# FTB Nonresident Withholding — Palace Fund LLC / Sungho Park **Source:** California FTB notice dated 03/10/2026 (images: p1.HEIC, p2.HEIC) **Researched:** 2026-03-20 **Linear:** MAN-82 --- ## Bottom Line The FTB notice described the **domestic nonresident** framework (7%). That rate does not apply to Sungho Park. He is a **foreign partner** (South Korean resident, nonresident alien), so a stricter framework applies: | Item | Value | |------|-------| | Applicable rate | **12.3%** (not 7%) | | Withholding base | Sungho's **allocable share of CA income** — not distributions actually paid | | $1,500 threshold | **Does not apply** to foreign partners | | Form 590 exemption | **Not available** — foreign nationals cannot use Form 590 | | US-Korea treaty | **No effect** — California does not honor US income tax treaties | | CA source income | **100%** — Palace Fund operates entirely in California | --- ## Legal Framework California R&TC 18666 adopts IRC 1446 (as modified) for foreign LLC members. This is a separate regime from the domestic 7% withholding under R&TC 18662. **Two distinct regimes:** - **Domestic nonresident** (US person, not CA resident): 7%, threshold $1,500, Form 590 available, Form 592-PTE, Form 592-B - **Foreign partner** (non-US person): 12.3%, no threshold, Form 590 NOT available, Form 592-F, Form 592-A (quarterly) Sungho Park = foreign partner. The 12.3% regime applies. --- ## What Palace Fund Must Do ### Quarterly (Form 592-A) - Compute Sungho's estimated allocable share of CA income each quarter - Withhold 12.3% and remit to FTB using **Form 592-A** (Payment Voucher for Foreign Partner or Member Withholding) - Due dates (calendar-year LLC): **April 15, June 15, September 15, December 15** ### Annual (Form 592-F) - File **Form 592-F** (Foreign Partner or Member Annual Withholding Return) - Reports total CA income allocated to Sungho + total tax withheld - Due: **March 15** of the following year (calendar-year LLC) - Extension available if IRS grants extension on Form 8804 (via Form 7004) - Do NOT use Form 592-PTE — that is for domestic nonresident members only ### Sungho's California Return - Sungho must file **Form 540NR** (California nonresident return) to claim credit for withheld amounts - Withholding is a prepayment of his CA income tax liability --- ## Only Reduction Mechanism **Form 589** (Nonresident Reduced Withholding Request) — filed by the LLC on Sungho's behalf before distributions are made. Documents deductible California expenses to reduce required withholding. Deductible amount capped at 50% of gross CA source payments. Requires FTB approval (~10 business days online, ~21 by mail). Must be approved before taking effect. No exemption exists. Treaty does not help. This is the only path to a lower rate. --- ## Failure to Comply The LLC becomes directly liable for unwithheld tax plus interest. Additional penalties: - Up to $340/form for failure to file - Greater of $680 or 10% of required withholding for intentional disregard --- ## Federal §1446 Withholding — Separate Analysis The operating agreement already contemplates IRC §1446 withholding on Sungho's "effectively connected income." After review: **§1446 withholding is likely not required**, because Palace Fund probably has no ECI. **IRC §864(b)(2) trading-for-own-account safe harbor:** A partnership that trades in stocks and securities for its own account is NOT considered engaged in a US trade or business, regardless of how frequently it trades. Palace Fund's stated business per the operating agreement is "buying and selling stocks, bonds and other securities for the account of the Company." This falls squarely within the safe harbor. **Consequence:** If Palace Fund is not engaged in a US trade or business, there is no ECI, and §1446 withholding = zero. The operating agreement's §1446 clause is correctly drafted — it applies if there is ECI — but there simply won't be any. **What actually gets withheld at the federal level:** | Income Type | Treatment | Withholding | |-------------|-----------|-------------| | Capital gains on US stocks | Art. 16 treaty exemption → not US taxable | None | | Dividends from US companies | FDAP, withheld by broker at 15% (treaty rate, requires Form W-8BEN + 제34조의2 election) | 15% at source | | Interest from US sources | FDAP, withheld by broker at 12% (treaty rate) | 12% at source | **Federal forms required annually:** - Form 1065 (partnership return) + Schedule K-1 to Sungho — due March 15 (extension to September 15) - No Form 8804/8805 required if no ECI **Sungho's federal filing:** Form 1040-NR required if he has any US-source income. Likely only FDAP dividends/interest withheld at source → he can file to claim treaty benefits or may owe nothing additional. --- ## Form 589 — Recommendation: Do Not File Form 589 (Nonresident Reduced Withholding Request) is the only mechanism to reduce the 12.3% California rate. It works by deducting Palace Fund's California-deductible expenses before computing the withholding base. Palace Fund's deductible California expenses are minimal: - CA franchise tax ($800/yr) - State filing fees (under $50) - Legal/accounting (TBD, but minimal for a one-investor fund) - Trading commissions (minimal with modern brokers) If the fund earns $30,000 in a year, total deductible expenses might be ~$1,000. The Form 589 would reduce the withholding base from $30,000 to $29,000 — saving $123. The approval process takes 10–21 business days and requires a formal FTB application. Not worth it. **Recommendation: Do not file Form 589. Withhold at 12.3%, have Sungho file 540NR.** If returns grow substantially in future years, revisit. --- ## What Sungho Needs to Do Before the first distribution: 1. **Obtain a US ITIN** — Required to file CA Form 540NR. Apply using Form W-7, filed with first 1040-NR or submitted separately to IRS with certified passport copy. No US visit required; can mail to IRS Austin Service Center. 2. **Provide Form W-8BEN to Palace Fund** — Certifies his foreign status and Korean residency, enabling treaty rates. Palace Fund must keep on file and provide to broker. 3. **Provide Form W-8BEN to the brokerage** — For treaty-reduced dividend (15%) and interest (12%) withholding at the broker level. 4. **File Korean 제34조의2 election** — Elects LLC fiscal transparency under Korean law. Required for IRC §894(c) to allow treaty benefits on FDAP income. Without this, Korean law treats the LLC as opaque → 30% withholding (not 15%) on dividends. --- ## Compliance Calendar ### Quarterly | Due Date | Form | What | |----------|------|------| | April 15 | Form 592-A | CA withholding payment on Q1 CA income | | June 15 | Form 592-A | CA withholding payment on Q2 CA income | | September 15 | Form 592-A | CA withholding payment on Q3 CA income | | December 15 | Form 592-A | CA withholding payment on Q4 CA income | ### Annual | Due Date | Form | What | |----------|------|------| | March 15 | Form 1065 + K-1 | Federal partnership return; K-1 to Sungho | | March 15 | Form 592-F | CA annual foreign partner withholding return | | April 15 | Form 1040-NR | Sungho's federal nonresident return (if income) | | October 15 | CA Form 540NR | Sungho's CA nonresident return; claims 592-A credit | All deadlines above assume calendar-year filing. Extensions available: Form 7004 for 1065/592-F (6 months), Form 4868 for 1040-NR (6 months, no extra time to pay). --- ## Action Items - [x] Determine whether to file Form 589 → **No. Not worth it for minimal expense base.** - [ ] Sungho: Apply for US ITIN (Form W-7) before first distribution - [ ] Sungho: Sign and deliver Form W-8BEN to Palace Fund and to the brokerage - [ ] Sungho: File Korean 제34조의2 transparent entity election - [ ] Palace Fund: Set up accounting to track Sungho's quarterly allocable CA income - [ ] Palace Fund: File Form 592-A quarterly once income is earned - [ ] Palace Fund: File Form 592-F by March 15 each year - [ ] Palace Fund: File Form 1065 + K-1 by March 15 each year (extension to Sept 15 if needed) - [ ] Sungho: File CA Form 540NR by October 15 each year (claims 592-A withholding as credit)