 on distributions made with respect to 1, 2023 (Regs. Sec. 1.1446(f)-4(f));
in Social Security taxes for a quarter but PTP interests; and (3) by non–publicly ■ Distributions with respect to PTP
deferred $15,000 must pay $5,000 by traded partnerships on distributions interests that occur on or after Jan. 1,
Jan. 3, 2022, and the remaining $10,000 to transferees who failed to with- 2023 (Regs. Sec. 1.1446-4 (as listed
by Jan. 3, 2023. hold properly. in Regs. Sec. 1.1446-7)); and
It was previously unclear whether Taxpayers may rely on the modified ■ Requiring partnerships to withhold
the IRS would treat the tax to be repaid applicability dates immediately. under Sec. 1446(f)(4) on transfers

10 January 2022 The Tax Adviser