INCOME TAX EXCISE TAX - Internal Revenue Service · application of the tax laws, including all...

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3 Bulletin No. 1996–19 May 6, 1996 HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations. INCOME TAX Rev. Rul. 96–24, page 5. Federal rates; adjusted federal rates; adjusted federal long-term rate, and the long-term exempt rate. For purposes of sections 1274, 1288, 382, and other sections of the Code, tables set forth the rates for May 1996. Rev. Rul. 96–25, page 4. Fringe benefits aircraft valuation formula. For purposes of section 1.61–21(g) of the regulations, relating to the rule for valuing non-commercial flights on employer- provided aircraft, the Standard Industry Fare Level (SIFL), cents-per-mile rates, and terminal charges in effect for 1996 are set forth. Rev. Rul. 95–66 modified. INTL–062–90; INTL–0032–93; INTL–52–86; INTL–52–94, page 26. General revision of regulations under Chapter 3 of the Code relating to withholding of tax on U.S. source income paid to foreign persons and related collection, refunds, and credits; revision of information reporting regulations under subpart B of Chapter 61 and backup withholding regulations under section 3406; and removal of regulations under part 35a and certain regulations under income tax treaties. EXEMPT ORGANIZATIONS Announcement 96–39, page 84. Families for Children, Golden Valley, MN, no longer qualifies as an organization to which contributions are deductible under section 170 of the Code. EXCISE TAX Notice 96–28, page 7. A determination has been made to add butyl benzyl phthalate to the list of taxable substances in section 4672(a)(3) of the Code. ADMINISTRATIVE Notice 96–29, page 7. Credit for producing fuel from a nonconventional source, section 29 inflation adjustment factor, and section 29 reference price. This notice publishes the section 29 inflation adjustment factor, nonconventional source fuel credit, and the section 29 reference price for calendar year 1995. These data are used to determine the credit allowable on fuel produced from a nonconventional source under section 29 of the Code. Rev. Proc. 96–30, page 8. Section 355 checklist questionnaire. This procedure sets forth in a checklist questionnaire the information that must be included in a request for rulings under section 355. Announcement 96–38, page 84. The instructions for Schedule SSA (Form 5500), Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits, are corrected. Announcement 96–40, page 85. T.D. 8653, 1996–12 I.R.B. 4, relating to the character and timing of gain or loss from certain hedging transactions entered into by members of a consolidated group, is corrected. Finding Lists begin on page 87.

Transcript of INCOME TAX EXCISE TAX - Internal Revenue Service · application of the tax laws, including all...

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Bulletin No. 1996–19May 6, 1996

HIGHLIGHTSOF THIS ISSUE

These synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 96–24, page 5.Federal rates; adjusted federal rates; adjusted federallong-term rate, and the long-term exempt rate. Forpurposes of sections 1274, 1288, 382, and othersections of the Code, tables set forth the rates for May1996.

Rev. Rul. 96–25, page 4.Fringe benefits aircraft valuation formula. For purposes ofsection 1.61–21(g) of the regulations, relating to therule for valuing non-commercial flights on employer-provided aircraft, the Standard Industry Fare Level(SIFL), cents-per-mile rates, and terminal charges ineffect for 1996 are set forth. Rev. Rul. 95–66modified.

INTL–062–90; INTL–0032–93; INTL–52–86;INTL–52–94, page 26.General revision of regulations under Chapter 3 of theCode relating to withholding of tax on U.S. sourceincome paid to foreign persons and related collection,refunds, and credits; revision of information reportingregulations under subpart B of Chapter 61 and backupwithholding regulations under section 3406; andremoval of regulations under part 35a and certainregulations under income tax treaties.

EXEMPT ORGANIZATIONS

Announcement 96–39, page 84.Families for Children, Golden Valley, MN, no longerqualifies as an organization to which contributions aredeductible under section 170 of the Code.

EXCISE TAX

Notice 96–28, page 7.A determination has been made to add butyl benzylphthalate to the list of taxable substances in section4672(a)(3) of the Code.

ADMINISTRATIVE

Notice 96–29, page 7.Credit for producing fuel from a nonconventional source,section 29 inflation adjustment factor, and section 29reference price. This notice publishes the section 29inflation adjustment factor, nonconventional source fuelcredit, and the section 29 reference price for calendaryear 1995. These data are used to determine the creditallowable on fuel produced from a nonconventionalsource under section 29 of the Code.

Rev. Proc. 96–30, page 8.Section 355 checklist questionnaire. This procedure setsforth in a checklist questionnaire the information thatmust be included in a request for rulings under section355.

Announcement 96–38, page 84.The instructions for Schedule SSA (Form 5500),Annual Registration Statement Identifying SeparatedParticipants With Deferred Vested Benefits, arecorrected.

Announcement 96–40, page 85.T.D. 8653, 1996–12 I.R.B. 4, relating to the characterand timing of gain or loss from certain hedgingtransactions entered into by members of a consolidatedgroup, is corrected.

Finding Lists begin on page 87.

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Mission of the ServiceThe purpose of the Internal Revenue Service is tocollect the proper amount of tax revenue at the leastcost; serve the public by continually improving the

quality of our products and services; and perform in amanner warranting the highest degree of publicconfidence in our integrity, efficiency and fairness.

Statement of Principlesof Internal RevenueTax AdministrationThe function of the Internal Revenue Service is toadminister the Internal Revenue Code. Tax policyfor raising revenue is determined by Congress.

With this in mind, it is the duty of the Service tocarry out that policy by correctly applying the lawsenacted by Congress; to determine the reasonablemeaning of various Code provisions in light of theCongressional purpose in enacting them; and toperform this work in a fair and impartial manner,with neither a government nor a taxpayer point ofview.

At the heart of administration is interpretation of theCode. It is the responsibility of each person in theService, charged with the duty of interpreting thelaw, to try to find the true meaning of the statutoryprovision and not to adopt a strained construction inthe belief that he or she is ‘‘protecting the revenue.’’The revenue is properly protected only when we as-certain and apply the true meaning of the statute.

The Service also has the responsibility of applyingand administering the law in a reasonable,practical manner. Issues should only be raised byexamining officers when they have merit, neverarbitrarily or for trading purposes. At the sametime, the examining officer should never hesitateto raise a meritorious issue. It is also importantthat care be exercised not to raise an issue or toask a court to adopt a position inconsistent withan established Service position.

Administration should be both reasonable andvigorous. It should be conducted with as littledelay as possible and with great courtesy andconsiderateness. It should never try to overreach,and should be reasonable within the bounds of lawand sound administration. It should, however, bevigorous in requiring compliance with law and itshould be relentless in its attack on unreal taxdevices and fraud.

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IntroductionThe Internal Revenue Bulletin is the authoritativeinstrument of the Commissioner of Internal Revenue forannouncing official rulings and procedures of theInternal Revenue Service and for publishing TreasuryDecisions, Executive Orders, Tax Conventions, legisla-tion, court decisions, and other items of generalinterest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscrip-tion basis. Bulletin contents of a permanent nature areconsolidated semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletinall substantive rulings necessary to promote a uniformapplication of the tax laws, including all rulings thatsupersede, revoke, modify, or amend any of thosepreviously published in the Bulletin. All publishedrulings apply retroactively unless otherwise indicated.Procedures relating solely to matters of internalmanagement are not published; however, statements ofinternal practices and procedures that affect the rightsand duties of taxpayers are published.

Revenue rulings represent the conclusions of theService on the application of the law to the pivotal factsstated in the revenue ruling. In those based onpositions taken in rulings to taxpayers or technicaladvice to Service field offices, identifying details andinformation of a confidential nature are deleted toprevent unwarranted invasions of privacy and to complywith statutory requirements.

Rulings and procedures reported in the Bulletin do nothave the force and effect of Treasury DepartmentRegulations, but they may be used as precedents.Unpublished rulings will not be relied on, used, or citedas precedents by Service personnel in the disposition ofother cases. In applying published rulings and proce-dures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must beconsidered, and Service personnel and others con-cerned are cautioned against reaching the sameconclusions in other cases unless the facts andcircumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based onprovisions of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows:Subpart A, Tax Conventions, and Subpart B, Legislationand Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts andSubparts. Also included in this part are Bank SecrecyAct Administrative Rulings. Bank Secrecy Act Admin-istrative Rulings are issued by the Department of theTreasury’s Office of the Assistant Secretary(Enforcement).

Part IV.—Items of General Interest.With the exception of the Notice of Proposed Rulemak-ing and the disbarment and suspension list included inthis part, none of these announcements are consoli-dated in the Cumulative Bulletins.

The first Bulletin for each month includes an index forthe matters published during the preceding month.These monthly indexes are cumulated on a quarterlyand semiannual basis, and are published in the firstBulletin of the succeeding quarterly and semi-annualperiod, respectively.

The Bulletin Index-Digest System, a research andreference service supplementing the Bulletin, may beobtained from the Superintendent of Documents on asubscription basis. It consists of four Services: ServiceNo. 1, Income Tax; Service No. 2, Estate and GiftTaxes; Service No. 3, Employment Taxes; Service No.4, Excise Taxes. Each Service consists of a basicvolume and a cumulative supplement that provides (1)finding lists of items published in the Bulletin, (2)digests of revenue rulings, revenue procedures, andother published items, and (3) indexes of Public Laws,Treasury Decisions, and Tax Conventions.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 61.—Gross Income Defined

26 CFR 1.61–21: Taxation of fringebenefits.

Fringe benefits aircraft valuationformula. For purposes of section 1.61–21(g) of the regulations, relating to therule for valuing non-commercial flightson employer-provided aircraft, theStandard Industry Fare Level (SIFL),cents-per-mile rates and terminalcharges in effect for 1996 are set forth.Rev. Rul. 95–66 modified.

Rev. Rul. 96–25

For purposes of the taxation of fringebenefits under section 61 of the InternalRevenue Code, section 1.61–21(g) ofthe Income Tax Regulations provides arule for valuing noncommercial flightson employer-provided aircraft. Section1.61–21(g)(5) of the Income Tax Reg-ulations provides an aircraft valuationformula to determine the value of suchflights. The value of a flight is deter-mined under the base aircraft valuationformula (also known as the Standard

Industry Fare Level formula or SIFL) bymultiplying the SIFL cents-per-milerates applicable for the period duringwhich the flight was taken by theappropriate aircraft multiple provided insection 1.61–21(g)(7) and then addingthe applicable terminal charge. TheSIFL cents-per-mile rates in the formulaand the terminal charge are calculatedby the Department of Transportation andare revised semi-annually.

The following chart sets forth theterminal charges and SIFL mileagerates:

Period During Which theFlight Was Taken Terminal Charge SIFL Mileage Rates

1/1/96-6/30/96 $32.20 Up to 500 miles = $.1761 per mile

501–1500 miles = $.1343

Over 1500 miles = $.1291

EFFECT ON OTHER REVENUERULING

Rev. Rul. 95–66, 1995–40 I.R.B. 4,is modified.

DRAFTING INFORMATION

The principal author of this Revenueruling is Thomas R. Foley of the Officeof the Associate Chief Counsel(Employee Benefits and Exempt Orga-nizations). For further information re-garding this revenue ruling contact Mr.Foley on (202) 622-6050 (not a toll-free call).

Section 42.—Low-Income HousingCredit

The adjusted applicable federal short-term,mid-term, and long-term rates are set forth forthe month of May 1996. See Rev. Rul. 96–24,page 5.

Section 280G.—Golden ParachutePayments

Federal short-term, mid-term, and long-termrates are set forth for the month of May 1996.See Rev. Rul. 96–24, page 5.

Section 355.—Distribution of stockand securities of a controlledcorporation

25 CFR 1.355–1: Distribution of stock andsecurities of a controlled corporation.

The revenue procedure sets forth in a checklistquestionnaire the information that must beincluded in a request for rulings under § 355. SeeRev. Proc. 96–30, page 8.

Section 382.—Limitation on NetOperating Loss Carryforwards andCertain Built-In Losses FollowingOwnership Change

The adjusted federal long-term rate is set forthfor the month of May 1996. See Rev. Rul. 96–24, page 5.

Section 412.—Minimum FundingStandards

The adjusted applicable federal short-term,mid-term, and long-term rates are set forth forthe month of May 1996. See Rev. Rul. 96–24,page 5.

Section 467.—Certain Payments forthe Use of Property or Services

The adjusted applicable federal short-term,mid-term, and long-term rates are set forth forthe month of May 1996. See Rev. Rul. 96–24,page 5.

Section 468.—Special Rules forMining and Solid Waste Reclamationand Closing Costs

The adjusted applicable federal short-term,mid-term, and long-term rates are set forth forthe month of May 1996. See Rev. Rul. 96–24,page 5.

Section 483.—Interest on CertainDeferred Payments

The adjusted applicable federal short-term,mid-term, and long-term rates are set forth forthe month of May 1996. See Rev. Rul. 96–24,page 5.

Section 807.—Rules for CertainReserves

The adjusted applicable federal short-term,mid-term, and long-term rates are set forth forthe month of May 1996. See Rev. Rul. 96–24,page 5.

Section 846.—Discounted UnpaidLosses Defined

The adjusted applicable federal short-term,mid-term, and long-term rates are set forth forthe month of May 1996. See Rev. Rul. 96–24,page 5.

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Section 1274.—Determination ofIssue Price in the Case of CertainDebt Instruments Issued forProperty

(Also Sections 42, 280G, 382, 412, 467, 468,482, 483, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federalrates; adjusted federal long-term rate,and the long-term exempt rate. Forpurposes of sections 1274, 1288, 382,and other sections of the Code, tablesset forth the rates for May 1996.

Rev. Rul. 96–24

This revenue ruling provides variousprescribed rates for federal income taxpurposes for May 1996 (the currentmonth.) Table 1 contains the short-term, mid-term, and long-term applica-ble federal rates (AFR) for the currentmonth for purposes of section 1274(d)of the Internal Revenue Code. Table 2contains the short-term, mid-term, andlong-term adjusted applicable federalrates (adjusted AFR) for the currentmonth for purposes of section 1288(b).

Table 3 sets forth the adjusted federallong-term rate and the long-term tax-exempt rate described in section 382(f).Table 4 contains the appropriate per-centages for determining the low-income housing credit described insection 42(b)(2) for buildings placed inservice during the current month. Fi-nally, Table 5 contains the federal ratefor determining the present value of anannuity, an interest for life or for aterm of years, or a remainder or areversionary interest for purposes ofsection 7520.

REV. RUL. 96–24 TABLE 1

Applicable Federal Rates (AFR) for May 1996

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-Term

AFR 5.76% 5.68% 5.64% 5.61%110 AFR 6.35% 6.25% 6.20% 6.17%120 AFR 6.94% 6.82% 6.76% 6.73%130 AFR 7.52% 7.38% 7.31% 7.27%

Mid-TermAFR 6.36% 6.26% 6.21% 6.18%

110 AFR 7.01% 6.89% 6.83% 6.79%120 AFR 7.65% 7.51% 7.44% 7.40%130 AFR 8.31% 8.14% 8.06% 8.01%150 AFR 9.61% 9.39% 9.28% 9.21%175 AFR 11.26% 10.96% 10.81% 10.72%

Long-TermAFR 6.83% 6.72% 6.66% 6.63%

110 AFR 7.53% 7.39% 7.32% 7.28%120 AFR 8.22% 8.06% 7.98% 7.93%130 AFR 8.93% 8.74% 8.65% 8.58%

REV. RUL. 96–24 TABLE 2

Adjusted AFR for May 1996

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-termadjusted AFR 3.75% 3.72% 3.70% 3.69%

Mid-termadjusted AFR 4.69% 4.64% 4.61% 4.60%

Long-termadjusted AFR 5.68% 5.60% 5.56% 5.54%

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REV. RUL. 96–24 TABLE 3

Rates Under Section 382 for May 1996

Adjusted federal long-term rate for the current month 5.68%

Long-term tax-exempt rate for ownership changes during the current month (the highest of theadjusted federal long-term rates for the current month and the prior two months.) 5.68%

REV. RUL. 96–24 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for May 1996

Appropriate percentage for the 70% present value low-income housing credit 8.55%

Appropriate percentage for the 30% present value low-income housing credit 3.66%

REV. RUL. 96–24 TABLE 5

Rate Under Section 7520 for May 1996

Applicable federal rate for determining the present value of an annuity, an interest for life ora term of years, or a remainder or reversionary interest 7.6%

Section 1288.—Treatment of OriginalIssue Discount on Tax-ExemptObligations

The adjusted applicable federal short-term,mid-term, and long-term rates are set forth forthe month of May 1996. See Rev. Rul. 96–24,page 5.

Section 7520.—Valuation Tables

The adjusted applicable federal short-term,mid-term, and long-term rates are set forth forthe month of May 1996. See Rev. Rul. 96–24,page 5.

Section 7872.—Treatment of Loanswith Below-Market Interest Rates

The adjusted applicable federal short-term,mid-term, and long-term rates are set forth forthe month of May 1996. See Rev. Rul. 96–24,page 5.

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Part III. Administrative, Procedural, and Miscellaneous

Tax on Certain Imported Substances;Notice of Determination

Notice 96–28

This notice announces a determi-nation, under Notice 89–61, 1989–1C.B. 717, that the list of taxablesubstances in § 4672(a)(3) will bemodified to include butyl benzyl phtha-late. This modification is effectiveApril 1, 1991.

Background

Under § 4672(a), an importer orexporter of any substance may requestthat the Secretary determine whetherthat substance should be listed as ataxable substance. The Secretary shalladd the substance to the list of taxablesubstances in § 4672(a)(3) if the Secre-tary determines that taxable chemicalsconstitute more than 50 percent of theweight, or more than 50 percent of thevalue, of the materials used to producethe substance. This determination is tobe made on the basis of the pre-dominant method of production. Notice89–61, sets forth the rules relating tothe determination process.

Determination

On March 22, 1996, the Secretarydetermined that butyl benzyl phthalateshould be added to the list of taxablesubstances in § 4672(a)(3), effectiveApril 1, 1991.

The rate of tax prescribed for butylbenzyl phthalate, under § 4671(b)(3), is$5.54 per ton. This is based upon aconversion factor for methane of 0.05,a conversion factor for propylene of0.17, a conversion factor for xylene of0.47, a conversion factor for toluene of0.32, and a conversion factor forchlorine of 0.26.

The petitioner is Monsanto Com-pany, a manufacturer and exporter ofthis substance. No material commentswere received on this petition. Thefollowing information is the basis forthe determination.

HTS number: 2917.39.2000CAS number: 85–68–7

Butyl benzyl phthalate is derivedfrom the taxable chemicals methane,propylene, xylene, toluene, and chlo-

rine and is a liquid produced predomi-nantly by the reaction of n-butanol andphthalic anhydride, followed by a reac-tion with benzyl chloride in the pres-ence of a catalyst. n-butanol is man-ufactured by the hydrogenation ofn-butyraldehyde, which is derived frompropylene and synthesis gas (hydrogenand synthesis gas are derived fromnatural gas). Benzyl chloride is pro-duced by direct photochemical chlo-rination of toluene. Phthalic anhydrideis produced by the reaction of o-xylenewith air in the presence of a catalyst.

The stoichiometric material con-sumption formula for this substance is:

CH4 (methane) + C3H6 (propylene) +C8H10 (xylene) + 3 O2 (oxygen) +C7H8 (toluene) + Cl2 (chlorine)-----. C19H20O4 (butyl benzyl phthalate) + 2 HCl (hydrochloricacid) + H2 (hydrogen) + 2 H2O(water)

Butyl benzyl phthalate has beendetermined to be a taxable substancebecause a review of its stoichiometricmaterial consumption formula showsthat, based on the predominant methodof production, taxable chemicals con-stitute 77.25 percent by weight of thematerials used in its production.

The principal author of this notice isRuth Hoffman, Office of AssistantChief Counsel (Passthroughs and Spe-cial Industries). For further informationregarding this notice contact RuthHoffman on (202) 622-3130 (not a toll-free number).

Credit for Producing Fuel From aNonconventional Source, Section 29Inflation Adjustment Factor, andSection 29 Reference Price

Notice 96–29

This notice publishes the § 29 infla-tion adjustment factor, the nonconven-tional source fuel credit, and the §29reference price for calendar year 1995.These are used to determine the creditallowable on fuel produced from a non-conventional source under § 29 of theInternal Revenue Code. The calendaryear 1995 inflation-adjusted credit ap-plies to the sales of barrel-of-oilequivalent of qualified fuels sold by ataxpayer to an unrelated person during

the 1995 calendar year, the domesticproduction of which is attributable tothe taxpayer.

BACKGROUND

Section 29(a) provides for a creditfor producing fuel from a nonconven-tional source, measured in barrel-of-oilequivalent of qualified fuels, the pro-duction of which is attributable to thetaxpayer and sold by the taxpayer to anunrelated person during the tax year.The credit is equal to the product of$3.00 and the appropriate inflationadjustment factor.

Section 29(b)(1) and (2) provides fora phaseout of the credit. The creditallowable under § 29(a) must be re-duced by an amount which bears thesame ratio to the amount of the credit(determined without regard to § 29(b)-(1)) as the amount by which thereference price for the calendar year inwhich the sale occurs exceeds $23.50bears to $6.00. The $3.00 in § 29(a)and the $23.50 and $6.00 must each beadjusted by multiplying these amountsby the 1995 inflation adjustment factor.In the case of gas from a tight for-mation, the $3.00 amount in § 29(a)must not be adjusted.

Section 29(c)(1) defines the term‘‘qualified fuels’’ to include oil pro-duced from shale and tar sands; gasproduced from geopressurized brine,Devonian shale, coal seams, or a tightformation, or biomass; and liquid,gaseous, or solid synthetic fuels pro-duced from coal (including lignite),including such fuels when used asfeedstocks.

Section 29(d)(1) provides that thecredit is to be applied only for sale ofqualified fuels the production of whichis within the United States (within themeaning of § 638(1)) or a possessionof the United States (within the mean-ing of § 638(2)).

Section 29(d)(2)(A) requires that theSecretary, not later than April 1 of eachcalendar year, determine and publish inthe Federal Register the inflation ad-justment factor and the reference pricefor the preceding calendar year.

Section 29(d)(2)(B) defines ‘‘infla-tion adjustment factor’’ for a calendaryear as the fraction the numerator ofwhich is the GNP implicit price defla-tor for the calendar year and the

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denominator of which is the GNPimplicit price deflator for calendar year1979. The term ‘‘GNP implicit pricedeflator’’ means the first version of theimplicit price deflator for the grossnational product as computed andpublished by the Department ofCommerce.

Section 29(d)(2)(C) defines ‘‘refer-ence price’’ to mean with respect to acalendar year the Secretary’s estimateof the annual average wellhead priceper barrel of all domestic crude oil theprice of which is not subject toregulation by the United States.

Section 29(d)(3) provides that in thecase of a property or facility in whichmore than one person has an interest,except to the extent provided byregulations prepared by the Secretary,production from the property or facility(as the case may be) must be allocatedamong the persons in proportion totheir respective interests in the grosssales from the property or facility.

Section 29(d)(5) and (6) providesthat the term ‘‘barrel-of-oil equivalent’’with respect to any fuel generallymeans that amount of the fuel whichhas a Btu content of 5.8 million.

INFLATION ADJUSTMENTFACTOR AND REFERENCE PRICE

The inflation adjustment factor forcalendar year 1995 is 1.9439. Thereference price for calendar year 1995is $14.62. As required by § 29(d)-(2)(A), the inflation adjustment factorand reference price for calendar year1995 where published in the FederalRegister on April 10, 1996 (61 Fed.Reg. 16031).

PHASE-OUT CALCULATION

Because the calendar year 1995reference price does not exceed $23.50multiplied by the inflation adjustmentfactor, the phaseout of the credit

provided for in § 29(b)(1) does notoccur for any qualified fuel sold incalendar year 1995.

CREDIT AMOUNT

The nonconventional source fuelcredit under § 29(a) is $5.83 per barrel-of-oil equivalent of qualified fuels($3.00 3 1.9439). This amount waspublished in the Federal Register onApril 10, 1996 (61 Fed. Reg. 16031).

DRAFTING INFORMATIONCONTACT

The principal author of this notice isDavid G. McMunn of the Office ofAssistant Chief Counsel (Passthroughsand Special Industries). For furtherinformation regarding this notice con-tact Mr. McMunn on (202)622-3110(not a toll-free call).

26 CFR 601.201: Rulings and determination letters.(Also Part I, § 355; 1.355–1.)

Rev. Proc. 96–30

SECTION 355 CHECKLIST QUESTIONNAIRE CONTENTS

1. PURPOSE2. BACKGROUND3. CHANGES4. INFORMATION TO BE INCLUDED IN REQUESTS FOR RULINGS UNDER § 355 OF THE INTERNAL REVE-

NUE CODE.01 Information regarding Distributing and Controlled

(1) Identification(2) Jurisdiction(3) Taxable year

.02 Ownership of interests in Distributing and Controlled (1) Capital structure of Distributing and Controlled immediately prior to the distribution(2) Foreign shareholders(3) Description of stock, securities, and other property being distributed

(a) Stock(b) Securities(c) Other property(d) Timing(e) Planned stock issuances(f) Obtaining control

(4) Ownership of stock and securities immediately after the distribution(a) Interests in Controlled to be held by Distributing

(i) Retention of stock, securities, or options(ii) Retention of debt(iii) Purpose for Distributing holding stock, securities, or options in Controlled

(b) Interests in Controlled to be held by shareholders of Distributing(i) Distribution or exchange(ii) Stock ownership (iii) Securities(iv) Surrender of stock

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(c) Interests in Controlled to be held by security holders of Distributing(d) Receipt of consideration other than with respect to stock or securities

(i) Shareholder in dual capacity(ii) Security holder in dual capacity(iii) Other transfers

.03 Information concerning the businesses of Distributing and Controlled(1) Description of businesses (2) Distributing’s Active Businesses

(a) Active conduct during the preceding 5-year period(b) Employee information(c) Nonemployee information(d) Continuous ownership of an Active Business during the preceding 5-year period(e) Change in business(f) Separation of real property, intellectual property, or other intangible property from user(g) Balance sheets(h) Profit and loss statements

(3) Description of Active Businesses being transferred by Distributing to Controlled (4) Pre-existing Controlled’s Active Businesses(5) Indirect conduct of trade or business through ownership of stock in other corporations (Other

Corporations)(6) Changes in ownership of an Active Business during the preceding 5-year period

(a) Identity(b) Date(c) Transaction(d) Consideration(e) Gain or loss

(7) Stock ownership during the preceding 5-year period(a) Stock of Controlled or other Corporations continuously owned(b) Stock of Controlled or other Corporations acquired

(i) Identity(ii) Date and consideration(iii) Transaction(iv) Gain or loss

(c) Other changes in ownership(8) Continuation of business

.04 Business purpose(1) Detailed description(2) Corporate Business Purposes(3) Alternative transactions(4) Cross reference to Appendix A (5) Non-Corporate Business Purposes

(a) General(b) Shareholder planning(c) Special tax status(d) Reduction in federal taxes(e) Representation

(6) Substantiation of business purpose(a) Documentation(b) Third party documentation

(7) Additional documents (a) Regulatory filings(b) Material prepared for directors(c) Communications to shareholders and employees

.05 Device (1) Dispositions of stock or securities

(a) Representation(b) Permitted purchases(c) Other dispositions

(i) Detailed description(ii) Consideration(iii) Evidence of nondevice

(2) Absence of earnings and profits(3) Non pro rata distribution

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(4) Investment and inactive assets(a) Detailed description(b) Explanation

(5) Liquidation or sale of assets.06 Continuity of shareholder interest .07 Disqualified distribution.08 Miscellaneous

(1) Transfers and transactions between Distributing and Controlled(a) Contributions to capital(b) Liabilities(c) Investment credit property (d) Matching of income and deductions

(2) Indebtedness(a) Cancellation of indebtedness(b) Continuing indebtedness

(3) Consolidated transactions (4) Continuing transactions between Distributing and Controlled(5) Investment company(6) Transfers of money or property to Distributing(7) Foreign corporation(8) Other transactions(9) Plan of reorganization and other relevant documents(10) Requested rulings(11) Presubmission conference

5. EFFECT ON OTHER DOCUMENTS

6. EFFECTIVE DATE

DRAFTING INFORMATION

APPENDIX A — BUSINESS PURPOSE GUIDELINES

1. Key employee

2. Stock offering

3. Borrowing

4. Cost savings

5. Fit and focus

6. Competition

7. Facilitating an acquisition of Distributing

8. Facilitating an acquisition by Distributing or Controlled

9. Risk reduction

APPENDIX B — RULING REQUESTS INVOLVING RETENTION OF STOCK OR OPTIONS BY DISTRIBUTING

APPENDIX C — REPRESENTATIONS REGARDING S CORPORATION STATUS

SECTION 1. PURPOSE This revenue procedure updates Rev. Proc. 86–41, 1986–2 C.B. 716, which sets forth in achecklist questionnaire the information that must be included in a request for rulings under§ 355, relating to the nonrecognition of gain or loss on distributions of stock and securities ofcontrolled corporations.

SECTION 2. BACKGROUND This checklist is intended to facilitate the filing and processing of ruling requests under§ 355. It specifies information and representations to be included so that the requests will beas complete as possible when initially filed. Nevertheless, because the information andrepresentations necessary to rule on a particular transaction depend upon all the facts andcircumstances, the Service may require information or representations in addition to those setforth in this revenue procedure.

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The general procedures of the Internal Revenue Service with respect to the issuance ofletter rulings and determination letters by the National Office are outlined in the first revenueprocedure published each year (the ‘‘annual revenue procedure’’). See, e.g., Rev. Proc. 96–1,1996–1 I.R.B. 8. The Service also publishes a revenue procedure, generally in the firstInternal Revenue Bulletin of the year, which provides a list of those areas of the Code underthe jurisdiction of the Associate Chief Counsel (Domestic) for which the Service will notissue advance letter rulings. See, e.g., Rev. Proc. 96–3, 1996–1 I.R.B. 82. The Serviceperiodically updates these revenue procedures, along with this checklist questionnaire.

Careful attention to all requirements of the most recent revenue procedures, including thischecklist questionnaire, will aid in the timely processing of ruling requests. Failure to submitthe requisite information and representations will often delay consideration of the transactionand the issuance of a letter ruling.

SECTION 3. CHANGES This revenue procedure substantially modifies Rev. Proc. 86–41. The principal changes areto add to, delete, or modify the information and representations requested, and to add anappendix that provides guidelines with respect to ruling requests involving certain corporatebusiness purposes. This document also revokes section 3.01(23) of Rev. Proc. 96–3, whichsets forth ‘‘no rule’’ positions regarding certain corporate business purposes.

SECTION 4. INFORMATIONTO BE INCLUDED INREQUESTS FOR RULINGSUNDER § 355

This section describes the information and representations to be provided in a § 355 rulingrequest. The presentation of the information and representations in the ruling request shouldfollow the organization of this section and use appropriate descriptive headings. Taxpayers arewelcome to provide a narrative description of the transaction to supplement (but not substitutefor) the presentation requested in this section.

A ruling request should address each item in this section and provide all facts relevant tothe transaction. If an item is not applicable, so state and briefly explain why.

Standard representations are set forth throughout this section and are highlighted by theword ‘‘representation’’ in boldface type. The representations are necessary to ensure thatspecific statutory and judicial requirements, and administrative ruling guidelines relatingthereto, are satisfied. Each representation should be submitted in the language requested. If arepresentation cannot be submitted exactly as requested, an explanation must be given.Deviation from the language of the representations should be avoided, except as required bythe facts being described. Unnecessary variations may delay processing the ruling request andwill not be accepted unless reasons satisfactory to the Service are submitted.

Distribution includesexchanges

The terms ‘‘Distributing’’ and ‘‘Controlled’’ in this document refer to the ‘‘distributingcorporation’’ and ‘‘controlled corporation’’ as described in § 355(a)(1)(A). References to theterm ‘‘distribution’’ include a distribution of stock or securities of Controlled with respect toDistributing stock, an exchange of Distributing stock or securities for Controlled stock orsecurities, or some combination thereof, as the context requires.

Successors of Distributingor Controlled

Requests for information and representations regarding Distributing or Controlled include,as the context requires, a request for information (or representations) regarding a successor ofDistributing or Controlled. For example, if Distributing will merge with an acquiringcorporation after the distribution, the representation requested in section 4.03(8) of thisrevenue procedure (that is, Distributing will continue to conduct its business) should bemodified to include a similar representation under penalties of perjury by the acquiringcorporation regarding the continuing conduct of Distributing’s business after the merger, inaddition to Distributing’s representation. Similarly, the representation requested in section4.05(1) of this revenue procedure (that is, there is no plan or intention by the Distributingshareholders to dispose of their shares in Distributing), should be modified to include asimilar representation regarding dispositions of acquiring corporation shares by theDistributing shareholders. If a taxpayer believes that information regarding, or arepresentation by, a successor is inappropriate or should be modified, the taxpayer mustexplain why.

Information regardingDistributing and Controlled

.01(1) Identification. State the name, employer identification number, and place and date of

incorporation of Distributing and Controlled. If Controlled is not in existence, state itsproposed name and place of incorporation. If Distributing joins in the filing of a consolidatedfederal income tax return, provide the name and employer identification number of thecommon parent corporation of the affiliated group.

(2) Jurisdiction. Identify the District Office that has or will have examination jurisdictionover the return of Distributing (sometimes referred to below as the ‘‘taxpayer’’) and ofControlled.

(3) Taxable year. State the last day of the taxable year of Distributing and Controlled.Ownership of interests inDistributing and Controlled

.02(1) Capital structure of Distributing and Controlled immediately prior to the distribution.

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Under a separate heading for each corporation, provide the following information with respectto the stock and securities of Distributing and Controlled that will be outstanding immediatelyprior to the distribution:

Description of stock (a) A complete description of each class of stock, setting forth the rights and privileges ofeach class, including voting or nonvoting rights, dividend and liquidation preferences orlimitations, and whether classified as common or preferred stock.

Shareholdings (b) A list of the number of shares and the percentage of each class of stock owned by eachshareholder prior to the distribution. However, if the corporation has more than 100shareholders, the taxpayer need only list those shareholders owning 5 percent or more of anyclass of stock, and state the total number of other shareholders together with the total numberof shares and the percentage that these other shareholders own of each class of stock.

Description of agreements (c) A description of any existing, planned, or intended agreements, such as a voting trust,affecting the rights of any shareholder. However, if the corporation has more than 100shareholders, the taxpayer need only describe agreements affecting shareholders owningdirectly, or as a result of the agreement, controlling, 5 percent or more of any class of stock.

Description of securities (d) A description of any securities and all other outstanding interests (bonds, debentures,notes, warrants, options, puts, etc.) and a brief explanation as to whether any of these itemsshould be considered a stock interest.

Foreign shareholders (2) Foreign shareholders. If Distributing has any foreign shareholders, state whether: (i)Distributing or Controlled was a United States real property holding corporation (as definedin § 897(c)(2)) at any time during the 5-year period ending on the date of the distribution,and (ii) Distributing or Controlled will be a United States real property holding corporationimmediately after the distribution. See § 367(e)(1) and § 897. In addition, if Distributing ispublicly traded, provide a list of all foreign persons owning 5 percent or more of Distributingstock either before or after the distribution. If Distributing is not publicly traded, provide alist of all foreign persons owning stock of Distributing either before or after the distribution.See section 4.08(7) of this revenue procedure for additional information regarding foreignparties.

Stock, securities, andproperty being distributed

(3) Description of stock, securities, and other property being distributed.(a) Stock. State the number of shares and percentage of each class of stock of Controlled

being distributed. In addition, if preferred stock is being distributed and it is contended thatthis stock is not ‘‘section 306 stock,’’ within the meaning of § 306(c), fully explain thereasons for this contention.

(b) Securities. State the principal amount of each series of securities of Controlled beingdistributed.

(c) Other property. Provide complete details as to any property, other than stock andsecurities of Controlled, to be distributed or received in the transaction including, but notlimited to, cash, stock rights, warrants, or the payment of expenses incurred in connectionwith the transaction (see § 356).

Date of distribution (d) Timing. State the date of the distribution and whether all the stock, securities, and otherproperty will be distributed on that date. If all the stock, securities, and other property are notbeing distributed on the same date, state the approximate length of, and the reasons for, thedelay in the distribution.

Control (e) Planned stock issuance, etc. Describe any planned or intended stock issuances,redemptions, or dispositions of Controlled shares. Explain the effect of any of thesetransactions on the distribution-of-control requirement of § 355(a)(1)(D), and if property isbeing transferred from Distributing to Controlled, the effect on the control-immediately-afterrequirement of § 368(a)(1)(D).

Obtaining control (f) Obtaining control. State whether Distributing has modified or will modify its ownershipof Controlled stock, such as in a recapitalization, within the 5-year period preceding thedistribution with the result that Distributing obtained or will obtain control of Controlled, asdefined in § 368(c). Provide complete details, including the information requested in section4.08(8) of this revenue procedure, with respect to such modifications.

(4) Ownership of stock and securities in Controlled immediately after the distribution.Post-distribution ownershipof interests in Controlledby Distributing

(a) Interests in Controlled to be held by Distributing (see § 1.355–2(e) of the Income TaxRegulations).

(i) Retention of stock, securities, or options. State the number of shares and percentage ofeach class of stock in, and the principal amount of each series of securities of, Controlled tobe held by Distributing after the distribution and the length of time Distributing will hold thisinterest. Describe any options that Distributing will hold after the distribution to acquire stockin Controlled and the length of time Distributing will hold these options.

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(ii) Retention of debt. If Controlled will be indebted to Distributing after the distribution ofControlled stock, submit the following REPRESENTATION: The indebtedness owed by thecontrolled corporation to the distributing corporation after the distribution of the controlledcorporation stock will not constitute stock or securities.

(iii) Purpose for Distributing holding stock, securities, or options in Controlled. IfDistributing will hold stock, securities, or options in Controlled after the distribution, explainthe reasons therefor and why this should not be viewed as in pursuance of a plan having asone of its principal purposes avoiding federal income tax. See Appendix B of this revenueprocedure regarding favorable rulings with respect to the retention of stock, securities, oroptions. State whether a distribution of all the stock or securities of Controlled would betreated to any extent as a distribution of ‘‘other property’’ under § 356.

Post-distribution ownershipof interests in Controlledby shareholders ofDistributing

(b) Interests in Controlled to be held by shareholders of Distributing.(i) Distribution or exchange. State whether the distribution of Controlled stock will be pro

rata or non pro rata with respect to the shareholders of Distributing. Fully describe thetransaction between Distributing and its shareholders.

(ii) Stock ownership. State the number of shares and the percentage of each class of stockoutstanding in Distributing and Controlled that will be owned by each shareholderimmediately after the distribution. However, if there will be more than 100 shareholdersimmediately after the distribution, the taxpayer need only list those shareholders who willown 5 percent or more of any class of stock, and state the expected total number of othershareholders together with the expected total number of shares and the expected percentagethat these other shareholders will own of each class of stock.

(iii) Securities. Identify any shareholders of Distributing receiving securities of Controlledand state the principal amount of each series of securities to be received in the transaction.With respect to each shareholder, state the principal amount of each series of Distributingsecurities to be surrendered in the transaction, or, if no securities are being exchanged, sostate. See § 1.355–2(f)(1).

(iv) Surrender of stock. If one or more Distributing shareholders will surrenderDistributing stock in the transaction, submit the following REPRESENTATION: The fair marketvalue of the controlled corporation stock and other consideration to be received by eachshareholder of the distributing corporation will be approximately equal to the fair marketvalue of the distributing corporation stock surrendered by the shareholder in the exchange.

Post-distribution ownershipof interests in Controlledby security holders ofDistributing

(c) Interests in Controlled to be held by security holders of Distributing. Identify thosesecurity holders of Distributing receiving Controlled stock, the total number of shares of eachclass of stock being received, and the principal amount of the securities of Distributing beingexchanged. Identify those security holders of Distributing receiving securities of Controlled,the principal amount being received by each holder, and the principal amount of the securitiesof Distributing being exchanged. See § 1.355–2(f)(1). If no securities are being exchanged, sostate. If the securities are, or, immediately after the distribution, will be, held by more than100 security holders, identify only those security holders that will own 5 percent or more ofthe outstanding shares of any class of Controlled stock or of any outstanding series ofControlled securities immediately after the distribution.

(d) Receipt of consideration other than with respect to stock or securities.(i) Shareholder in dual capacity. Submit the following REPRESENTATION: No part of the

consideration to be distributed by the distributing corporation will be received by ashareholder as a creditor, employee, or in any capacity other than that of a shareholder ofthe corporation.

(ii) Security holder in dual capacity. If consideration will be distributed to securityholders, submit the following REPRESENTATION: No part of the consideration to bedistributed by the distributing corporation will be received by a security holder as anemployee or in any capacity other than that of a security holder of the corporation.

(iii) Other transfers. State whether the shareholders or security holders of Distributing willtransfer or surrender any property in the transaction other than stock or securities ofDistributing. If so, provide full details.

Information concerningthe businesses ofDistributing and Controlled(see generally § 1.355–3)

.03(1) Description of businesses. Describe each line of business engaged in by Distributing,

Controlled, and their respective subsidiaries, whether or not the business will be relied uponto meet the requirements of § 355(b). Note which corporations are engaged in each line ofbusiness.

Distributing’s ActiveBusinesses

(2) Distributing’s Active Businesses. Submit a complete description of each trade orbusiness that will be relied upon to meet the requirements of § 355(b) (an ‘‘ActiveBusiness’’), that is conducted directly by Distributing, and that will be retained byDistributing. Provide the following information with respect to each such Active Business:

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(a) Active conduct during the preceding 5-year period. Provide all information necessaryto establish that the Active Business is a trade or business that has been actively conductedfor the entire 5-year period ending on the date of the distribution (within the meaning of§ 1.355–3(b)(2) and (3)). In general, the description should conclusively show that substantialmanagerial and operational activities have been directly carried on by the Active Businessduring each of the past 5 years.

Employee information (b) Employee information. If the Active Business employed fewer than 50 full-timeemployees during any of the past 5 years, submit separate lists for each of the past 5 yearsshowing the job titles of the Active Business’ employees, the function (managerial,operational, or other) of each position, and the number of persons employed in each position.Include a brief description of the type of duties performed by each category of employeeduring each of these years.

Nonemployee information (c) Nonemployee information. If Distributing is required to submit the employeeinformation specified in section 4.03(2)(b) of this revenue procedure with respect to an ActiveBusiness, also state whether Distributing uses persons who are not employees, such asindependent contractors. If so, include a brief description of the duties they perform, and thepercentage of the activities they perform for the Active Business.

Continuous ownership ofActive Businessesconducted during 5-yearperiod

(d) Continuous ownership of an Active Business during the preceding 5-year period. Statewhether the Active Business has been continuously conducted, within the meaning of§ 1.355–3(b), by Distributing for the 5-year period ending on the date of distribution. Givethe date Distributing commenced conduct of the Active Business or acquired the ActiveBusiness. If an Active Business has not been continuously conducted by Distributing for such5-year period, see section 4.03(6) of this revenue procedure.

Change in business during5-year period

(e) Change in business. Describe any substantial change during the preceding 5-yearperiod in the type of business activity conducted or the method of conducting business, suchas substantial changes in: products or services offered, production capacity, assets owned orused, technology employed, sales or distribution channels, or locations. If the preceding5-year period includes any time during which there was no business activity, or a significantamount of time during which there was a substantial reduction in business activity, identifythe period of time, the type and amount of business activity during this period, and thereasons for the cessation or reduction in activity.

Separation of realproperty, intellectualproperty, or otherintangible property fromuser

(f) Separation of real property, intellectual property, or other intangible property fromuser. State whether all or a portion of any real property, intellectual property, or otherintangible property historically occupied or used by one business will be separated in thetransaction from that business. If so, describe the property. State whether the businessformerly using the property will continue to use the property after the transaction, and theterms upon which it will be allowed to use the property. Describe any other planned use ofthe property after the transaction. Explain the reason for separating the ownership of theproperty from its historic user.

Balance sheets (g) Balance sheets. Provide a copy of the most recent balance sheet of Distributing(including all applicable notes). The balance sheet should not be limited to assets andliabilities of Distributing’s Active Businesses. Also submit any consolidated balance sheetsprepared for financial accounting purposes that include Distributing.

Profit and loss statements (h) Profit and loss statements. Submit separate unconsolidated profit and loss statements(including all applicable notes) for each of the past 5 years for each Active Business. Thestatements must show that each business has had gross receipts and operating expenses(including employee expenses such as payroll withholding taxes) representative of the activeconduct of a trade or business for each of the past 5 years. Submit the followingREPRESENTATION: The 5 years of financial information submitted on behalf of the distributingcorporation is representative of the corporation’s present operation, and with regard to suchcorporation, there have been no substantial operational changes since the date of the lastfinancial statements submitted.

Description of ActiveBusinesses transferred toControlled

(3) Description of Active Businesses being transferred by Distributing to Controlled. If, inconnection with the plan, Distributing transfers all or part of the assets of one or more of itsActive Businesses (see § 1.355–3(c), example (4)) to either a newly formed or pre-existingControlled, identify and submit a complete description of each Active Business or part of anActive Business being transferred. Submit the information and representation required bysection 4.03(2)(a) through (h) of this revenue procedure for each such Active Business, or partof an Active Business, being transferred. If property will be transferred from Distributing toControlled, submit a pro forma balance sheet for Controlled reflecting the transfer of assets toControlled and all liabilities to be assumed or to which the property transferred will be subject.

Description of pre-existingControlled’s ActiveBusinesses

(4) Pre-existing Controlled’s Active Businesses. If Controlled is a pre-existing corporation,submit a complete description of each Active Business conducted directly by Controlled.

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Submit the information and representation required by section 4.03(2)(a) through (h) of thisrevenue procedure with respect to each such Active Business, treating references toDistributing as references to Controlled, as appropriate.

Indirect conduct of tradeor business

(5) Indirect conduct of trade or business through ownership of stock in othercorporations. If either Distributing or Controlled is not directly engaged in an ActiveBusiness but will be so engaged indirectly through ownership of stock and securities in one ormore corporations controlled by it (‘‘Other Corporations’’) immediately after the distribution,submit the information and representation required by sections 4.03(2)(a) through (h) of thisrevenue procedure (treating, for this purpose, each Other Corporation as Distributing orControlled, as appropriate). In addition, if Distributing or Controlled isnot directly engaged in an Active Business, submit the following REPRESENTATION:Immediately after the distribution, at least 90 percent of the fair market value of the grossassets of [insert the name of the corporation so indirectly engaged] will consist of the stockand securities of controlled corporations that are engaged in the active conduct of a trade orbusiness as defined in § 355(b)(2). See section 3.04 of Rev. Proc. 77–37, 1977–2 C.B. 568,570.

Active Businessesacquired during 5-yearperiod

(6) Changes in ownership of an Active Business during the 5-year period ending on thedate of distribution. If an Active Business that is directly conducted by Distributing,Controlled, or an Other Corporation has been acquired by that corporation during the 5-yearperiod ending on the date of distribution, identify the Active Business that was acquired andprovide the following information with respect to that Active Business:

(a) Identity. Identify the party from whom the business was acquired, and the transferor’srelationship, if any, to Distributing or its shareholders.

(b) Date. State the date the business was acquired and the period of time the business hadbeen previously conducted by Distributing’s, Controlled’s, or Other Corporation’s predecessorin interest.

(c) Transaction. Describe the transaction in which the business was acquired. For example,was the business acquired in a reorganization under § 368(a)(1), by purchase, or by someother means? If a letter ruling was issued with respect to the transaction, attach a copy.

(d) Consideration. State the consideration given in the acquisition.(e) Gain or loss. State whether gain or loss was recognized, in whole or in part, to any

party to the transaction and whether the basis of the assets acquired was determined, in wholeor in part, by reference to the transferor’s basis.

(7) Stock ownership during the preceding 5-year period (see § 355(b)(2)(D)).Stock continuously ownedduring 5-year period

(a) Stock of Controlled or Other Corporations continuously owned during the preceding5-year period. Identify Controlled and Other Corporations whose shares have beencontinuously held by Distributing or Controlled for the 5-year period ending on the date ofdistribution.

Stock acquired during5-year period

(b) Stock of Controlled or Other Corporations acquired by Distributing, Controlled, orOther Corporations during the preceding 5-year period. If the stock of Controlled or OtherCorporations has been acquired by Distributing, Controlled, or Other Corporations during the5-year period ending on the date of the distribution, identify the stock that was acquired andprovide the following information with respect to that stock:

(i) Identity. Identify the party from whom the stock was acquired and the transferor’srelationship, if any, to Distributing or its shareholders.

(ii) Date and consideration. State the date the stock was acquired and the considerationgiven in the acquisition.

(iii) Transaction. Describe the transaction in which the stock was acquired. For example,was the stock acquired in a § 368(a)(1) reorganization, by purchase, or by some other means?State whether control was acquired in a transaction in which Distributing transferred cash orother liquid or inactive assets to Controlled. See section 4.01(31) of Rev. Proc. 96–3. If aletter ruling was issued with respect to the transaction, attach a copy.

(iv) Gain or loss. State whether gain or loss was recognized, in whole or in part, to anyparty to the transaction and whether the basis of the stock acquired was determined, in wholeor in part, by reference to the transferor’s basis.

Other changes inownership during 5-yearperiod

(c) Other changes in ownership. Provide complete details concerning any change inownership of the stock of Distributing, Controlled, or Other Corporations during the 5-yearperiod ending on the date of the distribution that is not fully described under section4.03(7)(b) of this revenue procedure. For this purpose, a change of ownership includes, but isnot limited to, acquisitions, redemptions, recapitalizations, stock dividends, and sales.Information regarding sales of stock to which the issuing corporation was not a party need notbe provided if: (i) the sale occurred on a recognized stock exchange or in an establishedmarket; and (ii) both the purchaser and the seller held less than 5 percent of the corporation’sstock both before and after the sale.

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Continuation of business (8) Continuation of business. If the transaction involves the vertical division of a singleActive Business, submit the following REPRESENTATION: Following the transaction, thedistributing and controlled corporations will each continue, independently and with itsseparate employees, the active conduct of its share of all the integrated activities of thebusiness conducted by the distributing corporation prior to consummation of the transaction.If the transaction involves the separation of two or more Active Businesses, submit thefollowing REPRESENTATION: Following the transaction, the distributing and controlledcorporations will each continue the active conduct of its business, independently and with itsseparate employees. Additionally, if, following the transaction, Distributing and Controlledwill share the services of any employees, identify these employees, specify the services to beperformed, the length of time the employees will be shared, the compensation arrangements,and explain why the services of these employees will be shared.

In addition, describe any planned or intended substantial reduction in business activity forany Active Business. Generally, a substantial reduction in business activity does not include avertical division of a single Active Business where Distributing and Controlled togethercontinue all of the integrated activities of the Active Business.

Business purpose (seegenerally § 1.355–2(b))

.04(1) Detailed Description. Describe in detail each purpose (whether or not a corporate

business purpose) for the distribution of the stock of Controlled.(2) Corporate Business Purposes. Explain which purposes described in section 4.04(1) of

this revenue procedure are corporate business purposes within the meaning of § 1.355–2(b)(2)(‘‘Corporate Business Purposes’’). Describe how each Corporate Business Purpose is a realand substantial nonfederal tax purpose germane to the business of Distributing, Controlled, orthe affiliated group (as defined in § 1.355–3(b)(4)(iv)) to which Distributing belongs. Inaddition, explain the business exigencies that require the distribution at this time. Submit thefollowing REPRESENTATION: The distribution of the stock, or stock and securities, of thecontrolled corporation is carried out for the following corporate business purposes: [listthese Corporate Business Purposes]. The distribution of the stock, or stock and securities, ofthe controlled corporation is motivated, in whole or substantial part, by one or more of thesecorporate business purposes.

Alternative transactions (3) Alternative transactions. Explain why each Corporate Business Purpose cannot beachieved through a nontaxable transaction that does not involve the distribution of stock ofControlled and which is neither impractical nor unduly expensive. For example, in appropriatecases, possible alternative transactions might include the transfer of assets to a partnership orlimited liability company. If a Corporate Business Purpose can be achieved through anontaxable alternative transaction that would be impractical or unduly expensive, fullydescribe the reason the alternative transaction would be impractical or the additional expensethat would be incurred by using the alternative transaction instead of the proposed transaction.An alternative transaction that will cause the loss of a favorable special tax status, such as anexisting S corporation election, will ordinarily be viewed as unduly expensive.

Appendix A (4) Cross reference to Appendix A. Appendix A of this revenue procedure providesguidelines that the Service will use, for ruling purposes, in evaluating whether a distributionsatisfies the corporate business purpose requirement in certain situations and specifiesinformation to be submitted with respect to the following business purposes: key employee,stock offering, borrowing, cost savings, fit and focus, competition, facilitating an acquisitionof Distributing, facilitating an acquisition by Distributing or Controlled, and risk reduction.The business purposes described in Appendix A of this revenue procedure are not anexclusive list of Corporate Business Purposes for which the Service will issue a favorableruling. If a purpose for the transaction is not described in Appendix A of this revenueprocedure, the taxpayer should follow section 4.04 of this revenue procedure to establish thatthe distribution satisfies the corporate business purpose requirement.

Non-Corporate BusinessPurposes

(5) Non-Corporate Business Purposes.(a) General. If the transaction will enable Distributing, Controlled, or Other Corporations

to effect a reduction in federal taxes, or if it appears that the transaction will achieve one ormore other non-Corporate Business Purposes, the taxpayer must convince the Service by clearand convincing evidence that the distribution is motivated in whole or substantial part by oneor more Corporate Business Purposes in order to obtain a favorable ruling.

Shareholder planning (b) Shareholder planning. State whether a purpose for the distribution is to facilitate thepersonal planning (such as estate planning or gifts) of any shareholder. If the answer is in theaffirmative, provide the details.

Special tax status (c) Special tax status. State whether Distributing, Controlled, or any Other Corporation is,plans to become, will cease to be, or will become eligible to become an S corporation, realestate investment trust, insurance company, bank, savings and loan, controlled foreigncorporation, or other corporation with a special federal tax status. If so, describe the specialtax status and the date it was or will become effective, will cease to be effective, or when the

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corporation will become eligible. If either Distributing or Controlled will be eligible to elect Scorporation status after the distribution, see Appendix C.

Description of anyreduction in federal taxes

(d) Reduction in federal taxes. Describe any reduction in federal taxes of Distributing,Controlled, or any Other Corporations that can reasonably be expected to result from thetransaction. For this purpose, nonrecognition of income or gain to the shareholders orcorporation resulting from the application of § 355 or § 361 is disregarded.

Representation regardingpotential non-CorporateBusiness Purpose

(e) Representation. In order to lessen the Service’s concern about a potential non-Corporate Business Purpose, the taxpayer, in appropriate cases, may wish to represent that itwill engage in a specific course of action (such as making or not making an election) thatobviates the potential avoidance of federal taxes or other non-Corporate Business Purpose.

(6) Substantiation of business purpose.Substantiation (a) Documentation. The taxpayer must provide substantiation of one or more Corporate

Business Purposes that motivate the transaction in whole or substantial part. The type andextent of the substantiation will necessarily vary depending on the described business purposeand facts of the particular case. Accordingly, the taxpayer should submit documentation thatprovides factual support for the Corporate Business Purposes. The Service recognizes that aparticular transaction may be undertaken for more than one Corporate Business Purpose.Generally, satisfying the requirements of this section 4.04(6) of this revenue procedure withrespect to one Corporate Business Purpose that motivates the transaction, in substantial part,will suffice in such cases.

Third party documentation (b) Third party documentation. If the transaction is being undertaken at the request of, orpursuant to the advice or analysis of, persons other than Controlled or Distributing, explainfully. Provide documentation of such third party requests, advice, or analysis to substantiatethe business purpose for the distribution. Such documentation should include an explanationof the third party’s qualifications to speak to the matter.

Business purposes for which third party documentation may be necessary include, forexample, risk reduction, cost savings, facilitating a stock offering or borrowing, obtainingregulatory relief, improving credit, and preserving a franchise. Third party documentationprepared specifically for submission with the taxpayer’s ruling request must contain anacknowledgement that the documentation will be submitted to the Internal Revenue Servicefor use in determining the federal tax consequences of the transaction.

(7) Additional documents.Regulatory filings (a) Regulatory filings. Provide copies of any proxy statements, information statements, or

prospectuses filed or prepared in connection with the distribution or any related transaction.List and briefly describe any other documents that have been or will be filed with (orprepared for) any federal, state, local, or foreign regulatory body (such as the Securities andExchange Commission) by the taxpayer in connection with the distribution. The Service mayrequest copies of some or all such documents in the course of analyzing the ruling request.

Material prepared fordirectors

(b) Material prepared for directors. Attach a copy of any materials that relate to thepurpose for the distribution and were prepared for or presented to the taxpayer’s board ofdirectors, and any relevant portions of the board’s minutes.

Communications toshareholders andemployees

(c) Communications to shareholders and employees. Attach a copy of any press releasesrelating to the distribution. Attach copies of any letters or memoranda relating to thedistribution that the taxpayer or its officers sent to the taxpayer’s shareholders. In addition,attach copies of the taxpayer’s written statements to its employees that discuss any purposefor the distribution.

Device (see generally§ 1.355–(2)(d))

.05(1) Dispositions of stock or securities.(a) Representation. Submit the following REPRESENTATION: There is no plan or intention

by the shareholders or security holders of the distributing corporation to sell, exchange,transfer by gift, or otherwise dispose of any of their stock in, or securities of, either thedistributing or controlled corporation after the transaction. For publicly traded companies,the taxpayer may instead submit the following REPRESENTATION: There is no plan orintention by any shareholder who owns 5 percent or more of the stock of the distributingcorporation, and the management of the distributing corporation, to its best knowledge, is notaware of any plan or intention on the part of any particular remaining shareholder orsecurity holder of the distributing corporation to sell, exchange, transfer by gift, or otherwisedispose of any stock in, or securities of, either the distributing or controlled corporation afterthe transaction.

Purchases of stock byDistributing or Controlled

(b) Permitted purchases. For ruling purposes, the Service will treat purchases by eitherDistributing or Controlled of its stock after the transaction as not violating the devicerequirement of § 355(a)(1)(B) provided that:

(i) there is a sufficient business purpose for the stock purchase;

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(ii) the stock to be purchased is widely held; (iii) the stock purchases will be made in the open market; and (iv) there is no plan or intention that the aggregate amount of stock purchases will equal or

exceed 20 percent of the outstanding stock of the corporation.Submit the following REPRESENTATION: There is no plan or intention by either the

distributing corporation or the controlled corporation, directly or through any subsidiarycorporation, to purchase any of its outstanding stock after the transaction, other than throughstock purchases meeting the requirements of section 4.05(1)(b) of Rev. Proc. 96–30.

If the stock purchases do not meet the requirements of this paragraph (b), the Service willconsider ruling on whether the purchases violate the device requirement of § 355(a)(1)(B)after considering all of the facts and circumstances of each case.

Information regardingplanned dispositions ofstock or securities

(c) Other dispositions. If a plan or intent to dispose exists (including stock purchases thatmeet the requirements of section 4.05(1)(b) of this revenue procedure), provide the followinginformation:

(i) Detailed description. Give complete details concerning the transaction, including anyagreements existing between the parties and the number of shares of each class of stock orthe amount of each series of securities that will be disposed of by each shareholder orsecurity holder.

(ii) Consideration. State the consideration to be received by each shareholder or securityholder.

(iii) Evidence of nondevice. Explain any special circumstances indicating why thedisposition should not be viewed as a device, such as proportionate sales of Distributing andControlled stock by the shareholder.

Absence of earnings andprofits

(2) Absence of earnings and profits. If the taxpayer contends that the distribution shouldnot be considered to be a device because of an absence of earnings and profits (see § 1.355–2(d)(5)(ii)), submit the following REPRESENTATIONS:

(a) The distributing corporation and the controlled corporation have no accumulatedearnings and profits at the beginning of their respective taxable years;

(b) The distributing corporation and the controlled corporation will have no currentearnings and profits as of the date of the distribution;

(c) No distribution of property by the distributing corporation immediately before thetransaction would require recognition of gain resulting in current earnings and profits for thetaxable year of the distribution; and

(d) The distributing corporation is not aware of, nor is the distributing corporationplanning or intending, any event that will result in the distributing corporation or thecontrolled corporation having positive current or accumulated earnings and profits after thedistribution.

Distribution qualifying asan exchange

(3) Non pro rata distribution. State whether all or any part of the distribution, if consideredtaxable, would qualify as an exchange under § 302(a) or § 303(a).

Investment assets (4) Investment and inactive assets. Under a separate heading for each corporation, providethe following information with respect to Distributing, Controlled, or Other Corporations:

(a) Detailed description. Provide a description and valuation of the investment assets, andother assets that are not related to the reasonable needs of the Active Businesses ofDistributing, Controlled, or Other Corporations; and

(b) Explanation. Explain why Distributing, Controlled, or Other Corporations will holdthese assets.

Liquidation or sale ofassets

(5) Liquidation or sale of assets. Submit the following REPRESENTATION: There is no planor intention to liquidate either the distributing or controlled corporation, to merge eithercorporation with any other corporation, or to sell or otherwise dispose of the assets of eithercorporation after the transaction, except in the ordinary course of business. Alternatively,describe the subsequent transaction.

Continuity of shareholderinterest (see generally§ 1.355–2(c))

.06 The taxpayer must explain how the continuity of interest requirement will be satisfied.Generally, the Service will view this requirement as satisfied if one or more persons who,directly or indirectly, were the owners of the enterprise prior to the distribution own, in theaggregate, 50 percent or more of the stock in each of the modified corporate forms in whichthe enterprise is conducted after the separation. In appropriate cases, the Service may requirea continuity of interest representation from the taxpayer.

Disqualified distribution .07 Explain in detail why the distribution of Controlled stock, or of Controlled stock andsecurities, will not be a disqualified distribution within the meaning of § 355(d)(2). Generally,the explanation should set forth facts establishing that, taking into account the application of§ 355(d)(6), (7), and (8), immediately after the distribution: (i) no person holds disqualifiedstock in Distributing that constitutes a 50 percent or greater interest in Distributing; and (ii)no person holds disqualified stock in Controlled that constitutes a 50 percent or greater

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interest in Controlled. It is not necessary for the taxpayer to submit information accountingfor all of the stock of Distributing or Controlled if, by providing information with respect to asmaller amount of stock, it can establish that the distribution will not be a disqualifieddistribution.

Miscellaneous .08(1) Transfers and transactions between Distributing and Controlled.

Contributions to capital

Section 351

(a) Contributions to capital. Provide complete details concerning any transfers of propertyby Distributing to Controlled in anticipation of or in connection with the transaction. Forruling purposes, such transfers ordinarily will be treated as occurring in connection with areorganization pursuant to § 368(a)(1)(D). If a transfer of property from Distributing toControlled will not qualify as a reorganization pursuant to § 368(a)(1)(D), and the taxpayercontends that § 351 applies to the transaction, submit the information and representationsspecified in Rev. Proc. 83–59, 1983–2 C.B. 575, as modified or superseded, or explain whyan item is not being submitted.

Liabilities (b) Liabilities. If Controlled is assuming liabilities or receiving assets subject to liabilities,submit the following REPRESENTATIONS:

(i) The total adjusted bases and the fair market value of the assets transferred to thecontrolled corporation by the distributing corporation each equals or exceeds the sum of theliabilities assumed by the controlled corporation plus any liabilities to which the transferredassets are subject; and

(ii) The liabilities assumed in the transaction and the liabilities to which the transferredassets are subject were incurred in the ordinary course of business and are associated withthe assets being transferred.

Investment creditrecapture representation

(c) Investment credit property. If any property is being transferred between Distributingand Controlled, state whether any investment credit determined under § 46 has been (or willbe) claimed with respect to any of such property. If the answer is in the affirmative, submitthe following REPRESENTATION: The income tax liability for the taxable year in whichinvestment credit property (including any building to which § 47(d) applies) is transferredwill be adjusted pursuant to § 50(a)(1) or (a)(2) (or § 47, as in effect before amendment byPublic Law 101–508, Title 11, 104 Stat. 1388, 536 (1990), if applicable) to reflect an earlydisposition of the property. Alternatively, explain why no increase in tax will be requiredunder § 50 (or § 47, as in effect before such amendment) as a result of the transaction.

Matching of income anddeductions

(d) Matching of income and deductions. State the overall method of accounting ofDistributing and Controlled. Further, state whether the transaction involves or will result in asituation in which one party recognizes income but another party recognizes the deductionsassociated with such income or one party owns property but another party recognizes theincome associated with such property. See, for example, Notice 95–53, 1995–44 I.R.B. 21. Ifone or more parties use the cash method of accounting, explain the extent to which anyactions have been or will be taken that are not in the ordinary course of business and thatmight affect the timing or the amount of any income or deduction to be recognized by a cashbasis party to the transaction. See, for example, Rev. Rul. 80–198, 1980–2 C.B. 113. Inaddition, submit a statement as to whether any income items, such as accounts receivable, orany items resulting from a sale, exchange or disposition that would have resulted in income toDistributing, or any items of expense, will be transferred to Controlled. If any of these itemsare being transferred, fully explain. Further, submit the following REPRESENTATION: Thedistributing corporation neither accumulated its receivables nor made extraordinary paymentof its payables in anticipation of the transaction. If Distributing uses the cash method ofaccounting or a similar method and Controlled uses the accrual method or a similar method, aclosing agreement will be required unless the taxpayer submits the following REPRESENTA-TION: No income items, including accounts receivable or any item resulting from a sale,exchange or disposition of property, that would have resulted in income to the distributingcorporation, and no items of expense will be transferred to the controlled corporation if thedistributing corporation has earned the right to receive the income or could claim adeduction for the expense under the accrual or similar method of accounting.

(2) Indebtedness.Debt cancellation (a) Cancellation of indebtedness. If any indebtedness has been or will be cancelled in

connection with the transaction, give complete details concerning the principal amount of theindebtedness, the circumstances under which it arose, and the date and method under whichthe indebtedness will be discharged.

Intercorporateindebtedness

(b) Continuing indebtedness. Submit the following REPRESENTATION: No intercorporatedebt will exist between the distributing corporation and the controlled corporation at the timeof, or subsequent to, the distribution of the controlled corporation stock. Alternatively, submita full description of all existing, planned, or intended debt between Distributing and

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Controlled, including complete details as to principal amounts, terms, and reasons for theissuance. Include copies of any instruments evidencing the intercorporate indebtedness. If anydebt exists between Controlled, as debtor, and Distributing, as creditor, state whether suchdebt arose in connection with a transfer of assets by Distributing to Controlled. If so, explainthe circumstances.

Consolidated transactions (3) Consolidated transactions. If Distributing joins in the filing of a consolidated federalincome tax return, submit the following REPRESENTATION: Immediately before thedistribution, items of income, gain, loss, deduction, and credit will be taken into account asrequired by the applicable intercompany transaction regulations (See § 1.1502–13 and§1.1502–14 as in effect before the publication of T.D. 8597, 1995–32 I.R.B. 6, and ascurrently in effect; § 1.1502–13 as published by T.D. 8597). Further, Distributing’s excessloss account with respect to the Controlled stock will be included in income immediatelybefore the distribution (See § 1.1502–19).

Future intercorporatetransactions

(4) Continuing transactions between Distributing and Controlled (or two or morecontrolled corporations). Describe in detail any continuing, planned, or intended transactionsbetween Distributing and Controlled following the distribution, either directly or indirectly(such as through a partnership), or between an Other Corporation and a corporation fromwhich it will be separated. In addition, submit the following REPRESENTATION: Paymentsmade in connection with all continuing transactions, if any, between the distributing andcontrolled corporations, will be for fair market value based on terms and conditions arrivedat by the parties bargaining at arm’s length.

Investment company (5) Investment company. If assets are transferred by Distributing to Controlled, or ifliabilities owed by Controlled to Distributing are cancelled, submit the followingREPRESENTATION: No two parties to the transaction are investment companies as defined in§ 368(a)(2)(F)(iii) and (iv).

Consideration received byDistributing

(6) Transfers of money or property to Distributing. Set forth all consideration received byDistributing, including distributions by Controlled to Distributing, in connection with thetransaction. Describe any receipt of money or property by Distributing from Controlled incontemplation of the distribution (other than in the ordinary course of business).

Foreign corporation (7) Foreign corporation. State whether Distributing, Controlled, or any Other Corporationis a foreign corporation and whether any such foreign corporation is a passive foreigninvestment corporation (as defined in § 1296(a)), or a controlled foreign corporation (asdefined in § 957) both before and after the distribution. See §§ 367(b), 367(e)(1), 897, and1248(f).

Other transactions (8) Other transactions. State whether there have been, or will be, any related transactions,and, if so, describe these other transactions and fully explain their relationship to, and impacton, the present transaction. Even if the transaction is thought to be unrelated, provide fulldetails if it is contemplated that any stock is to be issued or redeemed by Distributing,Controlled, or Other Corporations, other than that already described as being distributedpursuant to the plan. Provide a description of any plan or intention to issue, redeem, or alterany rights in, such as voting rights, shares of stock of Distributing, Controlled, or OtherCorporations.

Plan of reorganization andother relevant documents

(9) Plan of reorganization and other relevant documents. Submit a copy of the plan ofreorganization or distribution. Alternatively, state why a copy is not available. In addition,submit a copy of any indemnification and tax sharing agreements to which Distributing orControlled is a party.

If these or any other documents requested in this revenue procedure become available afterfiling the ruling request, submit copies as soon as possible.

Requested rulings (10) Requested rulings. List the rulings being requested in the exact wording desired, andprovide statutory, regulatory, or other authority for their issuance.

Presubmissionconference

(11) Presubmission conference. Prior to submitting a § 355 ruling request, the taxpayermay request a conference with the Office of Assistant Chief Counsel (Corporate). Apresubmission conference is particularly recommended if the transaction does not satisfy allof the requirements or relevant guidelines of this revenue procedure. The taxpayer mustsubmit a description of the transaction, including the name of the taxpayer, and amemorandum of the issues to be discussed at the conference, at least three business daysbefore the conference. The taxpayer must provide a power of attorney for each representativeattending the conference. In appropriate cases, the Service will consider conducting thepresubmission conference by telephone. For additional information regarding presubmissionconferences, see the annual revenue procedure referred to in section 2 of this revenueprocedure and contact the Office of the Assistant Chief Counsel (Corporate) at (202)622-7710 (not a toll-free call).

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SECTION 5. EFFECT ONOTHER DOCUMENTS

.01 Rev. Procs. 91–63, 91–62, and 86–41 are superseded. Section 3.01(23) of Rev. Proc.96–3 is revoked.

.02 The item relating to the § 355 Checklist Questionnaire in section 9.01 of Rev. Proc.96–1 is amended to read as follows: Rev. Proc. 96–30, 1996–19 I.R.B. 8.

.03 Section 9.02 of Rev. Proc. 96–1 is modified to replace the reference to Rev. Proc. 91–63 with a reference to section 4.05(1)(b) of Rev. Proc. 96–30.

SECTION 6. EFFECTIVEDATE

This revenue procedure will apply to all ruling requests postmarked, or, if not mailed,received, on or after June 5, 1996. However, the Service may ask the taxpayer to submitinformation specified in this revenue procedure for any ruling requests submitted prior to thatdate. The revocation of section 3.01(23) of Rev. Proc. 96–3 is effective on date May 6, 1996.The Service will entertain ruling requests on the business purposes listed in Appendix A ofthis revenue procedure whether the ruling request arrives before, on, or after the publicationdate of this revenue procedure.

DRAFTING INFORMATION The principal author of this revenue procedure is Dean P. Lekos of the Office of AssistantChief Counsel (Corporate). For further information regarding this revenue procedure, contactMr. Lekos on (202) 622-7550 or Mr. Howard W. Staiman on (202) 622-7750 (not toll-freecalls).

APPENDIX A

SECTION 1. BUSINESS PURPOSE GUIDELINESAppendix A provides guidelines that the Service will use, for ruling purposes, in evaluating whether a distribution satisfies

the corporate business purpose requirement in certain situations. These guidelines apply in addition to the requirementsspecified in section 4.04 of this revenue procedure.

The business purposes described in this Appendix A are not an exclusive list of Corporate Business Purposes for whichthe Service will issue a favorable ruling. If a purpose for the transaction is not described in Appendix A of this revenueprocedure, the taxpayer should follow section 4.04 of this revenue procedure to establish that the distribution satisfies thecorporate business purpose requirement. The failure of a transaction to meet the guidelines in this Appendix A does not, inand of itself, mean that the distribution is not carried out for a Corporate Business Purpose. Moreover, the Service willconsider requests for rulings that do not satisfy the guidelines in this Appendix A and may rule favorably in appropriatecircumstances. Conversely, although a transaction may fall within the literal language of these guidelines, the Service willnot issue a favorable ruling unless it is satisfied that the transaction is motivated, in whole or substantial part, by a real andsubstantial nonfederal tax purpose germane to the business of Distributing, Controlled, or the affiliated group to whichDistributing belongs, and that the purpose cannot be achieved through a nontaxable transaction that does not involve thedistribution of Controlled stock and which is neither impractical nor unduly expensive. The Service will continue to evaluatethe guidelines in this Appendix A and may modify them when appropriate.

The Service recognizes that a particular transaction may be motivated, in whole or substantial part, by more than onebusiness purpose described in this Appendix A. Generally, in such cases, satisfying the guidelines for one CorporateBusiness Purpose that motivates the transaction, in substantial part, will suffice.

A reference to Distributing or Controlled includes, as the context requires, a reference to Other Corporations (as defined insection 4.03(5) of this revenue procedure), or to a corporation that will be formed as part of the transaction.

SECTION 2. SPECIFIC CORPORATE BUSINESS PURPOSES

.01 Key Employee.

(1) General. To establish that a Corporate Business Purpose for the distribution is to provide an equity interest in abusiness of Distributing or Controlled to a current or prospective employee, or employees, ordinarily, the taxpayer mustdemonstrate to the satisfaction of the Service that:

(a) The transfer of Distributing or Controlled stock to this employee, or these employees, will accomplish a real andsubstantial purpose germane to the business of Distributing, Controlled or the affiliated group (as defined in § 1.355–3(b)(4)(iv)) to which Distributing belongs. Among other things, the taxpayer must explain why the individual, or eachindividual, is considered a key employee, and why it is necessary to give the individual, or each individual, an equityinterest of the type and amount proposed in the transaction.

(b) Generally within one year of the distribution, the employee, or the employees as a group, will receive asignificant amount, in terms of percentage and value, of voting stock of either Distributing or Controlled. (An acquisitionof a significant percentage of stock may not be required, however, if it would be prohibitively expensive for the employee,

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or employees, to acquire a significant percentage of stock.) The taxpayer must state when the employee, or employees, willacquire the stock and fully describe the terms and method of acquisition (for example, purchase, compensation, or exerciseof an option).

(c) The objective to be accomplished by transferring stock to the employee, or employees, cannot be accomplishedby an alternative nontaxable transaction that does not involve the distribution of Controlled stock and which is neitherimpractical nor unduly expensive. (For example, the Service generally will consider that it is unduly expensive to create acontrolled corporation that would terminate an existing S corporation election. In such cases, however, the taxpayer mustdemonstrate why another nontaxable transaction, such as the transfer of assets to a partnership or limited liabilitycompany, is neither impractical nor unduly expensive.) Where the taxpayer contends that a transaction involving adistribution will provide the employee, or employees, voting power representing a meaningful voice in the governance oftheir employer’s business that is not available through an alternative transaction, the Service will consider such cases on acase-by-case basis, taking into account factors such as the distribution of voting power among the shareholders, familyrelationships, and competing economic interests.

(2) Options and restricted stock. The Service will scrutinize closely situations in which stock issued to the employee,or employees is subject to an option or restriction.

(3) Stock ownership plans. The principles of section 2.01(1) and (2) of this Appendix A also apply if a businesspurpose is to transfer Distributing or Controlled stock to an employee stock ownership plan described in § 4975(e)(7) (an‘‘ESOP’’), treating the ESOP as a group of key employees. Other plans relating to employee stock ownership will beconsidered on a case-by-case basis.

.02 Stock offering. To establish that a Corporate Business Purpose for the distribution is to facilitate a stock offering,ordinarily, the taxpayer must demonstrate to the satisfaction of the Service that:

(1) The issuing corporation needs to raise a substantial amount of capital in the near future to fund operations, capitalexpenditures, acquisitions, the retirement of indebtedness, or other business needs.

(2) The stock offering will raise significantly more funds per share (net of transaction costs of the distribution), or isotherwise more advantageous, if Distributing and Controlled are separated in connection with the offering. The taxpayerordinarily must submit substantiation in the form of an analysis based on the professional judgment of persons qualified tospeak to such matters. The analysis should be supported by data involving comparable corporations, businesses, and stockofferings and should compare the expected results of an offering, taking into account the proposed distribution, with theexpected results of an offering by Distributing or Controlled without the distribution. Generally, the Service willacknowledge (without extensive substantiation) that an offering of publicly traded stock by a widely held corporation withno significant shareholders will raise more funds per share than an offering by the same corporation in the position of acontrolled subsidiary.

(3) The funds raised in the stock offering will, under all circumstances, be used for the business needs of Distributing,Controlled, or the affiliated group (as defined in § 1.355–3(b)(4)(iv)) to which Distributing belongs. The taxpayer shouldexplain when and how the funds will be used in satisfying such business needs.

(4) The stock offering will be completed within one year of the distribution.(5) If the stock of a corporation with one or more significant shareholders will be purchased by a limited number of

investors who require the distribution as a condition of their participation, the Service may require appropriatesubstantiation from these investors..03 Borrowing. To establish that a Corporate Business Purpose for the distribution is to facilitate borrowing, ordinarily,

the taxpayer must demonstrate to the satisfaction of the Service that: (1) Distributing or Controlled needs to raise a substantial amount of capital in the near future to fund operations, capital

expenditures, acquisitions, or other business needs.(2) The separation will enable Distributing or Controlled to borrow significantly more money or borrow on significantly

better nonfinancial terms. The taxpayer ordinarily must submit substantiation, such as an analysis based on theprofessional judgment of persons qualified to speak to such matters.

(3) The funds raised in the borrowing will, under all circumstances, be used for the business needs of Distributing,Controlled, or the affiliated group (as defined in § 1.355–3(b)(4)(iv)) to which Distributing belongs. The taxpayer shouldexplain when and how the funds will be used in satisfying such business needs.

(4) The borrowing will be completed within one year after the distribution.If the distribution will enable Distributing or Controlled to borrow money at a lower cost, see section 2.04 of this

Appendix A, relating to cost savings..04 Cost savings. To establish that a Corporate Business Purpose for the distribution is cost savings, ordinarily, the

taxpayer must demonstrate to the satisfaction of the Service that the distribution will produce significant cost savings.Ordinarily, the taxpayer’s submission should include analysis based on the professional judgment of persons qualified tospeak to this matter (such as the taxpayer’s insurer for insurance savings, an investment banker for lower borrowing costs,or, in appropriate cases, the taxpayer’s employees). The analysis must explain the savings and why the savings cannot beachieved through a nontaxable transaction that does not involve the distribution of stock of Controlled and which is neitherimpractical nor unduly expensive.

Significant cost savings generally are projection period cost savings equal to at least one percent of the base period netincome of Distributing’s affiliated group. Projection period cost savings are the total anticipated future cost savings to

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Distributing, Controlled, and their affiliated group for the 3-year period following the distribution, reduced by the transactioncosts of the distribution and any anticipated additional direct or indirect costs to Distributing, Controlled and their affiliatedgroup, all of which are computed on an after-tax basis. For this purpose, all savings (whether or not from the same source)and all additional costs to Distributing, Controlled, and their affiliated group are aggregated. Base period net income is thetotal net consolidated financial income of Distributing’s affiliated group for the 3-year period preceding the distribution, allof which is computed on an after-tax basis, using generally accepted accounting principles. The taxpayer may choose to usethe 5-year periods preceding and following the distribution for the base period and projection period instead of 3-yearperiods. Members of an affiliated group are determined in accordance with § 1.355-3(b)(4)(iv). In the case of foreign taxsavings, explain the extent to which the foreign tax that is expected to be saved would have resulted in foreign tax credits orforeign tax credit carryovers for federal tax purposes.

The Service may apply different guidelines in various situations, including the following:(1) Projection period cost savings will not equal one percent of base period net income.(2) Net income for one or more of the 3 (or 5) years preceding the distribution is nominal or is affected by

extraordinary or nonrecurring items of gain, loss, income or deduction, or there is a loss for any year.(3) Controlled stock will be distributed to a member of Distributing’s affiliated group.(4) There are cost savings from the reduction of both federal and nonfederal taxes. In certain situations, a purpose of

reducing nonfederal taxes is not a Corporate Business Purpose. See § 1.355–2(b)(2)..05 Fit and Focus.

(1) General. This section 2.05 of Appendix A provides guidelines for a ruling request in which a Corporate BusinessPurpose for the distribution is that the separation will enhance the success of the businesses by enabling the corporations toresolve management, systemic, or other problems that arise (or are exacerbated) by the taxpayer’s operation of differentbusinesses within a single corporation or affiliated group. Except as provided in section 2.05(2) of this Appendix A, theService ordinarily will rule with respect to pro rata as well as non pro rata distributions.

(2) Significant shareholder or nonpublicly traded. If Distributing is not publicly traded (or is publicly traded, but has asignificant shareholder), the Service ordinarily will not rule unless the distribution:

(a) is a non pro rata distribution to enable a significant shareholder or shareholder group to concentrate on aparticular business (see example (2) of § 1.355–2(b)(5)), or

(b) effects an internal restructuring within an affiliated group (members of an affiliated group are determined inaccordance with § 1.355–3(b)(4)(iv)).(3) Significant shareholder defined. A significant shareholder is any person who is directly or indirectly, or together

with related persons, the owner of 5 percent or more of any class of stock of Distributing or Controlled and who activelyparticipates in the management or operation of Distributing or Controlled. If the taxpayer contends that a person meeting orexceeding this 5 percent threshold does not actively participate in management or operations, the taxpayer should submitdetails supporting the taxpayer’s contention.

(4) Substantiation. Documentary substantiation satisfactory to the Service is essential. The documentation shoulddescribe in detail the problems associated with the current corporate structure and demonstrate why the distribution willlessen or eliminate these problems. Internal reports and studies, and analyses based upon the professional judgment ofpersons qualified to speak to such matters (such as investment bankers or management consultants), are examples ofdocumentation that may provide adequate substantiation. Reports by securities analysts or similar materials may also behelpful. However, in the case of a non pro rata distribution made to enable a significant shareholder or shareholder group toconcentrate on a particular business, the Service ordinarily will not require third party documentation or detailed studies.

(5) Special scrutiny. In evaluating the ruling request, the Service will scrutinize closely the following situations:(a) Continuing relationship. Any continuing relationship between Distributing and Controlled to determine if such

relationship is consistent with the stated business purpose. Examples of continuing relationships include commondirectors, officers, or key employees, the provision of goods or services to the other company, or commonly-ownedproperty.

(b) Cross ownership. Except for cases involving an internal restructuring of an affiliated group, any direct or indirectcontinuing interest in both Distributing and Controlled by a significant shareholder or, in the case of a nonpubliclytraded corporation, any other shareholder. For example, if the purpose of the distribution is to allow a significantshareholder to concentrate on a particular business, the Service ordinarily will require, as a condition of ruling, that theseparating shareholders not maintain interests (including interests as employees or directors) in both Distributing andControlled after the distribution. Exceptions will be made on a case-by-case basis, taking into account the extent andnature of the interest in each corporation.

(c) Certain internal restructurings. Any internal restructuring in which the distributee is not entitled to eliminate,exclude, or receive a 100 percent dividends-received deduction with respect to, a distribution from Distributing, such asa transaction involving a foreign corporation.

.06 Competition.(1) General. To establish that a Corporate Business Purpose for the distribution is to resolve the taxpayer’s problems

with customers or suppliers who object to Distributing or Controlled being associated with a business that competes with thecustomer or supplier, ordinarily, the taxpayer must demonstrate to the satisfaction of the Service that:

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(a) One or more customers or suppliers have significantly reduced (or will significantly reduce) their purchases from,or sales to (or, for potential customers or suppliers, have not made any purchases from, or sales to), Distributing orControlled because of the competing business.

(b) Because of the distribution, these customers or suppliers will significantly increase (or not implement a plannedsignificant reduction in) their purchases from, or sales to, Distributing or Controlled after the distribution.

(c) These customers or suppliers do not object to the Distributing shareholders’ ownership of stock of Controlledafter the distribution.

(d) Sales to these customers, or purchases from these suppliers, will represent a meaningful amount of sales orpurchases by Distributing or Controlled after the distribution.

(2) Substantiation. The taxpayer must submit substantiating evidence. In most cases, corroboration from customers orsuppliers will be required.

.07 Facilitating an acquisition of Distributing. To establish that a Corporate Business Purpose for the distribution is totailor Distributing’s assets to facilitate a subsequent tax-free acquisition of Distributing by another corporation (the‘‘acquiring corporation’’), ordinarily, the taxpayer must demonstrate to the satisfaction of the Service that:

(1) The acquisition will not be completed unless Distributing and Controlled are separated.

(2) The acquisition cannot be accomplished by an alternative nontaxable transaction that does not involve thedistribution of Controlled stock and is neither impractical nor unduly expensive.

(3) The acquiring corporation is not related to Distributing or Controlled. If the taxpayer contends that the Serviceshould rule favorably, notwithstanding the fact that the acquiring corporation is related to Distributing or Controlled,explain the relationship and why the Service should disregard the relationship.

(4) The acquisition will be completed, and, except in unusual circumstances, will be completed within one year of thedistribution.

.08 Facilitating an acquisition by Distributing or Controlled. To establish that a Corporate Business Purpose for thedistribution is to tailor Distributing’s assets or Controlled’s corporate structure to facilitate a subsequent tax-free acquisitionof another corporation (the ‘‘target corporation’’) by Distributing or Controlled, ordinarily, the taxpayer must demonstrate tothe satisfaction of the Service that:

(1) The combination of the target corporation with Distributing or Controlled will not be undertaken unless Distributingand Controlled are separated.

(2) The acquisition cannot be accomplished by an alternative nontaxable transaction that does not involve thedistribution of Controlled stock and is neither impractical nor unduly expensive.

(3) The target corporation is not related to Distributing or Controlled. If the taxpayer contends that the Service shouldrule favorably, notwithstanding the fact that the target corporation is related to Distributing or Controlled, explain therelationship and why the Service should disregard the relationship.

(4) The acquisition will be completed, and, except in unusual circumstances, will be completed within one year of thedistribution.

.09 Risk Reduction. If a Corporate Business Purpose for the distribution is to significantly enhance the protection of oneor more businesses (the ‘‘other businesses’’) from the risks of another business (the ‘‘risky business’’), the factors theService will consider, and the taxpayer should address, include:

(1) The nature and magnitude of the risks faced by the risky business. The taxpayer must submit information regardingthe claims history of the risky business, or of the typical risk experience of similar businesses in that industry.

(2) Whether the assets and insurance associated with the risky business are sufficient to meet reasonably expectedclaims arising from the conduct of the risky business. The taxpayer must submit the book value and approximate fairmarket value of the net assets, including intangibles, of the risky business. Describe any other factors, such as liabilitiesthat are not included on the taxpayer’s balance sheet, that affect the value of the net assets of the risky business. Thetaxpayer must submit information as to the taxpayer’s current insurance coverage and discuss the availability and cost ofadditional insurance. Facts regarding the cost and availability of insurance generally will require third party substantiation.If affordable insurance is available, but a separation of the businesses would reduce the cost, see section 2.04 of thisAppendix A, relating to cost savings.

(3) Whether, under applicable law, the distribution will significantly enhance the protection of the other businessesfrom the risks of the risky business and, whether, under applicable law, an alternative nontaxable transaction that does notinvolve the distribution of Controlled stock and which is neither impractical nor unduly expensive (for example, creating aparent/subsidiary or holding company structure) would provide similar protection. See example (3) of § 1.355–2(b)(5). Thetaxpayer’s submission should include an analysis of the law and the application of the law to the relevant facts of theproposed transaction. An opinion of counsel may be required. It is not necessary for the taxpayer to establish conclusivelythat, under applicable law, the proposed transaction will afford adequate protection or that an alternative transaction wouldnot afford adequate protection. However, the taxpayer must convince the Service that, based on objective analysis of thelaw and its application to the facts, risk reduction is a real and substantial purpose for the transaction.

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APPENDIX B

SECTION 1. RULING REQUESTS INVOLVING RETENTION OF STOCK OR OPTIONS BY DISTRIBUTING

.01 The Service will issue favorable rulings regarding the application of § 355(a)(1)(D)(ii), relating to the retention byDistributing of stock or options in Controlled, to transactions in which Controlled stock will be widely held if Distributingestablishes that the following requirements are satisfied:

(1) A sufficient business purpose exists for the retention of the stock, options, and any stock acquired on the exerciseof the options.

(2) None of Distributing’s directors or officers will serve as directors or officers of Controlled as long as Distributingretains the stock, options, or any stock acquired on the exercise of the options. Under appropriate facts and circumstances,the Service may issue a favorable ruling in cases in which the directors or officers of Distributing will serve as directorsor officers of Controlled. For example, the Service may issue a favorable ruling if a director or officer of Distributingserves as a director or officer of Controlled solely to accommodate Controlled’s business needs.

(3) The retained stock, options, and any stock acquired upon exercise of the options will be disposed of as soon as adisposition is warranted consistent with the business purpose specified in section 1.01(1) of this Appendix B, but in anyevent, not later than 5 years after the distribution.

(4) Distributing will vote the retained stock and any stock acquired on exercise of the options in proportion to the votescast by Controlled’s other shareholders. For example, if after the distribution the other shareholders of Controlled vote 70percent in favor of a matter and 30 percent against, Distributing would be required to vote the stock 70 percent in favorand 30 percent against the matter..02 In other cases, the Service may issue favorable rulings, based upon all relevant facts and circumstances, regarding the

application of § 355(a)(1)(D)(ii). For example, the Service will rule favorably if the transaction is covered by Rev. Rul. 75–321, 1975–2 C.B. 123.

APPENDIX C

SECTION 1. REPRESENTATIONS REGARDING S CORPORATION STATUS

.01 This Appendix C contains representations regarding S corporation status that the taxpayer may submit to lessen theService’s concerns about the potential avoidance of federal taxes. These representations may be submitted if eitherDistributing or Controlled will be eligible to elect S corporation status after the distribution. If either Distributing orControlled will be eligible to elect S corporation status after the distribution, but the taxpayer does not submit any of therepresentations in this Appendix C, please explain. The taxpayer’s failure to submit any of the representations will notprevent the Service from issuing a favorable ruling if it is satisfied that the distribution is motivated in whole or substantialpart by one or more Corporate Business Purposes. On the other hand, there may be cases where the submission of one of therepresentations will not conclusively establish that the transaction does not have the potential for the avoidance of federaltaxes.

(1) No S elections. REPRESENTATION: The distributing corporation is not an S corporation (within the meaning of§ 1361(a)), and there is no plan or intention by the distributing or controlled corporation to make an S corporation electionpursuant to § 1362(a).

(2) Distributing and Controlled will elect S corporation status. REPRESENTATION: The distributing corporation is notan S corporation (within the meaning of § 1361(a)), but immediately before the distribution, the distributing corporation willbe eligible to make an S corporation election pursuant to § 1362(a). The distributing and controlled corporations will electto be an S corporation pursuant to § 1362(a) on the first available date after the distribution, and there is no plan or intentto revoke or otherwise terminate the S corporation election of either the distributing or controlled corporation.

(3) Distributing is an S corporation. REPRESENTATION: The distributing corporation is an S corporation (within themeaning of § 1361(a)). The controlled corporation will elect to be an S corporation pursuant to § 1362(a) on the firstavailable date after the distribution and there is no plan or intent to revoke or otherwise terminate the S corporationelection of either the distributing or controlled corporation.

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Part IV. Items of General Interest

Notice of Proposed Rulemaking andWithdrawal of Notice of PorposedRulemaking

General Revision of RegulationsRelating to Withholding of Tax onCertain U.S. Source Income Paid toForeign Persons and RelatedCollection, Refunds, and Credits;Revision of Information Reporting andBackup Withholding Regulations; andRemoval of Regulations Under Part35a and of Certain RegulationsUnder Income Tax Treaties

INTL–062–90; INTL–0032–93; INTL–52–86; INTL–52–94

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemak-ing and withdrawal of notice of pro-posed rulemaking.

SUMMARY: This document containsproposed regulations relating to thewithholding of income tax under sec-tions 1441 and 1442 on certain U.S.source income paid to foreign persons,the related tax deposit and reportingrequirements under section 1461, andthe related collection, refunds, andcredits of withheld tax under sections1461 through 1463 and section 6402.Additionally, this document containsproposed regulations relating to thestatutory exemption under sections871(h) and 881(c) for portfolio interest.This document proposes to removecertain temporary employment tax reg-ulations under the Interest and Divi-dend Compliance Act of 1983 and toamend existing regulations under sec-tions 6041A and 6050N. This docu-ment also proposes changes to pro-posed regulations contained in projectnumber INTL–52–86 [1988–1 C.B.892], published on February 29, 1988(53 FR 5991) under sections 6041,6042, 6045, and 6049. This documentproposes related changes to the regula-tions under sections 163(f), 165(j),3401, 3406, 6114, and 6413 andproposes further changes to the pro-posed regulations under section 6109contained in project number IL–0024–94 [1995–27 I.R.B. 33] published onJune 8, 1995 (60 FR 30211). Thisdocument proposes to remove certainregulations under income tax treaties.

The IRS and Treasury have reviewedcurrent withholding and reporting pro-cedures applicable to cross-borderflows of income and have concludedthat changes are necessary in view ofthe substantial growth in such flowsover the past 15 years. This documentalso removes proposed regulations pub-lished on July 12, 1976 (41 FR 28517)and September 10, 1984 (49 FR355110), respectively.

DATES: Written comments and re-quests for a public hearing must bereceived by July 22, 1996.

ADDRESSES: Send submissions to:CC:DOM:CORP:R ([INTL–0032–93]),Room 5228, Internal Revenue Service,POB 7604, Ben Franklin Station,Washington, DC 20044. In the alterna-tive, submissions may be hand deliv-ered between the hours of 8 a.m. and 5p.m. to: CC:DOM:CORP:R ([INTL–0032–93]), Courier’s Desk, InternalRevenue Service, 1111 ConstitutionAvenue NW., Washington, DC.

FOR FURTHER INFORMATIONCONTACT: Philip Garlett, telephone(202) 622-3880 (not a toll-free num-ber), for questions on proposed regula-tions under sections 1441, 1442, 1461,1462, 1463, 3401, 6402, and 6413;Gwendolyn A. Stanley, telephone (202)622-3860 (not a toll-free number) forquestions on payments to partnerships;Carl Cooper, telephone (202) 622-3840(not a toll-free number) for questionson proposed regulations under sections163(f), 165(j), 871(h) and 881(c) andon withholding agreements; TeresaBurridge Hughes, telephone (202)622-3880 (not a toll-free number), forquestions on proposed regulations un-der sections 6041 through 6049,6050N; Teresa Burridge Hughes, tele-phone (202) 622-3880 and RenayFrance, telephone (202) 622-4910, forquestions on proposed regulations un-der section 3406; Elissa Shendalman(202) 622-3870 on proposed regula-tions under section 6045 and 6049relating to the reporting of paymentsmade in a currency other than the U.S.dollar or transactions subject to section988; Lilo Hester, telephone (202)874-1490 (not a toll-free number), forquestions on proposed regulations un-der section 6109; David F. Bergkuist,telephone (202) 622-3860 (not a toll-

free number), for questions on pro-posed regulations under section 6114.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information con-tained in this notice of proposedrulemaking have been submitted to theOffice of Management and Budget forreview in accordance with the Paper-work Reduction Act of 1995 (44U.S.C. 3507).

Comments on the collection of infor-mation should be sent to the Office ofManagement and Budget, Attn: DeskOfficer for the Department of theTreasury, Office of Information andRegulatory Affairs, Washington, DC20503, with copies to the InternalRevenue Service, Attn: IRS ReportsClearance Officer, T:FP, Washington,DC 20224. Comments on the collec-tions of information should be receivedby June 21, 1996.

An agency may not conduct orsponsor, and a person is not required torespond to, a collection of informationunless the collection of informationdisplays a valid control number.

The collections of information relat-ing to foreign persons that receivepayments subject to withholding undersections 1441 or 1442 of the InternalRevenue Code are in §§1.1441–1(e),1.1441–4(a)(2), 1.1441–4(b) (1) and(2), 1.1441–4(c), (d) and (e), 1.1441–5(a)(2)(ii), 1.1441–5(b), 1.1441–6(b)and (c), 1.1441–8(b), 1.1441–9(b),1.1461–1(b) and (c), 301.6114–1, and301.6402–3(e), 31.3401(a)(6)–1(e).This information is required by the IRSto identify and verify the status ofpersons to whom payments of U.S.source income is made. This informa-tion will be used to claim foreignperson status and, in appropriate cases,to claim residence in a country withwhich the United States has an incometax treaty in effect, so that withholdingat a reduced rate of tax may be ob-tained at source. The likely respondentsand recordkeepers are individuals, stateor local governments, farms, businessor other for-profit institutions, federalagencies, nonprofit institutions, andsmall business or organizations. Re-sponses to this collection of informa-tion are mandatory.

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Books or records relating to a col-lection of information must be retainedas long as their contents may becomematerial in the administration of anyinternal revenue law. Generally, taxreturns and tax return information areconfidential, as required by 26 U.S.C.6103.

The burden for the reporting require-ment contained in §§1.1441–1(e)(2),1 .1441–4(a) (2) , 1 .1441–4(b) (2) ,1.1441–4(c)(2), 1.1441–4(d), 1.1441–4(e)(1), (2) and (3), 1.1441–6(b),1.1441–8(b), 1.1441–9(a)(2), 301.6114–1(b)(4), and 301.6402–3(e) will bereflected in the burden of Form W–8,Form 8833, Form 8233, and the incometax return of a foreign person filed forpurposes of claiming a refund of tax.

The collection of information re-quirement for corporations contained in§1.6049–4(c) will be reflected in theburden of Form W–8.

The requirement for the recordkeep-ing requirement in §1.6049–5(c)(1)(ii)and (iii) is in an existing regulation,appearing in TD 7966 that was ap-proved under OMB number 1545–0112.

Background

This document contains proposedamendments to the Income Tax Regula-tions (CFR parts 1, 31, 35a and 301)under sections 163(f), 165(j), 871, 881,1441, 1442, 1461, 1462, 1463, 3401,3406, 6041, 6041A, 6042, 6045, 6049,6050N, 6109, 6114, 6402, and 6413 ofthe Internal Revenue Code (Code). Thisdocument also proposes to removecertain regulations under income taxtreaties.

Explanation of Provisions

A. Current rules

These proposed regulations deal withthe withholding of tax under section1441, 1442, or 1443 on amounts paidto foreign persons, procedures forclaiming foreign status to avoid backupwithholding under section 3406 on cer-tain payments, and the reporting to theIRS of payments to foreign persons.Reporting to the IRS may be requiredunder sections 6011 and 1461 or underthe reporting provisions of chapter 61of the Code, such as sections 6041,6041A, 6042, 6044, 6045, 6049,6050H, and 6050N, (the 1099 reportingprovisions).

1. U.S. income tax on U.S. sourceincome of foreign persons.

Under sections 871(a) and 881(a) ofthe Code, non-resident alien individualsand foreign corporations are subject toa 30 percent tax on most items ofincome they receive from sourceswithin the United States that are noteffectively connected with the conductof a trade or business in the UnitedStates. Income taxable under theseprovisions includes interest, dividends,royalties, compensation, and other fixedor determinable annual or periodicalincome. The tax liability imposed undersection 871(a) and 881(a) is generallycollected by way of withholding atsource under section 1441(a) (for pay-ments to non-resident alien individualsand foreign partnerships) or undersection 1442(a) (for payments to for-eign corporations). Special withholdingprovisions apply under section 1443 topayments of certain income to foreigntax-exempt entities.

The 30 percent rate is often reducedunder the Code or an income tax treaty.Under current regulations, a withhold-ing agent may generally rely on astatement furnished by, or on behalf of,the beneficial owner certifying entitle-ment to a reduced rate. For example,the portfolio interest exception undersection 871(h) and 881(c) is condi-tioned upon the beneficial owner of theinterest providing a statement of for-eign status to the U.S. withholdingagent, which can be provided on aForm W–8. See §35a.9999–5(b), A–9.If a reduction is claimed under anincome tax treaty, the withholdingagent may generally rely on a Form1001 provided by, or on behalf of, thebeneficial owner claiming residence ina treaty country. For dividends, how-ever, no certification is required andthe withholding agent may generallyrely on the address of the payee in thetreaty country. The procedural require-ments for claiming a reduced rate ofwithholding may vary depending uponthe type of income, the taxpayer, orwhether a treaty is involved.

A withholding agent is generallyrequired to file an annual income taxreturn on Form 1042 to report amountsupon which a tax was actually withheldunder chapter 3 of the Code or wouldhave been required to be withheld butfor an exemption under the Code, theregulations, or an income tax treaty. Aninformation return on a Form 1042–S

must be attached to the Form 1042 andreport each recipient’s name and ad-dress, amounts paid, and taxes with-held, if any. Section 1.1461–2(b) and(c).

2. Backup withholding

Under chapter 61 of the Code andsection 3406, a reportable payment, asdefined in section 3406(b), is subject tobackup withholding at the rate of 31percent unless the payor receives ataxpayer identifying number (TIN),generally on a Form W–9, and, forreportable interest and dividends, acertification that the payee is notsubject to notified payee underreport-ing. The payor of a reportable paymentis also generally required to file Form1099 with the IRS showing the name,address, and TIN of the payee; theamount of the payment; and the amountthat was withheld, if any. The payormust also provide a copy of Form 1099to the payee, who must report thepayment on an income tax return to theextent the payment constitutes grossincome. A payor that fails to obtain aTIN or other required information or tobackup withhold when required undersection 3406 may also be liable undersection 3403 for the amount that shouldhave been withheld. Information report-ing by payors is critical to a matchingsystem that allows the IRS to matchinformation provided by payors withincome reported on a payee’s return.

The information reporting provisionsof chapter 61 provide guidance to helppayors determine when payments aremade to a foreign person and, there-fore, exempt from 1099 reporting andbackup withholding. Generally, depend-ing upon the type of payment involved,a payor may rely on a certification offoreign status made on Form W–8,Form 1001, Form 4224, or on docu-mentary evidence. Therefore, eventhough an amount is exempt fromwithholding under chapter 3 of theCode if earned by a foreign person(e.g., gain from the sale of securities),a payor must nevertheless comply withspecified certification procedures inorder to avoid being subject to backupwithholding. Only amounts subject toreporting under the 1099 reportingprovisions can be subject to backupwithholding under section 3406. There-fore, payments to foreign persons thatare exempt from reporting are alsoexempt from backup withholding.

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B. Need for reform

The IRS and Treasury have reviewedthe current withholding and reportingprocedures applicable to cross-borderflows of income and have concludedthat changes are necessary in view ofthe substantial growth in such flowsover the past 15 years. The IRS andTreasury have concluded that allowingthe benefit of the reduced rate at sourcecontinues to be desirable. A system thatreduces withholding at source permitsan investor to receive its full incomewithout the administrative costs anddelays that can occur when applyingfor a refund of withheld taxes. Thisadvantage, however, is necessarily ac-companied by the need to rely, in part,on withholding agents. Withholdingagents perform an important com-pliance function as recipients of thenecessary documentation substantiatingclaims of foreign status and of reducedrates of withholding and as providersof information to the IRS.

One of the important objectives of theproposed revisions is to eliminate un-necessary burdens that the lack ofstandardization and coordination of cur-rent procedures imposes on withholdingagents. For example, under current rules,different forms must be used for dif-ferent purposes; different standards ofproof apply for establishing foreignstatus for purposes of the 1099 reportingprovisions (and the related backup with-holding provisions) and of the Chapter 3withholding provisions. Also, the revi-sions seek to facilitate compliance byclarifying many of the uncertaintiesunder current procedures (e.g., the scopeof due diligence standards imposed onwithholding agents). This proposal alsoaddresses the important issue of pay-ments to intermediaries (nominees,agents, etc.) and whether, in the case ofinterest, dividends, and gross proceedsfrom publicly traded or widely heldobligations or stocks, intermediariesshould certify status on behalf ofbeneficial owners and, if so, how. Undercurrent rules, nominee procedures workdifferently for different types of income.For example, a U.S. broker redeeming ashort-term obligation held by a foreignfinancial institution as an agent mayexempt the payment from 1099 report-ing and backup withholding and grantthe exemption from the 30 percent taxunder section 871(a) without having toobtain certificates or documentation. Ifthe foreign financial institution makes apayment to another person offshore then

no certification or documentation isrequired. On the other hand if, forexample, the foreign financial institu-tion, remitted the amount to a person inthe United States through a U.S. office,it might have to obtain a Form W–8 ora Form W–9. In contrast, interest onregistered obligations may not qualify asportfolio interest under sections 871(h)and 881(c) unless the U.S. withholdingagent receives a statement that thebeneficial owner of the obligation is nota U.S. person (see section 871(h)(2)-(B)(ii)). Current regulations implementthis condition by requiring that abeneficial owner certification be passedup through a chain of intermediaries tothe U.S. withholding agent. These pro-cedures have proved difficult to imple-ment in a number of cases and theseproposed regulations offer alternativeprocedures. The proposed revisions,therefore, respond to the concerns ex-pressed by various representatives of thefinancial community regarding the costof complying with current proceduresand potential harm to the competitive-ness of U.S. financial institutions inhandling investment transactions in theUnited States and abroad.

These proposed regulations are alsoresponsive to the Congressional man-date in section 342 of the Tax Equityand Fiscal Responsibility Act of 1982(TEFRA) that Treasury consider arange of options for replacing theaddress/self-certification method of ad-ministering income tax treaty benefits.Since 1982, the IRS and Treasury havestudied several options for improvingthe withholding tax procedures, includ-ing a system of certification of re-sidence in a treaty country and refundsystems. At hearings held in Februaryof 1985 on proposed regulations issuedin 1984 under section 1441, commentsfrom the public and several U.S. treatypartners made it apparent that certifica-tion requirements, as proposed, wouldcreate too many administrative prob-lems for payments made through nomi-nees. The proposed revisions take thesecomments into account and propose torely on procedures essentially identicalto the procedures proposed for portfoliointerest on registered obligations.

The streamlining of current proce-dures and the implementation of work-able nominee certification proceduresrepresent a substantial simplificationand reduction of burden. The IRS andTreasury expect that this, in turn,should result in greater compliance and

improve the ability by withholdingagents and the IRS to detect abusiveclaims under U.S. income tax treatiesor under the Code.

C. Summary of proposal

1. Changes affecting portfolio-typeinvestments

The proposed regulations under sec-tion 1441 and related Code provisionswould substantially revise some aspectsof the current system for withholdingon, and reporting of, amounts paid toforeign persons. Current certificationprocedures (i.e., Forms W–8, 1001,4224, etc.,) would be unified andreliance standards would be clarified inan effort to streamline the processingof cross-border payments, particularlyby banks and other financial institu-tions. Most forms (W–8, 1001, 4224,8709) are proposed to be combined intoa single form (Form W–8). In addition,taxpayer identifying numbers are notrequired to be stated on withholdingcertificates, with certain limited excep-tions that do not affect market-basedtransactions. These changes are impor-tant steps toward reducing the burdenon withholding agents and assistingtaxpayer compliance.

The address rule for claiming taxtreaty benefits for dividends is pro-posed to be eliminated. Instead, divi-dends would be made subject to thesame beneficial owner and intermediarycertification procedures as are proposedfor portfolio interest on registeredobligations. It is also proposed to applythe same procedures to bank depositinterest (as described in section871(i)(2)(A)). On the other hand, thedocumentary evidence procedures cur-rently in effect for bank deposit intereston accounts held with foreign brancheswould be continued and would be ap-plied as well to offshore payments ofdividends on publicly traded stocks andportfolio interest on registered obliga-tions. Therefore, documentary evidencewould become the general rule fordividends and interest earned on ac-counts held with foreign branches.These proposed changes illustrate theeffort by the IRS and Treasury toeliminate unnecessary procedural dif-ferences in order to reduce the burdenon withholding agents.

The proposal does not generally af-fect other important classes of invest-ment transactions. Thus, current port-

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folio interest rules for bearer obliga-tions (including commercial paper),convertible obligations, pass-throughcertificates, as well as rules for brokerproceeds and short term obligationswould be retained. In order to furthersimplify compliance, the regulationsunder section 165(j) (§1.165–12) areproposed to be revised to eliminate therequirements that, in connection withdelivery of bearer obligations, holdersreceive statements and send confirma-tions. Provisions regarding foreign-targeted registered obligations are to beretained. However, because these spe-cial procedures have been rarely used,comments are solicited on their useful-ness and whether they should beretained.

Foreign intermediary procedures ascurrently applicable to portfolio interest(which are proposed to become appli-cable to dividends and bank depositinterest as well) are substantially re-vised by providing several options,allowing different taxpayers to complyin different ways. These options recog-nize that it is appropriate to adaptwithholding requirements to accommo-date different types of transactions andshould provide substantial relief fromcurrent requirements.

In order to allow sufficient time fortransition, the regulations are proposedto be generally effective for paymentsmade after 1997. In addition, withhold-ing agents would be allowed to con-tinue to rely on existing certificatesafter that date until their validityexpires as determined under currentrules. Comments are solicited onwhether these proposed effective datesleave adequate time to implementnecessary system changes.

The regulations proposed in 1988regarding the reporting by U.S. banksof bank deposit interest paid to Cana-dian residents are finalized, effectivefor payments made on or after January1, 1997 with respect to Forms W–8furnished on or after that date. See theRules and Regulations section of thisissue of the Bulletin.

2. Intermediary procedures options forportfolio interest, dividends onpublicly traded stock, and bankdeposit interest.

The proposed regulations offer inter-mediary certification options designedto simplify compliance by withholdingagents. These procedures would be

mostly relevant to portfolio interest onregistered obligations, dividends onpublicly traded stocks (eliminating theaddress rule), and interest paid on bankdeposits (as described in section871(i)(2)(A)). First, for portfolio inter-est on registered obligations, the cur-rent certification procedures would beretained, as an option and are notreproposed. See §35a.9999–5(b), A–9.These rules will be included in finalregulations in proposed §1.871–14(c)-(2)(iii) and, accordingly, that section ofthe proposed regulations is reserved.Preserving the existing regulations isdesigned to accommodate those tax-payers and withholding agents forwhom the current rules workappropriately.

The regulations propose to add twonew procedures. First, a withholdingagent would be allowed to rely on anintermediary Form W–8 furnished onbehalf of one or more beneficialowners (or other intermediaries) with-out having to obtain beneficial ownerdocumentation if the intermediary hasentered into a withholding agreementwith the IRS and, thus, is a ‘‘qualifiedintermediary.’’ In a chain of intermedi-aries, an intermediary would be al-lowed to rely on the intermediary FormW–8 of another qualified intermediary.If the other intermediary is notqualified, the qualified intermediarywould generally be required to obtainbeneficial owner documentation fromthe other non-qualified intermediary.The qualified intermediary would thenpass such documentation up the chainor rely on such documentation whenissuing its intermediary Form W–8.

Under the withholding agreement pro-cedure, a qualified intermediary wouldagree with the IRS to obtain suchdocumentation or certifications as theagreement would specify. It is contem-plated that institutions that are subject tobona fide ‘‘know-your-customer’’ proce-dures under their domestic laws willgenerally be permitted to rely on suchprocedures. The withholding agreementwill generally include provisions forbeneficial owner information to bereported or made available to the IRSand for the IRS to audit such informa-tion. In appropriate cases, the reportingand audit may be limited to thebeneficial ownership information per-taining to U.S. source income (otherthan gross proceeds) of U.S. customersor to an audit of the reports preparedby, and the methodology employed by,

the approved external auditors of thequalified intermediary.

The regulations propose a secondintermediary procedure permitting a for-eign agent of a U.S. withholding agentto act on behalf of the withholdingagent. While the U.S. withholding agentwould remain liable for the acts (orfailures to act) of its agent, the proposedprocedure streamlines the withholdingprocess as the foreign agent wouldcollect the appropriate documentation onbehalf of the U.S. withholding agent andreport beneficial owner information tothe IRS without having to furnish thedocumentation to the U.S. withholdingagent. The documentation requirementsunder this procedure would be the sameas those normally applicable to with-holding agents.

Lastly, the proposed regulationsprovide that the U.S. competent au-thority may agree to special withhold-ing procedures with a foreign compe-tent authority under an income taxtreaty. The United States intends toconsult with its tax treaty partnersbefore implementing changes thatwould affect its relationship with itstreaty partners.

3. Use of taxpayer identifying number.

A taxpayer identifying number (TIN)is not required to be shown on with-holding documents provided for incomeon portfolio-type investments.

A TIN continues to be required forclaims of effectively connected income.A TIN would also be required to sup-port claims of benefits under an incometax treaty (other than dividends onpublicly traded stocks). Therefore, forexample, payments of dividends onnon-publicly traded stocks, royalties, orrelated party interest would require aTIN to be shown on the withholdingcertificate in order for a withholdingagent to rely on a claim of a reducedrate under a tax treaty.

In the case of an individual, a TINwould generally be an IRS individualtaxpayer identifying number (ITIN)issued by the IRS to a nonresidentalien individual who is not otherwiseeligible for a Social Security Number.In the case of a non-individual, a TINwould be an Employer IdentificationNumber (EIN). Over time, the IRS willissue EIN’s to foreign persons thatbegin with the two digits ‘‘98’’ topermit instant recognition of foreignstatus. See regulations proposed under

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section 6109 contained in project num-ber INTL–0024–94, published on June8, 1995 (60 FR 302111), describing thetypes of taxpayer identifying numbersissued to nonresident alien individualsand the manner in which a number canbe obtained. Further revisions to theregulations under section 6109 areproposed in order to require the state-ment of a TIN in appropriate cases.

4. Other proposed changes

The regulations propose to clarifythe extent of due diligence expectedfrom certain withholding agents, suchas banks and other financial institu-tions. Thus, for payments of portfolio-type income, the withholding agent’sdue diligence would be limited to anexamination of the address stated onthe withholding certificate. If the ad-dress on the certificate were a U.S.address or did not match the addressinformation in its records, the with-holding agent would have to seekfurther proof of a claim of foreignstatus. This change would not affect thecurrent requirement that a withholdingagent cannot ignore what it actuallyknows when determining the extent towhich it may rely on a withholdingcertificate. However, in the case offinancial institutions, knowledge wouldbe limited to information that can beassociated with the account under thesame procedures as apply for purposesof the backup withholding provisions.

As a further burden reduction, theregulations propose to eliminate therequirement to attach withholding cer-tificates to Forms 1042 and 1042–S.The current reporting requirements areotherwise unchanged except for clar-ification of how these requirementsapply in the case of payments tointermediaries. Therefore, even thoughcertification procedures are proposed tobe modified for bank deposit interest,such interest continues to be exemptfrom reporting (except for certain inter-est on bank deposits paid to Canadianresidents).

The period of validity of a certificateof foreign status (Form W–8) is limitedto three years as under current law.However, a Form W–8 stating a bene-ficial owner’s TIN is proposed to bevalid indefinitely if it relates to incomerequired to be reported to the IRS (or ifthe TIN is actually reported eventhough not otherwise required). Thevalidity period for certificates used to

claim a reduced rate for effectivelyconnected income is proposed to beextended from one year to three years.

The regulations propose new proce-dures dealing with payments to foreignpartnerships. These procedures gener-ally would allow looking through to thepartners and reliance on a certificationprovided for each partner. Alter-natively, in order to facilitate certifica-tion for partnerships with many part-ners or for tiered partnerships, theregulations would also allow a foreignpartnership to be a qualified intermedi-ary under an agreement with the IRS.In that case, the partnership would beallowed to furnish an intermediarycertificate for the partnership. Thepartnership would be required to with-hold under section 1441 in the samemanner as a domestic partnership. Inaddition, the regulations would clarifythe manner in which a foreign entityand its interest holders can determineentitlement to benefits under an incometax treaty with a particular countrybased upon the principles in effectunder the laws of that country.

The proposed regulations also ad-dress the practical difficulties that existunder current rules due to the lack ofclear guidelines on determining thestatus of a payee as a U.S. or a foreignperson in the absence of documenta-tion. While some guidelines exist inlimited cases (e.g., §35a.9999–5(b)A–10), guidance is incomplete. Theproposed regulations offer a com-prehensive and uniform set of presump-tions to assist withholding agents withthese determinations.

5. Changes to reporting rules underchapter 61 of the Internal RevenueCode

On February 29, 1988, the IRS andTreasury published in project numberINTL–52–86 (53 FR 5991) proposedamendments to the 1099 informationreporting regulations (the 1988 pro-posed regulations) modifying the re-porting requirements and the proce-dures for presenting a claim of foreignstatus. The provisions in the 1988proposed regulations concerning infor-mation reporting of bank deposit inter-est paid to persons resident in Canadaare finalized. See §1.6049–5(e)(2) ofthe 1988 proposed regulations and theRules and Regulations section of thisissue of the Bulletin. The 1988 pro-posed regulations are not otherwise

amended. In order to standardize proce-dures, changes are proposed to theprocedures for certifying foreign statusthat were proposed in 1988 so as toconform them to those proposed undersection 1441. The IRS and Treasury areconsidering finalizing the 1988 pro-posed regulations at the same time thatthe proposed regulations under section1441 are finalized.

Proposed effective dates

Unless otherwise provided in theregulations, the regulations are pro-posed to be effective for paymentsmade after December 31, 1997. Theregulations contain a number of transi-tion rules designed to phase out cur-rently outstanding withholding certifi-cates (e.g., Forms W–8 and 1001).

Section-by-section analysis

§1.163–5 Denial of interest deductionon certain obligations issued afterDecember 31, 1982, unless issued inregistered form

Section 1.163–5(c) contains foreigntargeting procedures applicable to cer-tain obligations issued in bearer form.Section 1.163–5(c)(2)(i)(B)(5) wouldbe revised to modify the cross-reference to the documentary evidencerules since the Q&A regulations underpart 35a are proposed to be eliminated.

§1.165–12 Denial of deduction forlosses on registration-required obliga-tions not in registered form

Section 165(j)(1) and §1.165–12(a)deny a loss deduction to a holder of aregistration-required obligation that isnot in registered form unless the holdermeets certain exceptions. Under§1.165–12(c)(1)(iii) and (iv), the lossdisallowance rule does not apply to aholder that delivers a registration-required obligation that is in bearerform and that is offered or sold in theUnited States if the holder delivers theobligation to a financial institution, andthe financial institution provides astatement that it is a financial institu-tion within the meaning of §1.165–12(c)(1)(v), it is purchasing the obliga-tion for its own account, the account ofanother financial institution, or anexempt organization, that will complywith section 165(j)(3)(A), (B), or (C).The loss disallowance rule also doesnot apply if a holder delivers a

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registration-required obligation inbearer form that is offered or soldoutside the United States if it isdelivered to a financial institution andthe holder gives the financial institutiona confirmation stating that any U.S.taxpayer that holds the obligation inbearer form and that is not exemptunder section 165(j)(3)(A), (B), or (C)will be denied a deduction for any lossor capital gain treatment with respect tothe obligation. A holder may deliver aregistration-required obligation inbearer form that is offered and soldoutside the United States to a personother than a financial institution only ifthe holder has documentary evidence,as described in §35a.9999–4T, A–5 thatthe person is not a U.S. person.

These proposed regulations wouldrevise §1.165–12(c)(1)(iv) to eliminatethe requirement that the holder receivea statement from a financial institutionfor bearer obligations offered or sold inthe United States. The proposed regula-tions would also eliminate the require-ment that the holder deliver a confir-mation to a financial institution forobligations offered or sold outside theUnited States. These changes are pro-posed to reduce the documentationburden associated with secondary mar-ket transactions. The documentary evi-dence requirement for delivery outsidethe United States to a foreign personother than a financial institution isretained. The proposed regulationswould clarify that the holder mayreceive such evidence electronically.

§1.871–14 Rules for portfolio interest.

Under section 871(h) and 881(c),interest that qualifies as portfolio inter-est is generally exempt from tax and isexempt from withholding at sourceunder section 1441(b)(9). Section1.871–14 proposes procedures govern-ing whether interest (including originalissue discount) qualifies as portfoliointerest described in section 871(h)(2).Section 1.1441–2(d) provides the ex-emption from withholding.

For interest on bearer obligations, theexisting provisions in §35a.9999–5(a),A–1 (dealing with portfolio interest onbearer obligations) and in §35a.9999–5(c) (dealing with convertible obliga-tions) will be incorporated in §1.871–14(b) without substantive changes andare not reproposed. These rules will berestated in proposed §1.871–14(b)(1)and (b)(2) that are currently shown asreserved.

For interest on registered obligations,section 871(h)(2)(B)(ii) provides thatsuch interest qualifies as portfoliointerest only if the U.S. withholdingagent receives a statement that thebeneficial owner is not a United Statesperson. Paragraph (c)(2)(i) providesthat the statement requirement wouldbe satisfied if the beneficial ownerfurnishes the type of documents de-scribed in proposed §1.1441–1(e)(1)(i)for a withholding agent to rely on aclaim of foreign status. Thus, in thecase of a payment to a beneficialowner, the beneficial owner mustprovide a beneficial owner withholdingcertificate described in proposed§1.1441–1(e)(2) or, if the payment ismade on an account held at a foreignbranch, documentary evidence may besubstituted (see paragraph (c)(2)(ii)).The ability to use documentary evi-dence on foreign branch accounts is asignificant change from current law andone that intends to reduce the burdenon transactions outside the UnitedStates. Further, as under current regula-tions, the withholding certificate wouldnot have to state a taxpayer identifyingnumber (although one may be pro-vided, if desired). See §35a.9999–5(b),A–9.

In the case of a payment to a foreignperson that acts as an intermediary(e.g., an agent, representative, nominee,etc.), the proposed procedures undersection 1441 would require either thatthe intermediary furnish an intermedi-ary withholding certificate or, if theintermediary acts as the agent of thewithholding agent, that the intermedi-ary be an authorized foreign agent.Under proposed §1.1441–1(e)(3)(iv) orproposed §1.871–14(c)(2)(iii), the cer-tificate could be, as under current rules,a certificate to which the beneficialowner documentation is attached (see§35a.9999–5(b), A–9). Alternatively,under proposed §1.1441–1(e)(3)(ii), itcould be a certificate by which theintermediary certifies for the beneficialowner (or other intermediaries) withoutbeing required to attach beneficialowner documentation. The latter certifi-cate could be issued only by a qualifiedintermediary, i.e., a person that has anagreement with the IRS. The qualifiedintermediary certificate would be issuedbased upon certifications or documenta-tion obtained by the qualified inter-mediary. The same standards wouldapply to these documents as are pro-posed to be applied to documents that aU.S. withholding agent is required to

obtain when paying directly to abeneficial owner. Therefore, a taxpayeridentifying number is not required tobe shown on a beneficial owner with-holding certificate provided to thequalified intermediary. Alternatively,the qualified intermediary could rely ondocumentary evidence for accountsheld at foreign branches. In addition,different procedures may apply underthe terms of a qualified intermediary’sagreement with the IRS.

Where a withholding agent actsthrough an authorized foreign agent,certificates received by the agent wouldbe deemed to be received by the with-holding agent. In that case, no certifi-cate would be required from theauthorized agent. See proposed§1.1441–7(c)(2) for the description ofan authorized foreign agent and pro-posed §1.1461–1(b)(2)(iii) and (c)(4)-(iii) for the filing of returns by thewithholding agent and its authorizedforeign agent. Paragraph (c)(2)(iv)specifies that other procedures mayapply under a competent authorityagreement with a country with whichthe United States has an income taxtreaty.

The regulations clarify the con-sequences of a late-received Form W–8or other documentation. Paragraph(c)(3) provides that the withholdingcertificate may be received by thewithholding agent at any time beforeexpiration of the beneficial owner’speriod of limitation for claiming arefund of tax with respect to theinterest. The applicable period is de-scribed in section 6511(a). Under thisrule, a foreign person would be al-lowed, for example, to provide therequired certificate to a U.S. withhold-ing agent (or its authorized foreignagent) at any time prior to filing anincome tax return and still be able toqualify the interest as portfolio interest.However, a withholding agent that doesnot hold a valid certificate (or othervalid documentation) when paying theinterest would be required to withhold.Failure to do so would make the with-holding agent liable for the tax if therequired certification or documentationprocedures are not complied with priorto the expiration of the beneficialowner’s period of limitation. If awithholding agent fails to withholdalthough it does not hold a validcertificate, but the documentation pro-cedures are ultimately complied with, awithholding agent would be liable for

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interest pursuant to section 1463 eventhough there is no underlying taxliability. In addition, the withholdingagent may be subject to penalties forfailure to withhold tax. See proposed§1.1441–1(f)(5).

Paragraphs (d) and (e) are reserved.Paragraph (d) will reflect the rules in§35a.9999–5(e), regarding pass-throughcertificates. Paragraph (e) will reflectthe rules in 35a.9999–5(b) A–12through A–15 regarding foreign-targeted registered obligations. Theserules are not reproposed. Under§1.871–14(g), the rules contained inproposed regulation §1.871–14 are pro-posed to be effective for payments ofinterest after December 31, 1997. How-ever, withholding agents may continueto rely on valid Forms W–8 that theyhold on the date that is 60 days afterthe regulations become final until theforms expire under the rules as ineffect on April 22, 1996.

§1.1441–1 Requirement for the with-holding of tax on payments to foreignpersons.

This section states the general rulesconcerning withholding on payments toforeign persons. Paragraph (a) providesthe general purpose and scope of thesection. Paragraph (b) states the generalrule that a withholding agent mustwithhold 30 percent of the grossamount of income subject to withhold-ing if paid to a foreign person unlessthe beneficial owner of the income is aU.S. person or is a foreign personentitled to a reduced rate of tax. Awithholding agent may grant a reducedrate at source in the case of a paymentto a foreign person only if, beforepayment, it can associate the appropri-ate documentation with the payment.Therefore, actual knowledge that thebeneficial owner is a foreign personwould not excuse the obligation toobtain appropriate documentation. Awithholding agent failing to act inaccordance with these rules may ul-timately be relieved from the liabilityfor the tax under section 1461, butwould, in any event, be liable forinterest, and possibly, penalties. Seeparagraph (f)(5). For this purpose,payment to a foreign person includes apayment to a U.S. person if thewithholding agent has actual knowl-edge or reason to know that the U.S.person is acting as the agent of aforeign person. These rules restatecurrent law. See §§1.1441–1 and

1.1441–7(a)(1) of the existingregulations.

Paragraph (c) defines terms, includ-ing payee and beneficial owner. Para-graph (c)(3) defines a payee as theperson to whom the payment is made.This definition has significance forpurposes of coordinating the section1441 withholding provisions with the1099 reporting and backup withholdingrules under chapter 61 of the Code andsection 3406, respectively (the 1099reporting and backup withholding pro-visions determine consequences of pay-ments based on payees; in contrast, thesection 1441 withholding provisionsdetermine consequences of paymentsbased on beneficial owner). In the caseof a payment to a foreign partnership,paragraph (c)(3)(ii) provides that thepartners, and not the partnership, areconsidered to be the payees. However,a foreign partnership could be consid-ered a payee if it certified to thewithholding agent that it is a qualifiedintermediary (see paragraph (e)(5) re-garding qualified intermediaries) or if itcertified that the income is effectivelyconnected with a U.S. trade or business(in which case, the partnership mustitself withhold the tax required undersection 1446). The provisions specifyhow these rules would apply on a look-through basis to tiered partnershipstructures.

Under paragraph (c)(6), a beneficialowner is defined as the person who,under U.S. tax principles, would berequired to include the amount paid ingross income. Therefore, under theseprinciples, partners, and not part-nerships, are the beneficial owners(unless the partner is itself a part-nership, in which case, one looksthrough to the partners of the highesttier foreign partnership). Therefore, theidentification of a beneficial owner isinfluenced by the classification of theentity to which the payment is made.This proposed rule revises §1.1441–3(f)of the existing regulations that, ineffect, treats a partnership as a benefi-cial owner for purposes of the with-holding provisions. This provision hascreated difficulties for partners of aforeign partnership who wish to claimthe benefit of a reduced rate at sourcebased on their status, but may not doso because the entity does not qualifyfor the reduced rate. The proposedregulations would alleviate these diffi-culties by permitting beneficial ownerinformation to be passed to the with-

holding agent or by permitting thepartnership to be a qual i f iedintermediary.

The IRS and Treasury are aware thatsome large investment partnershipshold significant amounts of U.S. port-folio type investments. The IRS andTreasury understand that generallythese entities are treated as corporationsunder the provisions of section7704(c)(3) and the regulations underthat section. Therefore, the proposedrevisions requiring beneficial ownerdocumentation for partners would notadversely affect these entities. The IRSand Treasury solicit comments on thispoint.

Generally, the determination of theclassification of an entity, including anentity organized in a foreign country, ismade under U.S. tax rules. BecauseU.S. and foreign laws may differ onclassification principles, the U.S. taxclassification of an entity as a part-nership or a corporation may differfrom the tax treatment of that entityunder the laws of a foreign country.Therefore, in the case of income paidto a foreign entity, the entity might beconsidered the beneficial owner underU.S. tax principles (because it isclassified as an association taxable as acorporation under U.S. tax principles),but, if foreign tax principles are ap-plied, its interest holders, rather thanthe entity, might be considered thebeneficial owners. This dual character-ization may give rise to difficulties inthe application of income tax treaties.In order to alleviate these difficulties,paragraph (c)(6)(ii)(B) proposes thatforeign tax principles, rather than U.S.tax principles, apply to identify thebeneficial owner of income for which aclaim of a reduced rate of withholdingis made based upon a tax treaty. Underthis proposed rule, when a benefit isclaimed under a tax treaty with aparticular country, the tax principlesthat govern the determination of whothe beneficial owner is for purposes ofobtaining benefits under that treatywould be the principles in effect underthe laws of that country. This clarifica-tion is intended to address the signifi-cant uncertainties resulting from thecurrent lack of guidance on theseissues. The IRS and Treasury intend toconsult with treaty partners in order topromote uniformity in this area. Para-graph (c)(6)(iii) provides that the bene-ficial owner rules in the proposedregulations would not apply to trusts.

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Until further guidance is provided, therules in the current regulations wouldcontinue to apply trusts. See §1.1441–3(f) and (g) of the existing regulations.

While different procedures wouldapply depending upon whether a pay-ment is made to a corporation or apartnership, a withholding agent wouldnot be required to determine the clas-sification of an entity when making apayment to a foreign person. Rather, awithholding agent would be allowed torely on the classification claimed bythe entity, unless it had actual knowl-edge or reason to know otherwise.

Paragraph (d) deals with proceduresthat would enable a withholding agentto determine the circumstances inwhich it could consider that the pay-ment is made to a U.S. person and is,therefore, exempt from section 1441withholding. This paragraph replaces§1.1441–5 of the existing regulationsand proposes to replace Form 1078with Form W–9, consistent with themanner in which a U.S. payee mustgenerally provide a taxpayer identifyingnumber under section 3406. In the caseof a payment to an exempt recipient ora payment of scholarship, grant, pen-sion, or annuities, for which no FormW–9 is required under section 3406, aperson also would be permitted to use aForm W–9 to establish its U.S. status.The regulations specify the informationthat must be stated on such a certifi-cate, which parallels that requiredunder §31.3406(h)–3(e)(2) in order fora payor to reasonably rely on a FormW–9. If no, or insufficient, documenta-tion is provided, the presumptions in§1.1441–1(f) would apply to determinewhether the beneficial owner should betreated as a foreign or U.S. person.

In the case of a payment to a foreignperson acting as an intermediary (e.g.,agent, representative, or nominee) for aU.S. person, paragraph (d)(3) providesthat the intermediary may transmit aForm W–9 for the U.S. person to claimU.S. status and avoid section 1441withholding. If the U.S. person is notan exempt recipient, the withholdingagent would then have to comply withthe 1099 reporting requirements underchapter 61 of the Code, because, underthese rules, the U.S. person would betreated as a payee. Similarly, as a resultof the payee rules set forth in para-graph (c)(3)(ii) dealing with paymentsto foreign partnerships, a withholdingagent may treat a payment to a foreignpartnership as a payment made to a

U.S. person to the extent of the U.S.partner’s distributive share of thatpayment. Similarly, the withholdingagent would have to comply with the1099 reporting requirements.

Paragraph (e) describes the condi-tions for a withholding agent to relyupon a beneficial owner’s claim offoreign status. Paragraph (e)(1)provides that a withholding agent mayrely upon a claim of foreign status if,prior to making the payment, the with-holding agent (1) holds a beneficialowner withholding certificate or anintermediary withholding certificate, (2)complies with on-line confirmation pro-cedures when prescribed by the IRS,and (3) has not received a notificationfrom the IRS that the withholdingcertificate is incorrect or unreliable.The withholding agent’s reliance on thewithholding certificate is subject to thewithholding agent’s actual knowledgeor reason to know otherwise. Seestandards of knowledge in proposed§1.1441–7(b).

Paragraph (e)(2) sets forth the re-quirements for a beneficial ownerwithholding certificate. Generally, awithholding certificate would be aForm W–8 or, in the case of certaincompensation for personal services, aForm 8233 (or an acceptable substitute)that is signed under penalties of perjuryby the beneficial owner and containscertain required information. The cer-tificate serves as a representation thatthe beneficial owner is not a U.S.person and that the conditions forclaiming a reduced rate of withholdingtax are satisfied. These conditions mayvary depending upon the nature of theincome or the type of exemptionclaimed.

Required information on a beneficialowner Form W–8 would include thebeneficial owner’s name, permanentresidence address, the type of incometo be received, and the basis for anyreduced rate claimed. Generally, theForm W–8 would not be required tostate the beneficial owner’s taxpayeridentifying number (‘‘TIN’’), except inlimited cases (see paragraph (e)(4)(vii),below). Paragraph (e)(3) sets forth therequirements for an intermediary with-holding certificate. Intermediary with-holding certificates may be provided byone of three types of persons: (1) aqualified intermediary, (2) a foreignpartnership, or (3) an agent, nominee,or other representative that is not aqualified intermediary.

Information required from a qualifiedintermediary on a Form W–8 would in-clude similar information as that re-quired for the beneficial owner FormW–8 except that the information wouldrelate to the intermediary. In addition,the Form W–8 would have to state aTIN and certify that the issuer is aqualified intermediary and has obtainedthe appropriate certificates or documen-tation with respect to the accountholders covered by the Form W–8. Aforeign partnership that is not a with-holding agent (because it is not aqualified intermediary or acting for theaccount of others) would have to pro-vide the same information about itself,and attach the partners’ withholdingcertificates. In addition, the partnershipwould be required to state an EIN onthe withholding certificate. See pro-posed §1.1441–5(b) for the certificatesrequired to be attached in the case oftiered partnerships. See also, proposed§1.1461–1(c)(4)(v) for Form 1042–Sfiling requirements for the withholdingagent.

An agent, nominee, or representativefurnishing an intermediary certificatewould have to provide informationabout itself, state an EIN for theintermediary (or an SSN or ITIN in thecase of an individual) and certify that itis not acting for its own account and isusing the Form W–8 to transmit bene-ficial owner certification for the pay-ment to which the Form W–8 relates.These procedures are essentially similarto those in effect for portfolio intereston registered obligations under§1.9999–5(b), A9 and that are proposedto be retained in proposed §1.871–14(c)(2)(iii).

Paragraph (e)(4)(i) requires that, inthe case of joint owners, each ownerprovide a withholding certificate. Thisrule would parallel the requirements forbackup withholding purposes. See§31.3406(h)–2(a).

Paragraph (e)(4)(ii)(A) provides thegeneral rule that a withholding certifi-cate would be valid for a period ofthree years or until the circumstancesof the beneficial owner changed, mak-ing an item of information on thecertificate incorrect. However, underparagraph (e)(4)(ii)(B), a withholdingcertificate that includes a TIN would bevalid indefinitely if the income (or,under special procedures, the TIN) with

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which the certificate is associated werereported to the IRS. For example, abank may rely on a claim of foreignstatus by an account holder if it holds aForm W–8 for the account holder evenwithout a TIN. In that case, thecertificate would be valid for a periodof three years only. If, however, theaccount holder were to state a TIN onthe form and the bank adopted proce-dures by which it reports the TIN tothe IRS as provided in proposed§1.1461–1(d), the certificate would bevalid indefinitely until a change incircumstances of the account holdermade the information on the formincorrect.

Second, certificates furnished toclaim a reduced rate of withholding onincome that is effectively connectedwith the conduct of a trade of businesswithin the United States would also belimited to three years in all circum-stances. This is a change from existingregulations under §1.1441–4(a)(2) thatrequire that a new certificate be filedeach year. This change would relievethe burden associated with annualrenewal of these certificates and sim-plify compliance by providing uniformvalidity period rules. The 3-year periodof validity for this certificate wouldextend from the date it is signed to thelast day of the third succeeding calen-dar year. This change would insure afull 3-year validity period in all cases(and up to four years where the certi-ficate is furnished at the beginning ofthe calendar year).

Under paragraph (e)(4)(iii), with-holding certificates must be retained foras long as they are relevant for thedetermination of the withholdingagent’s liability under proposed§1.1461–1. This rule would replace the4-year retention period under currentlaw and conform the rules undersection 1441 to the retention periodrequired for Forms W–9 under section3406. This change is necessary becausethe Form W–8, like Form W–9, is pro-posed to be made valid indefinitely incertain circumstances. Paragraph(e)(4)(iv) anticipates the possibilitythat, in the future, a withholding agentmay rely on electronically transmittedinformation otherwise required to bestated on a withholding certificate.

Paragraph (e)(4)(v) provides for on-line confirmation procedures for TIN’srequired to be stated on withholdingcertificates in order to verify theircorrectness and the claim that it be-

longs to a foreign person. Such proce-dures are being developed by the IRSand, when the system becomes opera-tional, the IRS may require certaincategories of withholding agents hand-ling large volumes of payments toforeign persons (such as certain teach-ing institutions) to perform on-lineconfirmation of such TIN’s. Theseprocedures would be similar to thosecurrently in use under section 3406 inorder to notify payors of an incorrectTIN.

Paragraph (e)(4)(vi) defines an ac-ceptable substitute form. As undersection 3406, these regulations wouldpermit the use of substitute forms pro-vided the information furnished is thesame as is required under the regula-tions and is certified to be correctunder penalties of perjury. See§31.3406(h)–3(c)(1).

Paragraph (e)(4)(vii) provides all ofthe circumstances in which a taxpayeris required to furnish a TIN on awithholding certificate for purposes ofthe regulations under sections 1441,1442, and 1443. Taxpayers would berequired to furnish a TIN when claim-ing the benefit of a reduced rate underan income tax treaty (other than withrespect to dividends on publicly tradedstocks) or because income is effectivelyconnected with a U.S. trade or busi-ness. In addition, intermediaries, part-nerships, foreign organizations claimingto be tax-exempt under section 501(c),and private foundations would be re-quired to furnish a TIN. A TIN wouldbe an IRS Individual Taxpayer Identi-fication Number (ITIN), a Social Se-curity Number (SSN), or an EmployerIdentification Number (EIN). A non-resident alien individual not eligible fora social security number would be ableto obtain an ITIN from the IRS. Seeproposed regulations under section6109 describing procedures for obtain-ing an ITIN.

Paragraph (e)(5)(i) provides that aqualified intermediary may furnish asingle intermediary withholding certifi-cate to a withholding agent on behalfof beneficial owners, other intermedi-aries, and U.S. payees. The qualifiedintermediary would have to obtaincertification or documentation fromthese persons on whose behalf theintermediary withholding certificate isprovided. Generally, the certificationand documentation would be the sameas that which a withholding agent isrequired to obtain, subject to such

modifications as the intermediary’sagreement with the IRS would provide.It is anticipated that the terms of theagreement would be flexible enough toaccommodate the individual circum-stances of a particular qualified inter-mediary, including any locally ap-plicable know-your-customer rules orpractices. Therefore, the agreementmight acknowledge certain documen-tary evidence procedures already inplace and not require additional docu-mentation. Paragraph (e)(5)(ii) providesthat a qualified intermediary is aforeign person that is a party to awithholding agreement with the IRSand is a clearing organization asdefined in §1.163–5(c)(2)(i)(D)(8), afinancial institution as defined in§1.165–12(c)(1)(iv), a partnership, orany other person acceptable within thediscretion of the IRS. A qualifiedintermediary would be able to eitherassume primary responsibility for with-holding and reporting to the IRS (if sopermitted under its agreement with theIRS) or leave that responsibility to thewithholding agent. A qualified inter-mediary that assumes primary with-holding responsibility would present anintermediary withholding certificate tothe withholding agent or anotherqualified intermediary representing thatit will withhold all appropriate amountsand comply with all applicable report-ing requirements. The withholdingagent or other qualified intermediarywould be allowed to rely on such acertificate and not withhold. However,the withholding agent would have tofile Forms 1042 and 1042–S undersection 1461 to report the payment tothe qualified intermediary and thequalified intermediary’s EIN. See pro-posed §1.1461–1(b)(2)(ii) and (c)(4)(ii).

A qualified intermediary that doesnot assume primary withholding re-sponsibility would present an inter-mediary withholding certificate to aU.S. withholding agent or anotherqualified intermediary representing thatbeneficial owners of U.S. income pay-ments (other than gross proceeds) arenot U.S. persons and, if applicable,qualify for a reduced rate of withhold-ing. It is anticipated that a qualifiedintermediary would establish separateaccounts for income subject to differentwithholding rates. A single intermedi-ary withholding certificate should serveas documentation for all these separateaccounts. In addition, the qualifiedintermediary would provide a Form W–9 for each beneficial owner that is a

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U.S. person to whom payments of in-come otherwise subject to withholdingare made and for whom reporting isrequired under chapter 61 of the Code.

A qualified intermediary would gen-erally have to agree to be subject to thesame reporting requirements as applyto withholding agents under proposed§1.1461–1(b) and (c), to allow periodicinspection of its records, and to payany amount of tax liability determinedto be due. The IRS intends to agree toarrangements with the qualified inter-mediary so that, for example, inspec-tion of records may be minimizedwhere the IRS otherwise gets sufficientaccess to beneficial ownership informa-tion, through annual reporting of TIN’s,review of know-your-customer rules,and selection of appropriate accountinformation, or through an exchange ofinformation program under a tax treaty.In appropriate cases, the IRS may relyon audits performed by an institution’sapproved external auditors where, forexample, under an income tax treaty orlocal laws, the IRS would be givenaccess to appropriate auditor’s recordsto verify compliance. Records may in-clude workpapers of, reports preparedby, and methodology employed by, theapproved external auditors. A proposedrevenue procedure providing guidancewith respect to withholding agreementshas been published as Announcement96–23, 1996–18 I.R.B. 7.

Paragraph (e)(5)(v) specifies that aforeign partnership that is a qualifiedintermediary acting for its partners is awithholding agent with respect to itspartners’ distributive shares of incomepaid to the partnership. In that case, thepartnership is subject to the same with-holding and reporting procedures aswould apply to a domestic partnership.Thus, any arrangement whereby thepartnership would seek to shift primarywithholding responsibility to the with-holding agent under the provisions ofparagraph (e)(5)(iv)(B) would not berecognized.

Paragraph (f) contains a set ofpresumptions upon which a withhold-ing agent (for purposes of section1441) and a payor (for purposes of the1099 reporting provisions) would relyto determine whether to treat a personas U.S. or foreign if, at the time ofpayment, the withholding agent orpayor does not have actual knowledgeof the status of the person to whom thepayment is made and lacks the requireddocumentation or knows or has reason

to know that the documentation it holdsis incorrect or unreliable. A presump-tion under this paragraph (f) could berebutted by providing or correcting therequired documentation to the with-holding agent or payor. Thus, thesepresumptions would assist the payor indetermining whether the income paid issubject to the 1099 reporting andbackup withholding regime (if paid to aU.S. person that is not an exemptrecipient) or to the section 1441withholding regime (if paid to a foreignperson).

Presumptions of foreign status result-ing from the application of theseprovisions would, when applied forpurposes of section 1441, only affectwhether the withholding agent shouldwithhold 30 percent from the paymenton the ground that the payment may,under the provisions, be treated asmade to a foreign beneficial owner.However, the presumptions could notoperate to deem the payee as havingestablished proof of foreign status forpurposes of claiming a reduced rate oftax under the Code or an income taxtreaty.

Paragraph (f)(2)(i) addresses report-able payments to a non-exempt recip-ient (a non-exempt recipient is a personfor whom the payor must file a Form1099; see proposed §1.6049–4(c)(1)(ii)for a list of exempt recipients). Wherea withholding agent lacks the requireddocumentation, it would presume thatthe payee is a U.S. individual. Accord-ingly, the withholding agent wouldwithhold 31 percent under section3406. Paragraph (f)(2)(ii) incorporatesthe concept of the 30-day grace periodunder §31.3406(d)–3(a) for a payee tofurnish a Form W–9 to the payor. Be-cause it may take longer to obtain therequired documentation from a foreignperson than from a U.S. person, theproposed regulations allow a withhold-ing agent to treat a payee as abeneficial owner that is a foreignperson for up to 90 days from the datethe agent credits the payee’s account(or until the end of the calendar year ifearlier) if the withholding agent has thename and a foreign address for theaccount holder or a facsimile copy oran electronic transmission of the infor-mation on a withholding certificate.This special rule would defer theobligation to backup withhold undersection 3406 because there are suffi-cient indicia of foreign status, but doesnot defer the obligation to withhold

under section 1441, if applicable. If therequired documentation were providedor corrected within the 90-day graceperiod, the amount withheld may berefunded to the payee under the adjust-ment procedures described in proposed§1.1461–2. The 90-day grace periodwould be terminated if any part of theproceeds in the account that are subjectto the grace period were withdrawn(other than for purposes of withholdingan amount of tax). If the requireddocumentation were not provided orcorrected by the expiration of the graceperiod, the payee would be presumedto be a U.S. payee for purposes ofsection 3406 and chapter 61 of theCode from the date the account wasfirst credited.

A special rule for joint owners orpayees is provided in paragraph(f)(2)(iii) that would permit a withhold-ing agent to presume that a paymentmade to joint owners or payees forwhom it does not hold the requireddocumentation is made to U.S. payees.The grace period would apply to jointpayees if each payee qualified for itsapplication. If any one of them with-drew any portion of the funds in theaccount, then additional withholdingunder paragraph (f)(2)(ii)(A) would berequired.

Paragraph (f)(2)(iv) addresses report-able payments to an exempt recipient.In that case, the withholding agentcould presume that the payee is aforeign person if it knew the payee’sTIN and the TIN began with the twodigits ‘‘98.’’ The withholding agentalso could presume that the payee is aforeign person if the payee had aforeign mailing address or the paymentwere made outside of the United States(as defined in proposed §1.6049–5(e)).In other cases, the withholding agentcould presume that the exempt recip-ient is a U.S. person. Thus, forexample, a U.S. withholding agentmaking a payment of interest on aregistered obligation to a corporationwith an EIN beginning with the digits‘‘98’’ would not have to backup with-hold under section 3406 (because thecorporation is an exempt recipient).However, it should withhold a 30 per-cent tax under section 1442 because thecondition under §1.871–14(c)(1)(iii)that a certificate of foreign status bereceived by the U.S. withholding agentfor the interest to qualify as portfoliointerest would not be satisfied. Thus,the withholding agent should treat the

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interest as not qualified for the port-folio interest exemption for purposes ofsection 1441(b)(9). Adjustments to thetax may be made at a later time inaccordance with proposed §1.1461–2 ifthe required documentation describedin proposed §1.871–14(c)(2) is laterfurnished. See proposed §§1.871–14(c)(3) and 1.1441–1(f)(5) for rulesaddressing late received documentation.

Paragraph (f)(3) contains special pre-sumption provisions for certain pay-ments that are not subject to backupwithholding: scholarship and pensionincome. In the case of scholarship andgrant income, the withholding agent orpayor may generally treat the payee asa U.S. person unless it has U.S. visainformation in its records concerningthe payee. For pension and annuities,the payment would be presumed to bemade to a U.S. person if the payor hadthe payee’s Social Security number andthe payment were made either to a U.S.mailing address or to a mailing addressin a foreign country with which theUnited States has an income tax treatyin effect that exempts residents of thecountry from U.S. tax on that income.In all other cases, the payor couldpresume that the payee is a foreignperson. A withholding agent may usethese presumptions as a safe harbor ormay, at its option, choose to withholdat a higher rate if it were unsure of theapplication of the presumption in aparticular case.

Paragraph (f)(4) provides specialrules for pass-through entities. Para-graph (f)(4)(i) provides rules for deter-mining whether to treat a partnership asforeign or domestic. The withholdingagent or payor could presume that thepartnership is a foreign partnership ifthe withholding agent or payor actuallyknows that the partnership’s EIN be-gins with the digits ‘‘98,’’ if themailing address of the partnership is ina foreign country, if the payment ismade outside of the United States (asdefined in proposed §1.6049–5(e)), orif the withholding agent or payorknows or had reason to know that thepartnership is foreign.

Under paragraph (f)(4)(ii), a with-holding agent or payor that makes areportable payment to a person deter-mined to be a foreign partnership couldpresume that any partner for which itdoes not hold the required documenta-tion is a U.S. individual. In that case,the payee would be treated as a U.S.payee that is not an exempt recipient

and the payment would be subject toreporting under chapter 61 of the Codeand to backup withholding under sec-tion 3406.

Paragraph (f)(4)(iii) provides rules forpartners’ distributive shares. A domesticpartnership could treat a partner as aU.S. payee if, at the time it is requiredto withhold on a reportable payment, itdid not hold all of the required docu-mentation for that partner. A foreignpartnership that is a qualified intermedi-ary under proposed §1.1441–1(e)(5)(ii)could treat a partner as a foreign payeeif, at the time it were required towithhold on a reportable payment, itcould not associate the payment with therequired documentation.

Paragraph (f)(5) clarifies that a with-holding agent that does not act inaccordance with the presumptions andfails to withhold the required amountmay be liable under section 1461 or3403 for the tax that should have beenwithheld based upon the presumptionsin paragraph (f), unless the withholdingagent can demonstrate either that thecorrect amount of tax was, in fact,withheld or that the beneficial ownerpaid the tax due. Proof of payment oftax could be established on the basis ofa Form 4669 furnished by the benefi-cial owner certifying the amount of taxpaid to the IRS. Proof that the correctamount of tax was, in fact, withheld,could be based upon obtaining the re-quired documentation. Late-receiveddocumentation could be accepted asproof of status and entitlement to areduced rate of tax. However, if thedelays involved in obtaining this docu-mentation affected its reliability, theIRS could require further proof ofstatus or entitlement to a reduced rate.Further, pursuant to section 1463 orsection 3403, the withholding agentwould be liable for interest undersection 6601, even though, ultimately,there is no underlying tax liability.Penalties may also apply.

Under paragraph (f)(6), a reportablepayment is an amount reportable undersection 3406(b) (without regard to anyexception to reporting under section6041, 6041A, 6042, 6045, 6049,6050A, or 6050N).

Paragraph (f)(7) provides that ifoverwithholding occurs under section1441 as a result of application of thepresumptions in paragraph (f), adjust-ments may be made in accordance withproposed §1.1461–2(a). Appropriate re-funds and credits may be claimed under

section 1464 or 6414. Amounts over-withheld under section 3406 are subjectto adjustments pursuant to §31.6413-(a)–3(a)(1).

Paragraph (g) provides that theserules are effective for payments madeafter December 31, 1997. However,transition rules are provided so thatvalid certificates (as determined undercurrent rules) that are outstanding onthe date that is 60 days after theseregulations are published as final reg-ulations may continue to be relied uponfor their period of validity. In addition,dividends on publicly traded stocks aregiven special transition relief. Seeproposed §1.1441–6(b)(2).

§1.1441–2 Income subject towithholding

Paragraph (a) restates the rules in§§1.1441–1 and –3(a) of the existingregulations limiting withholding toitems of income from sources withinthe United States. Paragraph (b) sim-plifies §1.1441–2(a) of the existingregulations by providing that, for pur-poses of chapter 3 of the Code, fixedor determinable, annual or periodical(FDAP) income is any income includ-able in income under section 61,subject to enumerated exceptions inparagraph (b)(2) (including certain ex-ceptions for original issue discount andcapital gains, including option pre-miums). Under these proposed rules,income paid under a notional principalcontract would be FDAP, but see pro-posed §1.1441–4(a)(3) for an exemp-tion from withholding.

Paragraph (b)(3) reflects the positionadopted by the IRS in TIR–877 (De-cember 27, 1966) and in Rev. Rul. 68–333, 1968–1 C.B. 390 that FDAP in-cludes original issue discount paid byan original issuer of bonds or otherobligations with original issue discount.However, under the authority of section1441(c)(8), only certain items of origi-nal issue discount are currently subjectto withholding of tax under Chapter 3.The lack of rules in this area in thepast reflects the difficulties in deter-mining the amount of OID upon whichwithholding should be applied. Theseproposed regulations, however, identifytransactions in which information aboutthe amount of original issue discountwould generally be known or availableto the withholding agent. Therefore, theproposed regulations require withhold-ing on amounts paid upon sale by an

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obligor that is related to the originalissuer. In addition, amounts that fail toqualify for the portfolio interest exemp-tion under section 871(h) or 881(c)(because, for example, the statementdescribed in section 871(h)(5) has notbeen furnished to the U.S. withholdingagent) would also be subject to with-holding, regardless of whether it ispossible for the withholding agent todetermine precisely the amount of OID.See proposed §1.871–14(c)(2). If therequired documentation were not fur-nished, the amounts could be treated aspaid to a U.S. or foreign payee basedupon the presumptions in proposed§1.1441–1(f). If the amounts are pre-sumed paid to a U.S. payee, backupwithholding under section 3406 mightapply. See §31.3406(b)(2)–(2). If theamounts are presumed paid to a foreignpayee, withholding under section 1441would apply (unless the OID instru-ment had a maturity not exceeding 183days from the date of issue).

Under these rules, the entire amountof OID (as determined on the date ofissue) would have to be reported astaxable if the exact amount of OIDwere not known. Any amount of over-withholding may be adjusted or re-funded in accordance with the proce-dures in proposed §1.1461–2(a) or§1.1464–1.

The proposed changes to the OIDrules would be effective for OID onobligations issued after a date that is 60days after these regulations are pub-lished as final regulations.

Paragraph (c) restates §1.1441–2(b)of the existing regulations to eliminatethe reference to pre-1967 payments. Italso eliminates the reference to itemsof income under section 402(a)(2) and403(a)(2), relating to payments fromcertain employees trusts or underemployee annuities, in order to con-form to the amendment made to sec-tions 1441(b) and (c)(5) by Public Law102–318 that deleted these sectionsfrom the requirement of withholdingunder section 1441.

Paragraph (d) lists exemptions fromwithholding for certain items thatotherwise constitute FDAP income.Paragraph (d)(1) lists the exceptionsthat are not conditioned upon furnish-ing documentation (e.g., interest onbearer or foreign targeted registeredobligations, short-term obligations).However, documentation may be re-quired under the 1099 reporting provi-sions in order to avoid reporting under

sections 6041 or 6049 and backupwithholding under section 3406. Para-graph (d)(2) lists two other exceptions,but those exceptions are conditionedupon furnishing documentation de-scribed in proposed §1.871–14(c)(2).The exceptions are portfolio interest onregistered obligations described in sec-tion 871(h)(2)(B) or 881(c)(2)(B) (otherthan foreign targeted obligations) andbank deposit interest described in sec-tion 871(i)(2)(A). Because bank depositinterest is not subject to beneficialowner documentation requirements un-der current rules, the regulations pro-pose a transition rule that would allowinterest paid on accounts in existenceon or before a date that is 60 days afterthese regulations are published as finalregulations to continue to be subject tocurrent rules until December 31, 1999.

Paragraph (e) clarifies the meaningof payment for purposes of withhold-ing. An amount would be consideredpaid when it is includable in incomeunder the cash basis method of ac-counting. Under paragraph (e)(2), in-come reallocated under section 482from a U.S. person to a related foreignperson would be considered a paymentfor withholding tax purposes. A pay-ment would also be considered to bemade if income arose as a result of asecondary adjustment made after in-come is allocated under section 482,unless the taxpayer entered into arepatriation agreement that eliminatedthe liability for withholding. Paragraph(e)(3) provides that income is notconsidered paid if it is blocked undercertain executive authority, but is con-sidered paid on the date the blockingrestriction is removed and, therefore,subject to withholding as of that date.Paragraph (e)(4) provides special pay-ment rules for dividends. These rulesare similar to those in effect forpurposes of backup withholding. See§31.3406(b)(2)–4. Paragraph (e)(5) co-ordinates the payment election forbranch interest tax under §1.884–4(c)(1) with section 6049 and the with-holding provisions under section 1441.

§1.1441–3 Amounts subject towithholding

Paragraph (a) restates the rule in§1.1441–2(a)(1) of the existing regula-tions that withholding is generallyimposed on the gross amount of in-come. Paragraph (b) provides for spe-cial withholding rules for interest.Paragraph (b)(1) restates the rule in

§1.1441–3(c)(3) of the existing regula-tions that requires withholding on theentire amount of stated interest owedon an interest-bearing obligation, re-gardless of the character of theamounts paid. The heading is modifiedto eliminate any inference that this ruleis limited to payments on defaultedinterest coupons. Paragraph (b)(2)restates the exemption from withhold-ing in §1.1441–4(h) of the existingregulations regarding sales of obliga-tions between interest payment dates.An anti-abuse rule is added that wouldrequire withholding where the with-holding agent knew or had reason toknow that the sale transaction was partof a plan the principal purpose ofwhich was to avoid withholdingthrough a pattern of sales andrepurchases.

Paragraph (c) provides rules relatingto corporate distributions and substan-tially relieves the withholding burdenimposed under §1.1441–3(b) of theexisting regulations on these distribu-tions. Under the proposed regulations, acorporation could determine the amountof a distribution subject to withholdingbased on a reasonable estimate ofavailable earnings and profits for thetaxable year. A corporation that made areasonable estimate, but nonethelessunderwithheld, would remain liable forthe amount of tax underwithheld (andinterest), but not penalties. These pro-posed regulations adopt the same ‘‘rea-sonable estimate’’ standard as isprovided under §31.3406(b)(2)–4(c)(2).Under paragraph (c)(2)(ii), an inter-mediary could rely on a reasonableestimate represented by the distributingcorporation. The distributing corpora-tion would be made liable for anyamount of underwithholding where thewithholding agent had relied on therepresentation and the estimate had notbeen reasonably determined.

Paragraph (c)(3) proposes specialprocedures for withholding on certaindistributions made by a RegulatedInvestment Company (RIC). In order todetermine whether a withholding obli-gation arises in that case, a RIC wouldbenefit from the same exceptions thatwould apply to other corporations fordistributions payable in stock or stockrights or distributions treated in part orin full as in exchange for stock. Inaddition, the proposed regulations pro-vide that no withholding is required fora distribution that is a capital gaindividend defined in section 852(b)-

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(3)(C) or an exempt interest dividenddefined in section 852(b)(5)(A). Specialprocedures are proposed for implement-ing these exemptions, however, becausea RIC must specifically designate theextent to which a distribution fallsunder one of these provisions. Underapplicable rules, the designation maybe made as late as 60 days after theclose of the RIC’s taxable year, andafter making the designation, the RICmay find that the amount so designatedexceeds what the Code and the regula-tions allow. This presents special diffi-culties under section 1441, which as-sumes that the amounts subject towithholding are fixed at the time theyare paid.

To address these special difficulties,paragraph (c)(3) would allow a RIC todesignate interim distributions as beingsubject to section 852(b)(3)(C) or852(b)(5)(A). If it later determined thatthe designation was in excess of whatwas permitted and, as a result, hadunderwithheld, the RIC would have tosatisfy the tax liability and could adjustthe withholding pursuant to proposed§1.1461–2(b). A RIC would not besubject to penalties for failure towithhold timely, provided the designa-tion was based upon a reasonable esti-mate when made. However, interestwould apply under section 6601. Inaddition, the RIC might be liable forpenalties if the IRS determined that theest imates were not reasonablydetermined.

Paragraph (d) restates, without sig-nificant changes, the rule in §1.1441–3(d) of the existing regulations regard-ing withholding on the full amountrealized from the sale of propertywhere the withholding agent does notknow the amount of gain subject towithholding. A withholding agent may,however, determine gain based on thebeneficial owner’s withholding certifi-cate if it indicates the beneficialowner’s basis in the property sold. Thisrule is of limited application as mostcapital gains are exempt from with-holding under section 1441.

Paragraph (e) restates the rule in§1.1441–7(c) of the existing regulationspertaining to payments in kind. Theproperty conversion requirement undercurrent rules would be made optional.Instead, the withholding agent couldchoose to obtain payment from anothersource. The regulations further proposeto clarify that the amount of a paymentin kind is measured by the fair market

value of the property transferred or ofthe services provided. Payments madein foreign currency require a conver-sion of the amount of tax using thespot rate (as defined in §1.988–1(d)(1))or a reasonable spot rate convention.Paragraph (e)(3) provides guidancewhere the withholding agent’s satisfac-tion of the beneficial owner’s taxliability constitutes additional incometo the beneficial owner that is subjectto withholding. In that case, the finalwithholding tax liability would be cal-culated under a gross-up formula.

The provisions currently stated under§1.1441–3(j), relating to conduit fi-nancing arrangements, are proposed tobe incorporated without change into anew paragraph (f). These provisions arenot reproposed.

The address rule in §1.1441–3(b)(3)of the existing regulations would beeliminated and replaced by require-ments to furnish appropriate documen-tation or to establish foreign status and,if applicable, residence in a treatycountry. See proposed §1.1441–1(e)and 1.1441–6. Section §1.1441–3(c)(1)requiring withholding in the case ofinterest paid on obligations issued bythe U.S. government would be deletedas unnecessary given the provisions in§1.1441–2(a) describing income subjectto withholding. Section §1.1441–3(c)(4)addressing unknown owners would alsobe deleted because the presumptionprovisions in §1.1441–1(f) provideguidance. The special rules for tax-freecovenant bonds issued prior to 1934are proposed to be deleted. Commentsare solicited as to whether these rulesare still necessary.

§1.1441–4 Certain exemptions fromwithholding

Paragraph (a)(1) restates, withoutsignificant change, the provisions in§1.1441–4(a) of the existing regulationsregarding the exemption from with-holding for certain income effectivelyconnected with the conduct of a tradeor business within the United States.The regulations clarify that the exemp-tion under this section does not applyto claim an exemption under an incometax treaty (i.e., income not attributableto a permanent establishment). Claimsof treaty benefit must be made underthe procedures described in proposed§1.1441–6.

Under paragraph (a)(2)(i), a with-holding agent could rely on a claim

that income is effectively connectedwith the conduct of a trade or businesswithin the United States if it held awithholding certificate so stating. Theregulations do not permit a withholdingagent to rely on a qualified intermedi-ary withholding certificate to grant areduced rate of withholding for incomeclaimed to be effectively connected,except in the case of a qualified inter-mediary that is a partnership acting forits own account. A partnership thatdoes not claim to be a qualified inter-mediary could also furnish an inter-mediary withholding certificate de-scribed in proposed §1.1441–1(e)(3)(iii)(i.e., the transmittal certificate normallyrequired from a partnership transmittingits partners’ documentation under theprocedures described in proposed§1.1441–5(b)). For purposes of claim-ing an effectively connected incomeexemption, it would not be necessary toattach the partners’ documentation tothe certificate since the exemption isavailable regardless of the status of thepartners and, under section 1446, thepartnership is required to withhold. Thevalidity period of a withholding certifi-cate used to claim an effectively con-nected exemption is proposed to beextended from one year to three years(subject to amendment if a change incircumstances affected the character ofthe income that the beneficial owneranticipated would be effectively con-nected). This rule should significantlyease the burden on continuing transac-tions that generate effectively con-nected income every year.

The regulations propose to eliminatethe requirement that the certificate beattached to the Form 1042–S; the with-holding agent would be required tostate the beneficial owner’s TIN on theForm 1042-S. See proposed §1.1461–1(c)(1)(i). If the withholding certificatewere silent as to whether the income iseffectively connected or if the requireddocumentation were lacking, incorrect,or unreliable, the withholding agentshould presume that the income is noteffectively connected.

The rules provided in §1.1441–4(f)of the existing regulations are proposedto be restated in a new paragraph(a)(2)(ii) and are not reproposed. Para-graph (a)(2)(iii) provides for specialrules for payments made to jointowners that would require each jointowner to provide a withholding certifi-cate certifying that the income iseffectively connected with a trade or

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business in the United States. Theserules are consistent with the jointowners rules provided under the section3406 regulation. See §31.3406(h)–2(a).

Paragraph (a)(3) provides that nowithholding is required on income fromnotional principal contracts regardless ofwhether a withholding certificate is pro-vided. However, such income wouldhave to be reported on a Form 1042 and1042–S. This rule would significantlysimplify the paper flows currently asso-ciated with these transactions.

Paragraph (a)(4) parallels the rule inproposed §1.1441–1(f)(5) regarding theconsequences of acting in a mannercontrary to prescribed presumptions.Late received documentation could re-lieve the withholding agent from thetax liability. However, an interestcharge would apply under section 6601on the amount that should have beenwithheld even if, ultimately, there is nounderlying tax liability. In addition,penalties might apply.

Paragraph (b) of the existing regula-tions concerning compensation for per-sonal services of an individual issubstantially unchanged. A new para-graph (b)(1)(ii) is added to require thatwithholding on distributions from cer-tain qualified pension plans and an-nuities occur under section 1441 ratherthan under section 3405 as was re-quired under §1.1441–4T(b)(ii) (whichexpired on February, 1993). A newparagraph (b)(1)(vi) is also added thatwould allow employers to wage with-hold on compensation that is otherwiseexempt from wage withholding byreason of section 3402(e). This ruleprovides relief for employers of non-resident alien individuals who deriveincome from sources partly within andpartly without the United States on aregular basis (e.g., crew membersworking on cruise ships). Without thisrule, employers would have to withholdat the 30 percent rate instead of thelower wage withholding rate.

The provisions under paragraph (b)-(2) of the existing regulations (dealingwith a claim of reduced rate of with-holding on personal service incomeunder an income tax treaty) are un-changed with one exception. The 10-day review rule in paragraphs (b)(2)(i)and (iv) would be extended to 20 days.This extension is necessary because ofthe increase in the number of Forms8233 that the IRS receives.

Paragraph (b)(6) is added to elimi-nate the requirement in §1.1441–3(e) of

the existing regulations to pro-rate thepersonal exemption based on the periodduring which a nonresident alien indi-vidual is present in the United Statesduring the taxable year. Therefore, theentire personal exemption amountcould be taken into account to deter-mine the base amount on which towithhold.

Paragraph (c) incorporates the provi-sions in §1.1441–2(c) of the existingregulations dealing with participants incertain exchange or training programsand provides additional guidance withrespect to payments of scholarship orfellowship grants to nonresident alienindividuals. It reflects 1988 and 1994statutory amendments to section 1441concerning certain visa holders. Suchincome is subject to a lower withhold-ing rate of 14 percent under section871(c). The regulations propose analternate withholding election so thattaxpayers may choose to be subject tothe withholding rates applicable towages, which in many cases are likelyto result in a lower rate. Also, individ-uals who receive both scholarship orgrants and compensation income fromthe same withholding agent couldchoose to combine all income on Form8233 to claim a reduced rate under atax treaty for both types of income.

Paragraphs (d) (dealing with an-nuities) and (e) (dealing with centralbanks of issue and the Bank of Inter-national Settlement) merely reflect con-forming changes regarding the pro-posed documentation requirements.

§1.1441–5 Withholding on paymentsto pass-through entities

The existing regulations in §1.1441–5 address claims of U.S. status. Theseprovisions are restated, with modifica-tions, in proposed §1.1441–1(d).

This section, as revised, would pro-vide special withholding procedures forpayments to partnerships. Paragraph (a)deals with domestic partnerships. Asunder current regulations, payments todomestic partnerships would not re-quire withholding, even if the partnerswere foreign persons. A domestic part-nership is the withholding agent foritems of income included in the dis-tributive share of a partner that is aforeign person. Paragraph (b) proposesto modify the current rules for pay-ments to foreign partnerships to permita look-through approach, so that claimsof reduced rate could be presented by

the partnership on behalf of the part-ners (including partners that are U.S.persons). The look-through approachwould apply through tiers of foreignpartnerships. In the alternative, a for-eign partnership could, under an agree-ment with the IRS, become a qualifiedintermediary so that the partners’ docu-mentation would not have to be fur-nished to the withholding agent. Seeproposed §1.1441–1(e)(5) for rules ap-plicable to qualified intermediaries.Paragraph (b)(2) clarifies how the look-through approach would operate in thecase of a tiered partnership. Generally,the partnership would have to lookthrough tiers until it reached thebeneficial owner (as determined underproposed §1.1441–1(c)(6)). However, itcould stop at any level in the chain thatconstitutes a payee (as defined inproposed §1.1441–1(c)(3)).

§1.1441–6 Claim of a reduced rateunder an income tax treaty

The proposed regulations eliminatethe ‘‘address’’ rule in §1.1441–6(c)(1)of the existing regulations and inregulations under several income taxtreaties, which permits a withholdingagent to grant a reduced rate of taxunder a treaty based upon the addressof the payee (including a nominee).Paragraph (b)(1) provides general pro-cedures for reliance by a withholdingagent on a claim for a reduced rate ofwithholding under a treaty based uponthe documentation requirements de-scribed in proposed §1.1441–1(e)(1)(i).A withholding agent could rely upon abeneficial owner withholding certificatedescribed in proposed §1.1441–1(e)(2)as establishing both foreign status andresidence in the treaty country provideda TIN is stated on the certificate. Inaddition, in the case of dividends withrespect to which an advance ruling isrequired in order to secure the reducedrate of tax under the tax treaty, thewithholding certificate would have tostate that the beneficial owner hasobtained such a ruling. Such rulings arecurrently required under a very limitednumber of tax treaties: Austria, Den-mark, Ireland, and Switzerland. Seeparagraph (e) regarding the proceduresfor obtaining such a ruling. Further, foramounts exceeding $500,000 in theaggregate for the taxable year paid to abeneficial owner related to the with-holding agent, the beneficial ownerwould have to indicate on the certifi-cate that it will file a Form 8833 under

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section 6114. The regulations undersection 6114 are proposed to be modi-fied accordingly. Claims of treatybenefit could also be made on the basisof an intermediary withholding certifi-cate described in proposed §1.1441–1(e)(3). Further, a U.S. withholdingagent could act through an authorizedforeign agent described in proposed§1.1441–7(c)(2).

Paragraph (b)(2) provides specialrules for certain dividends paid onstock that is traded on a U.S. estab-lished market. For these dividends, thewithholding agent could grant treatybenefits based upon the same documen-tation procedures as are proposed toapply to portfolio interest on registeredobligations (e.g., no TIN is required ona beneficial owner withholding certifi-cate). See proposed §1.871–14(c)(2).Paragraph (b)(3) provides that thecompetent authorities may agree todifferent certification procedures underan applicable tax treaty.

Paragraph (b)(4) clarifies the mannerin which beneficial owners could claimbenefits under a tax treaty whereforeign law principles apply to identifythe beneficial owner of a paymentmade to a foreign entity. Under pro-posed §1.1441–1(c)(6)(ii)(B), the bene-ficial owner would be determinedbased upon the laws of the countrywhose tax treaty with the United Statesis invoked to claim a reduced rate oftax.

These procedures are intended toapply in a reciprocal manner. There-fore, paragraph (b)(4)(iv) provides that,if the IRS determined that a treatypartner is not identifying beneficialowners in a similar manner and, as aresult, denies benefits under an other-wise applicable treaty to an entityorganized in the United States or tointerest holders residing in the UnitedStates, the benefits of these procedurescould be suspended for entitiesorganized, or interest holders residing,in that country until the competentauthorities reached a reciprocal agree-ment on the application of treatybenefits in such cases. Suspension ofbenefits under this provision would beeffective on a prospective basis only.

Paragraph (c) states the rules regard-ing certification of a TIN by the IRS.These procedures would apply to pay-ments for which a Form W–8 isfurnished with a TIN. They are directedto beneficial owners (or their agents)and are designed to ensure that the IRS

can verify the beneficial owner’s statusas a resident of a treaty country basedupon the information return later filedby the withholding agent on Form1042–S. If the IRS determined that theTIN does not support the beneficialowner’s claim of residence in the treatycountry, it would so notify the with-holding agent. The IRS could waive therequirement that a taxpayer certify itsTIN with the IRS when it implementsprocedures to verify a taxpayer’s statusdirectly with a foreign competent au-thority. The IRS could also certify aTIN based upon representations madeby a qualified intermediary.

The IRS would certify a TIN basedupon a certificate of residence ordocumentary evidence. Paragraph (c)(3)describes a certificate of residence as acertificate issued by the tax authoritiesof the treaty country certifying that thetaxpayer files income tax returns as aresident of that country and is currenton his filing obligations. Paragraph(c)(4) describes documentary evidenceas a document that is no more thanthree-years old and sufficiently identi-fies the person and the residence ofthat person in the treaty country.

Paragraph (e) incorporates the provi-sions in existing regulations that condi-tion the benefit of the reduced five-percent rate on related party dividendsto an advance ruling from the IRSdetermining that the parent-subsidiaryrelationship is not established or main-tained with the principal purpose tosecure the reduced rate. The rulingwould be required only if so requiredunder an applicable treaty. It must berequested prior to the payment of thedividend. While a request made afterpayment would not disqualify the divi-dend from the benefit of the reducedrate if a favorable ruling is laterobtained, the withholding agent wouldnevertheless withhold. Failure to do sowould subject the withholding agent toan interest charge under section 6601.Also, the withholding agent would beliable for the tax and related penaltiesif a favorable ruling were not issued.See proposed §1.1441–1(f)(5) regardingthe consequences to the withholdingagent when it does not withhold thefull amount even though it does nothold the required documentation priorto payment.

The regulations are proposed to beeffective for payments made afterDecember 31, 1997. However, certifi-cates issued on or before the date that

is 60 days after these regulations arepublished as final regulations willcontinue to be valid until they expire,based upon existing regulations. Inaddition, because no documentation iscurrently required for dividends, theregulations propose a transition rulethat would allow dividends paid onpublicly-traded stock to accounts inexistence on or before a date that is 60days after these regulations are pub-lished as final regulations to continueto be subject to the current address ruleuntil December 31, 1999.§1.1441–7 General provisions relatingto withholding agents.

This section modifies §1.1441–7 ofthe existing regulations dealing withwithholding agents. Paragraph (a) clar-ifies that a withholding agent is anyperson that has the control, receipt,custody, disposal, or payment of anitem of income and not merely aperson that pays or causes an amountto be paid. If there are several with-holding agents with respect to onepayment, only one tax should be with-held and only one return should befiled.

Paragraph (b) restates the ‘‘actualknowledge or reason to know’’ stand-ards applicable to a withholding agentas in effect under current law. The IRSand Treasury are aware that the ap-plication of a ‘‘reason to know’’standard without limitation may beimpractical in the case of financialinstitutions handling large volumes oftransactions for many customers.Therefore, the regulations propose tolimit the due diligence expected fromwithholding agents paying portfoliointerest, deposit interest, or dividendson publicly traded stock. Under para-graph (b)(2)(ii), a withholding agent’sdue diligence regarding a beneficialowner certificate would be limited toexamining the address stated on thecertificate. If this information indicatedthat the beneficial owner might be aU.S. taxpayer or conflicted with infor-mation that the withholding agentotherwise had in its records for thataccount, the withholding agent wouldhave to obtain specified documentationto verify the beneficial owner’s claimof foreign status or residence. Para-graph (b)(3) proposes to incorporaterules consistent with those under sec-tion 3406 dealing with universal ac-counts. Therefore, if the withholdingagent used a system of universalaccounts, it would be required to use

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that system to determine the scope ofits due diligence under the regulations.

Paragraph (c) restates and expandsthe provisions in §1.1441–7(b) of theexisting regulations pertaining to au-thorized agents and adds provisionsregarding an authorized foreign agent.This new concept is intended to facili-tate compliance by U.S. withholdingagents that make payments throughtheir agent abroad. By imputing theacts of a foreign agent to a U.S.withholding agent, the required docu-mentation could remain with the for-eign agent and would not have to beprovided to the U.S. withholding agent.However, the regulations require thatthe agent be ‘‘authorized’’ in order toinsure that the IRS can verify theforeign agent’s compliance with thewithholding procedures, which, in turn,would determine whether the U.S.withholding agent has itself complied.See proposed §1.1461–1(b)(2)(iii) and(c)(4)(iii) regarding corresponding fil-ing requirements.

Section §1.1441–7(b)(3) of the exist-ing regulations is proposed to bedeleted, pending comments on the con-tinuing necessity of providing guidanceon tax-free covenant bonds.

Paragraph (d) restates withoutchanges the provisions in §1.1441–7(a)(2) of the existing regulations deal-ing with the United States as awithholding agent. Paragraph (e)restates without changes the provisionsin §1.1441–3(c)(2) of the existingregulations dealing with assumed obli-gations. Section §1.1441–7(c) of exist-ing regulations dealing with paymentsother than money would be deleted andrestated in proposed §1.1441–3(f) deal-ing with withholding procedures forpayments in kind.

§1.1441–8T Foreign government andinternational organization exemptionfrom withholding

This section exempts from withhold-ing certain types of income excludedfrom gross income under section 892that are paid to foreign governmentsand international organizations. Revi-sions are proposed to paragraph (b) ofthe existing regulations to conform thecertification procedures to the proposedwithholding certificate procedures de-scribed in proposed §1.1441–1(e)(1)(i).Therefore, Form 8709 would be re-placed by the standard withholdingcertificate (Form W–8), meaning that

foreign governments and internationalorganizations would be relieved fromthe requirement to furnish annual cer-tification. A foreign government or aninternational organization would not berequired to furnish a tax identifyingnumber. However, if it did, the certifi-cate would be valid indefinitely forincome required to be reported onForm 1042 or for which the withhold-ing agent reports the TIN to the IRS.See proposed §1.1441–1(e)(4)(ii).

§1.1441–9 Exemption fromwithholding on exempt income offoreign tax-exempt corporations andforeign private foundations

This new section provides that in-come paid to a foreign organizationdescribed in section 501(c) would notbe subject to withholding under section1442 if the income were not subject totax as unrelated business income undersection 511 and the entity were exemptfrom tax under section 501(a). For pur-poses of granting a reduced rate, awithholding agent could rely on a with-holding certificate satisfying the re-quirements of proposed §1.1441–1(e)-(1). A beneficial owner certificate mustinclude a taxpayer identifying numberand must certify that it will not besubject to tax under section 511, andthat the IRS has issued a determinationletter. In the absence of such a letter,the beneficial owner should provide anopinion of counsel stating that theorganization meets the conditions for atax exemption under section 501(c).Since the affidavit requirement forforeign foundations is proposed to beeliminated, foreign tax-exempt organi-zations would be subject to the samedocumentation requirements as wouldapply to foreign foundations underproposed §1.1443–1(b).

§1.1461–1 Deposit and return of taxwithheld

The provisions in §1.1461–1 of theexisting regulations pertaining toownership certificates for bond interestare proposed to be deleted. Interest onbonds described in this section wouldbe subject to the regular proceduresprovided in the regulations under sec-tions 1441 and 1443. The special ruleswould no longer be necessary in viewof the substitute procedures provided inthe proposed regulations. Commentsare solicited as to the continuing needfor provisions governing tax-free cove-nant bonds.

Section 1.1461–1 contains proposedprocedures for withholding agents topay the withheld tax and file the annualincome tax return and informationreturns with respect to payments ofincome subject to section 1441 with-holding. Paragraph (a) restates§1.1461–3 of the existing regulationsregarding the payment of amountswithheld. The provisions regardingpre-1973 years are proposed to bedeleted as obsolete. Paragraph (b)revises §1.1461–2(b) of the existingregulations on the filing of returns ofamounts withheld. Paragraph (b)(1)clarifies that the Form 1042 mustinclude the total amount of incomepaid during the preceding calendaryear. Also, the filing date is changedfrom March 15 to February 28 in orderto conform with the filing dates forForm 1099. The proposed regulationswould eliminate the requirement toattach the Forms 1042–S to the return.Instead, the Forms 1042–S would haveto be filed separately with a transmittalform. See paragraph (c)(1)(i).

Paragraph (b)(2) describes applicablereturn requirements for multiple with-holding agents. Generally, as undercurrent rules, only one Form 1042would have to be filed for an item ofincome. Exceptions to this general ruleare provided for payments to qualifiedintermediaries where the U.S. withhold-ing agent would have to file a return,regardless of whether the qualifiedintermediary assumed primary with-holding responsibility for the paymentand regardless of whether the qualifiedintermediary were also required to filea return under its agreement with theIRS. Another exception would be pro-vided for payments to an authorizedforeign agent. In that case, the U.S.withholding agent and the authorizedforeign agent would each be requiredto make a return. The return of thewithholding agent would reportamounts paid to the authorized foreignagent. The return of the authorizedforeign agent would report amountspaid to the beneficial owner or itsintermediaries.

Paragraph (b)(3) requires thatchanges to the originally filed Form1042 be filed on an amended return ona new Form 1042X. This change isdesigned to facilitate the processing ofreturns by the IRS and would be con-sistent with the procedures for filingother amended returns.

Paragraph (c) revises the provisionsin §1.1461–2(c) of the existing regula-

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tions regarding the filing of informationreturns on Form 1042–S. As underexisting regulations, any income sub-ject to withholding must be reported onan information return on Form 1042–Sand a return would be due irrespectiveof the fact that no tax was withheld(e.g., the beneficial owner claimed anexemption or the withholding agentfailed to withhold).

The provisions of §1.1461–2(c)(3) ofthe existing regulations requiring thatthe name of the beneficial owner bereported on Form 1042–S would be re-tained. However, more detailed guid-ance is provided regarding reporting ofincome paid to intermediaries. Seeparagraph (c)(4) below dealing withmultiple agents. The proposed regula-tions eliminate as unnecessary therequirements under existing regulationsto attach any certificate, form, orstatement to the return.

Paragraph (c)(1)(ii) proposes newrules pertaining to joint owners. Asingle Form 1042–S may be providedto one of the joint owners. In that case,the withholding agent should providethe Form 1042–S to the joint ownerwhose status determines the tax with-held. Further, any one owner mayrequest a separate Form 1042–S, butthe total amounts of income and tax re-ported paid and withheld on all theforms 1042–S may not exceed the totalamount of income actually paid and taxactually withheld.

Paragraph (c)(2) replaces §1.1461–2(c)(1) of the existing regulations andstates that the items of income that aresubject to reporting on Form 1042–Sare those items of income subject towithholding, income from a notionalprincipal contract, and amounts de-scribed in sections 6041 through 6050Pthat are paid to a foreign person andare not exempt from reporting underthose sections or the correspondingregulations. This provision is intendedto standardize reports of payments toforeign persons to the IRS and shouldsimplify compliance by withholdingagents. Paragraph (c)(2)(ii) lists theexceptions to reporting on a Form1042–S. As under current regulations,items of income exempt from reportinginclude portfolio interest on a bearerobligation and original issue discounton short-term obligations. An explicitexception for reporting on depositsdescribed in section 871(i)(2)(A) wouldbe added. However, bank deposit inter-est that is subject to withholding under

section 1441 (because, for example,documentation was not furnished butpayments were made to a foreign ad-dress; see special grace period provi-sions under proposed §1.1441–1(f)(2)-(i)(B)) would have to be reported.Also, interest on bank deposit interestpaid to Canadian residents would haveto be reported based upon provisionsunder final regulations under section6049 published in the Rules andRegulations section of this issue of theBulletin. In addition to the itemsexcepted from reporting under existing§1.1461–1(c)(1), other items are addedthat prevent duplicative reporting. Fi-nally, the proposed regulations wouldclarify that to the extent group-term lifeinsurance and other items of incomerequired to be reported pursuant to theprovisions in §§1.6041–2 and 1.6052–1can be associated with wages requiredto be reported on a Form W–2, thensuch items may also be reported on aForm W–2 instead of a Form 1042–S.

Paragraph (c)(3) restates the provi-sions of §1.1461–2(c)(2) of the existingregulations regarding the types of infor-mation to be included on Form 1042–S.It clarifies that the information couldbe based on the information furnishedby or on behalf of the beneficial owner,as corrected based on the withholdingagent’s actual knowledge if necessary.In addition, the Form 1042–S wouldhave to include the TIN of the bene-ficial owner if required to be shown onthe withholding certificate. Also, abeneficial owner’s TIN that the benefi-cial owner is not required to furnishbut which is actually known to thewithholding agent would have to bereported on Form 1042–S.

Paragraph (c)(4) is added to providerules for filing Form 1042–S wherethere are multiple withholding agents.Generally, as with the Form 1042, onlyone Form 1042–S must be filed withrespect to an item of income. Currentrules requiring the withholding agent toidentify the beneficial owners of pay-ments made to agents, nominees, orrepresentatives, if known, would beeliminated for payments to an inter-mediary that either claims to be aqualified intermediary or is an author-ized foreign agent. In all other cases,the information on a Form 1042–Smust be reported for each beneficialowner. This would modify §1.1461–2(c)(3)(i) of the existing regulationsproviding that beneficial owner infor-mation be reported only if known. For

payments made to a person claiming tobe a qualified intermediary or is anauthorized foreign agent, each with-holding agent in the chain would bepermitted to report on one Form 1042–S reflecting the payment made to thenext qualified intermediary or author-ized foreign agent in the chain. In thecase of a payment to an authorizedforeign agent, however, the withholdingagent would be excused from the re-quirement to report the beneficialowner information only to the extentthat the authorized foreign agent actu-ally complies with the filing require-ments under paragraph (c)(4)(iv).

Paragraph (c)(5) is added to cross-reference the magnetic media filingrequirements applicable to Forms1042–S under §1.6011–1(c). Generally,a filer of 250 or more Forms 1042–Smust file on magnetic media, unless awaiver is granted.

Paragraph (d) would allow a with-holding agent to provide a list oftaxpayer identifying numbers furnishedby or on behalf of beneficial owners tothe extent the agent has relied uponsuch number to grant a reduced rate ofwithholding tax. This is a special filingprocedure under which the reporting ofthe associated amount of income wouldnot be have to be reported.

Finally, paragraph (e) clarifies theprovisions regarding indemnification ofwithholding agents. Section 1461 in-demnifies a withholding agent from theclaim of any person for the amount ofany payments made in accordance withthe provisions of chapter 3 of the Code.Some commentators and withholdingagents have expressed concerns thatsection 1461 could be interpreted tolimit indemnification to amounts thatwere required to be withheld. Theproposed regulations clarify that awithholding agent that withheld basedupon a reasonable belief that suchamount was withheld in accordancewith chapter 3 of the Code would betreated for purposes of section 1461 ashaving withheld in accordance withchapter 3 (even though it is laterdetermined that the withholding agent’sapplication of the rules was incorrect).Additionally, a withholding agentwould be indemnified against anyclaim of any person for the amount ofany withholding made in accordancewith the grace period provisions underproposed §1.1441–1(f)(2)(ii).

Paragraph (f) restates withoutchanges §1.1461–2(f) of the existing

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regulations dealing with amounts thatmay not constitute gross income, inwhole or in part. This rule would applyto amounts subject to withholdingunder proposed §§1.1441–3(b)(1) or1.1441–3(d).

Paragraph (g) is added to provideguidance on requests of extensions oftime to file Form 1042, Forms 1042–S,and to furnish Forms 1042–S to recip-ients. The rules with respect to suchrequests would parallel those undersection 6081. A change would bemade, however, to the form to be usedfor making a request for an extensionof time to file Forms 1042–S. Cur-rently, these requests are made onForm 2758; the proposed regulationsrequire such a request to be made onForm 8809.

§1.1461–2 Adjustments foroverwithholding and underwithholdingof tax

This section has also been renum-bered and, although the rules are thesame as those of the current regulationsin §1.1461–4, it has been redrafted tosimplify the language and to update theexamples. Specifically, the rule forreimbursements remains the same, butthe rule in proposed §1.1461–4(b) withrespect to the adjustment of tax pay-ments or deposits is now titled ‘‘set-offs,’’ which more accurately describesthe adjustment process.

§1.1462–1 Withheld tax as credit torecipient of income

Section 1.1462–1(a) is clarified bystating that the amount of income fromwhich the tax is required to bewithheld includes the amount calcu-lated under the gross-up formula inproposed §1.1441–3(e)(3).

§1.1463–1 Tax paid by recipient ofincome

This section provides that if theincome tax for which the beneficialowner and the withholding agent havejoint liability under section 1461 hasbeen paid by either one of them, theIRS may not collect from the other,regardless of the original liability forthe tax. This section has been changedto reflect the 1989 statutory amendment(Public Law 101, 239, Sec. 7743(a))that provides for the imposition ofinterest and penalties on the party thatfails to withhold.

Prior proposed regulations undersection 871 and chapter 3 of theCode

In 1976, proposed regulations werepublished relating primarily to with-holding and original issue discount. In1984, proposed regulations were pub-lished relating primarily to claims ofbenefits under income tax treaties.These proposed regulations were con-tained in project number LR–2043,published on July 12, 1976 (41 FR28517) and project number LR–271–83, published on September 10, 1984(49 FR 35511). Both proposed regula-tions are being withdrawn on April 22,1996.

Regulations under sections 6041,6041A, 6042, 6045, 6049, and 6050N

These proposed regulations provideexceptions from information reportingand backup withholding under sections3406, 6041, 6041A, 6042, 6045, 6049,and 6050N for payments to foreignbeneficial owners and for income paidby cer ta in fore ign payors ormiddlemen.

Generally the regulations clarify andsimplify the regulations under sections3406, 6041, 6042, 6045, and 6049 thatwere proposed on February 29, 1988, at53 FR 5991 (1988) (the 1988 proposedregulations). In addition, the regula-tions under these sections are proposedto be revised. The regulations alsowould add new exceptions from report-ing (including the addition of middle-man rules) to sections 6041, 6041A,and 6050N. These proposed revisionsand new exceptions from reportingparallel the exceptions under theseproposed regulations under sections6042 and 6049. Further, parallel provi-sions are found in each section for:definitions of terms (such as non-U.S.payor or non-U.S. middleman); pre-sumptions as to whether a payee isU.S. or foreign where the requireddocumentation is lacking, incorrect, orunreliable; rules for payments to jointowners; and rules for converting intoU.S. dollars amounts paid in foreigncurrency. In addition, the proposedregulations specify that the standard ofknowledge applicable to payors andmiddlemen would be actual knowledge.Thus, the ‘‘reason to know’’ standardwould not apply for purposes of thereporting provisions.

The subparagraphs under proposed§1.6042–3(a) (dealing with the defini-

tion of dividends for purposes ofinformation reporting under that sec-tion) are proposed to be restated withchanges in drafting only. The substan-tive rules in that paragraph would beunchanged and are, therefore, not re-proposed. Also, §1.6042–3(b)(3) and(4) of the 1988 proposed regulations(relating to capital gain dividends fromregulated investment companies andpayments to exempt recipients) wouldbe redesignated as subparagraphs (vii)and (viii), respectively, of proposed§1.6042–3(b)(1). These rules are notreproposed.

This document also proposes torevise the definition of an exemptrecipient in the case of a corporation.Section §1.6049–4(c)(1)(ii)(A) of the1988 proposed regulations provides thata person would be treated as a corpora-tion, and therefore as an exemptrecipient not subject to informationreporting, if the name of the payee or acorporate resolution provided to thepayor clearly indicates corporate status(the eyeball test). These proposedregulations retain the eyeball test of the1988 proposed regulations for pay-ments (i) other than interest, dividendsand broker proceeds paid to accountsestablished after a date that is 60 daysafter the date that these regulations arepublished as final regulations in theFederal Register and (2) other thaninterest, dividends and broker proceedsthat are not paid to a person to whomthe payor has an account relationship.For interest and dividends paid to anew account, the entity would berequired to provide either a corporateresolution or similar document thatclearly indicates corporate status, aForm W–9 with an EIN, or a Form W–8. For interest and dividends paidwhere an account relationship does notexist, the payor may continue to relyon the eyeball test if the payor also hasa mailing address of the payee in theUnited States. The IRS and Treasuryunderstand that financial institutionsroutinely request a corporate resolutionwhen opening accounts for entities.Therefore, requiring such a documentwould not significantly increase burdenand would improve compliance. Thisproposed rule is reflected in paragraph(c)(1)(ii)(A). In addition, the list ofinternational organizations under para-graph (c)(1)(ii)(G) is proposed to beeliminated as a simplification measure.

In addition, the 1988 proposed reg-ulations under §1.6049–5 are proposed

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to be substantially redrafted, althoughwithout significant substantive changes.Paragraph (b)(6) provides an exceptionfrom reporting for amounts fromsources outside the United States paidoutside the United States by a non-U.S.payor or non-U.S. middleman. Thisprovision duplicates that found in the1988 proposed regulations at proposed§§1.6049–5(b)(8) and 1.6049–5(d)(3)-(i), (ii), and the foreign source portionof proposed §1.6049–5(d)(3)(iii).

Paragraph (b)(7) (which correspondsto §1.6049–5(c)(6) of the 1988 pro-posed regulations) would except port-folio interest paid on bearer obligationsif paid outside the United States. Inthese proposed regulations, this excep-tion would not apply where a U.S.middleman acts as a custodian, nomi-nee, or other agent of the payee andcollects the amount for, or on behalfof, the payee, whether or not themiddleman is also acting as agent ofthe payor. Paragraph (b)(8) (whichcorresponds to §1.6049–5(c)(6) of the1988 proposed regulations) provides anexception for portfolio interest paid onregistered obligations.

The provisions of §1.6049–5(b)(9) ofthe 1988 proposed regulations, whichexcepted from reporting amounts paidby an international organization (or itsagent) on an obligation issued by theinternational organization are proposedto be incorporated in paragraph (b)(9)of these new proposed regulations.These rules are not reproposed.

Paragraph (b)(10) (which corre-sponds to §1.6049–5(c)(5)(ii) of the1988 proposed regulations) provides anexception for certain short-term foreigntargeted obligations. Paragraph (b)(11)(which corresponds to §1.6049–5(e)(1)(the parenthetical language) and§1.6049–5(e)(2)(i) and (ii) of the pro-posed 1988 proposed regulations)provides an exception for certainforeign-targeted obligations issued bypersons engaged in the banking busi-ness. Although the 1988 proposedregulations limited the exceptions at§1.6049–5(e)(2)(i) and (ii) to Cana-dians, these proposed regulations ex-pand the scope of the exceptions toapply to all beneficial owners. How-ever, as under the 1988 proposedregulations, the exception would notapply where a U.S. middleman acts asan agent of the payee.

Paragraph (b)(12) (which corre-sponds to §§1.6049–5(b)(7) and (c)(1),(2), and (3) of the 1988 proposed

regulations) would except any amountof U.S. source interest subject towithholding under section 1441. Suchinterest would be required to be re-ported on a Form 1042–S under pro-posed §1.1461–1(c). This exceptionwould replace §1.6049–5(b)(1)(vi),(b)(1)(vi)(B)(1) and (b)(2)(iv) of theexisting regulations, which provide anexception for reporting for bank depositinterest paid to a foreign person, butonly if a Form W–8 (or documentaryevidence in appropriate cases) isprovided to the payor. The withholdingcertificate requirement for bank depositinterest is now found at proposed§1.1441–2(d)(2).

Paragraph (b)(13) provides a newexception for assets blocked pursuantto an executive order.

Paragraph (b)(14) provides the gen-eral rule for exempting any otheramount of otherwise reportable interestbased on specified documentation fur-nished to the payor or middleman. Thestandards of documentation are de-scribed in paragraph (c) and wouldgenerally parallel the documentationstandards proposed for purposes ofclaiming a reduced rate of withholdingunder section 1441. Therefore, thepayor could rely on a beneficial owneror intermediary withholding certificatedescribed in proposed §1.1441–1(e)(1)-(i) provided it complied with theprocedures described in proposed§1.1441–1(e)(4)(iv) and (v) (dealingwith on-line confirmation and notifica-tion procedures). No taxpayer identify-ing number is required to be stated ona beneficial owner withholding certifi-cate. These proposed regulations retainthe permission under current regula-tions to furnish documentary evidenceinstead of a certificate for paymentsmade to an off-shore account. The on-shore and off-shore distinction is simi-lar to that found in the 1988 proposedregulations. The provisions of the 1988proposed regulations contained in para-graphs (d), (e), (f), (g), (h), (i), and (l)are withdrawn. Proposed paragraphs (j)(relating to payments outside theUnited States) and (k) (dealing withoriginal issue discount) of the 1988proposed regulations would be renum-bered as paragraphs (e) and (f), respec-tively. The provisions in these para-graphs are not restated.

§31.3401(a)(6)–1(e) Income exemptfrom income tax

This section is amended to reflect thenew certification procedures under pro-posed §§1.1441–1(e).

Backup withholding regulations undersection 3406

Several changes to the backup with-holding regulations under section 3406are proposed to conform those regula-tions to the proposed information re-porting and chapter 3 withholdingregulations. Section 31.3406(d)–3 (c)would be amended to extend to 90 daysthe current 30-day grace period appli-cable to readily tradeable instrumentsacquired directly from a payor if thepayment were made to a person forwhom indicia of foreign status existed,as described in proposed §1.1441–1(f)(2)(i)(B).

Section 31.3406(g)–1(e) would revisethe proposed regulations contained inproject number IA–224–82 published inthe Federal Register on September 27,1990 (55 FR 39427) to restate theprinciples that no backup withholdingapplies under section 3406 to report-able payments made outside the UnitedStates even though documentary evi-dence of non-U.S. status may berequired in order to exempt the pay-ment from 1099 reporting, unless thepayor has actual knowledge that thepayee is a United States person. Theregulations propose to add an exceptionfor notional principal contract paymentsthat are made outside the United States.

Amendments to §31.6413(a)–3

The regulations under §31.6413(a)–3are proposed to be amended in order toallow payers to refund backup with-holding in certain circumstances. Thoseregulations currently prohibit a refundof backup withholding except whenerroneous withholding has occurred. Itis proposed to expand the definition oferroneous withholding to a situationwhere the withholding agent backupwithholds because the payee fails toprovide sufficient documentation asrequired under section 3406 and 1441and the regulations under these sec-tions. Where an appropriate withhold-ing certificate is later provided, thewithholding agent could treat theearlier withholding as erroneous with-holding. However, the withholding cer-tificate should to be received prior tothe end of the calendar year in whichthe payment is made and prior to thetime the payor furnishes a Form 1099to the payee with respect to thepayment for which the withholdingerroneously occurred. The amount re-funded would be the amount actually

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withheld less the amount required to bewithheld, if any, under chapter 3 of theCode.

Removal of Q&A regulations

The existing regulations under part35a are proposed to be removed inorder to reflect the proposed revisionsin this document.

Amendments to §301.6109–1

Amendments to the regulations underthis section are currently pending toauthorize the IRS to issue taxpayeridentifying numbers to certain foreignpersons and to require a taxpayer tostate a TIN on any tax return filed(other than an information return).These regulations are proposed to befurther amended to require that a TINbe stated on withholding certificates asmay be required under the regulationsproposed under sections 1441, 1442,and 1443.

Amendments to §301.6114–1

The regulations under section 6114are proposed to be amended to requirecertain foreign entities to file a Form8833 if they are claiming to bequalified under a limitation of benefitsprovision under an income tax treaty,even though the income is also re-ported on a Form 1042 by the with-holding agent. The filing requirementwould be limited to payments betweenrelated parties that exceed $500,000 forthe taxable year. See proposed§1.1441–6(b)(1).

Amendments to §301.6402–3(e)

Paragraph (e) of the regulationsunder §301.6402–3 is proposed to beamended to require that returns filed toclaim a refund of tax include thetaxpayer’s TIN. In addition, the Form1042–S would have to be attached tothe return and also show the taxpayer’sTIN.

Removal of Certain RegulationsUnder Tax Conventions

This document proposes to removecertain regulations issued under incometax conventions between the UnitedStates and Greece, Germany, Switzer-land, Ireland, France, Austria, Pakistan,Sweden and Denmark. Removal ofthese regulations will be done in

consultation with the competent au-thorities of these countries.

Special Analyses

It has been determined that thisnotice of proposed rulemaking is not asignificant regulatory action as definedin EO 12866. Therefore, a regulatoryassessment is not required. It has alsobeen determined that section 553(b) ofthe Administrative Procedure Act (5U.S.C. chapter 5) and the RegulatoryFlexibility Act (5 U.S.C. chapter 6) donot apply to these regulations, and,therefore, a Regulatory FlexibilityAnalysis is not required. Pursuant tosection 7805(f) of the Internal RevenueCode, these regulations will be submit-ted to the Chief Counsel for Advocacyof the Small Business Administrationfor comment on their impact on smallbusiness.

Comments and Requests for a PublicHearing

Before these proposed regulationsare adopted as final regulations, consid-eration will be given to any writtencomments (a signed original and eight(8) copies) that are submitted timely tothe IRS. All comments will be avail-able for public inspection and copying.A public hearing will be scheduled ona date, time, and place as will bepublished in the Federal Register.

* * * * * *

Proposed Amendment to theRegulations

Accordingly, under the authority of26 U.S.C. 7805, 26 CFR chapter I isproposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citationfor part 1 is amended by adding entriesin numerical order and removing theentry for §1.1441–4T to read asfollows:

Authority: 26 U.S.C. 7805 * * *Section 1.1441–2 also issued under

26 U.S.C. 1441(c)(4) and 26 U.S.C.3401(a)(6).

Section 1.1441–3 also issued under26 U.S.C. 1441(c)(4) and 26 U.S.C.3401(a)(6). * * *

Section 1.1441–6 also issued under26 U.S.C. 1441(c)(4) and 26 U.S.C.3401(a)(6).

Section 1.1441–7 also issued under26 U.S.C. 1441(c)(4) and 26 U.S.C.3401(a)(6). * * *

§1.163–5 [Amended]

Par. 2. In §1.163–5 paragraph (c)(2)-(i)(B)(5) is amended by removing thelanguage ‘‘subdivision (iii) of A–5 of§35a.9999–4T’’ in the last sentence andadding ‘‘§1.6049–5(c)(2)(ii)’’ in itsplace.

Par. 3. Section 1.165–12(c) isamended by:

1. Removing paragraph (c)(1)(iii).2. Redesignating paragraphs (c)(1)-

(iv) and (c)(1)(v) as paragraphs (c)(1)-(iii) and (c)(1)(iv), respectively.

3. Amending paragraphs (c)(1)(i)and (c)(1)(ii) by removing the language‘‘(c)(1)(v)’’ and adding ‘‘(c)(1)(iv)’’ inits place.

4. Revising newly designated para-graph (c)(1)(iii).

The revision reads as follows:

§1.165–12 Denial of deduction forlosses on registration-requiredobligations not in registered form.

* * * * * *

(c) * * *(1) * * *(iii) The holder may deliver an

obligation in bearer form that is offeredor sold inside the United States only ifthe holder delivers it to a financialinstitution that is purchasing for itsown account, the account of anotherforeign institution, or an exempt orga-nization that will comply with therequirements of section 165(j)(3)(A),(B), or (C). The holder may deliver aregistration-required obligation inbearer form that is offered and soldoutside the United States to a personother than a financial institution only ifthe holder has evidence in its recordsthat such person is not a U.S. citizen orresident and does not have actualknowledge that such evidence is false.Such evidence may include a statementby that person that is deliveredelectronically. For purposes of thisparagraph (c), the term deliver includesa transfer of an obligation evidenced bya book entry including a book entrynotation by a clearing organizationevidencing transfer of the obligationfrom one member of the organizationto another member. For purposes of

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this paragraph (c), the term deliverdoes not include a transfer of anobligation to the issuer or its agent forcancellation or extinguishment.

* * * * * *

Par. 4. Section 1.871–14 is added toread as follows:

§1.871–14 Rules relating to repeal oftax on interest of nonresident alienindividuals and foreign corporationsreceived from certain portfolio debtinvestments.

(a) General rule. No tax shall beimposed under sections 871(a)(1)(A),871(a)(1)(C), 881(a)(1) or 881(a)(3) onany portfolio interest as defined insections 871(h)(2) and 881(c)(2) re-ceived by a foreign person. But seesection 871(h) or 882(a) if such interestis effectively connected with the con-duct of a trade or business within theUnited States.

(b) Rules concerning obligations notin registered form—(1) In general.[Reserved] For further guidance, see§35a.9999–5(a), Answer 1.

(2) Convertible obligations. [Re-served] For further guidance, see§35a.9999-5(c), Answers 18 and 19.

(3) Coordination with withholdingand reporting rules. See §1.1441–2(d)(1)(i) for an exception from docu-mentation requirements otherwise ap-plicable for purposes of section 1441.See section 6049 and §1.6049–5(b)(7)for rules relating to an exemption fromForm 1099 reporting and backup with-holding under section 3406.

(c) Rules concerning obligations inregistered form—(1) In general. In thecase of interest paid on an obligationthat is in registered form, the termportfolio interest means any interest(including original issue discount)—

(i) That is paid on an obligationissued after July 18, 1984;

(ii) That would be subject to taxunder section 871(a)(1)(A), 871(a)-(1)(C), 881(a)(1) or 881(a)(3) but forsection 871(h) or 881(c); and

(iii) With respect to which a UnitedStates (U.S.) person otherwise requiredto deduct and withhold tax undersection 1441(a) or 1442(a) receives astatement that meets the requirementsof section 871(h)(5) that the beneficialowner of the obligation is not a U.S.person.

(2) Required statement. A U.S. per-son will be considered to have received

a statement that meets the requirementsof section 871(h)(5) if either it com-plies with one of the proceduresdescribed in this paragraph and doesnot have actual knowledge or reason toknow that the beneficial owner is aU.S. person or it complies with theprocedures described in paragraph (d)or (e) of this section.

(i) The U.S. person (or its authorizedforeign agent described in §1.1441–7(c)(2)) complies with the withholdingcertificate procedures described in§1.1441–1(e)(1).

(ii) The U.S. person complies withthe documentary evidence proceduresdescribed in §1.6049–5(c)(2)(ii) (butonly if payments are made outside theUnited States with respect to offshoreaccounts). See §1.6049–5(e) for deter-mining the place of payment and§1.6049–5(d)(3) for a definition ofoffshore accounts.

(iii) [Reserved] For further guidance,see §35a.9999–5(b), Answer 9, sen-tences 5 through 13.

(iv) The U.S. person complies withprocedures that the U.S. competentauthority may agree to with the compe-tent authority of a country with whichthe United States has an income taxtreaty in effect.

(3) Time for providing certificate ordocumentary evidence. Interest on aregistered obligation shall qualify asportfolio interest if the withholdingcertificate or documentary evidencethat must be provided is furnishedbefore expiration of the beneficialowner’s period of limitation for claim-ing a refund of tax with respect to suchinterest. See, however, §1.1441–1(f)(5)for consequences to a withholdingagent that makes a payment withoutwithholding even though it cannotassociate the payment with the requireddocumentation prior to the payment.

(4) Coordination with withholdingand reporting rules. For an exemptionfrom withholding under section 1441with respect to obligations described inthis paragraph (c), see §1.1441–2(d)(2).For rules applicable to withholdingcertificates, see §1.1441–1(e)(4). Forapplication of presumptions when theU.S. person cannot associate the pay-ment with the required documentation,see §1.1441–1(f). For standards ofknowledge applicable to withholdingagents, see §1.1441–7(b). For rulesrelating to an exemption from Form1099 reporting and backup withholdingunder section 3406, see section 6049

and §1.6049–5(b)(8). For rules relatingto reporting on Forms 1042 and 1042–S, see §1.1461–1(b) and (c).

(d) Application of repeal of 30 per-cent withholding to pass-through cer-tificates. [Reserved] For further guid-ance, see §35a.9999-5(e), Answers 21and 22.

(e) Foreign-targeted registered obli-gations. [Reserved] For further guid-ance, see §35a.9999–5(b), Answers 12through 15.

(f) Definitions. For purposes of thissection, the terms foreign person andbeneficial owner have the meaning setforth in §1.1441–1(c)(2) and (c)(6),respectively; the term withholdingagent has the meaning set forth in§1.1441–7(a); and the term paymenthas the meaning set forth in §1.1441–2(e).

(g) Effective date—(1) In general.This section shall apply to payments ofinterest made after December 31, 1997.

(2) Transition rule. For purposes ofparagraph (c)(2)(i) of this section, awithholding agent that holds a validForm W–8 on a date that is 60 daysafter these regulations are published asfinal regulations in the Federal Registermay treat it as a valid withholdingcertificate until its validity expiresunder applicable provisions as in effecton April 22, 1996.

Par. 5. Section 1.1441–0 is added toread as follows:

§1.1441–0 Outline of regulationprovisions for section 1441.

This section lists captions containedin §§1.1441–1, 1.1441–2, 1.1441–3,1.1441–4, 1.1441–5, 1.1441–6, 1.1441–7, 1.1441–8T, and 1.1441–9.

§1.1441–1 Requirement for thededuction and withholding of tax onpayments to foreign persons.

(a) Purpose and scope.(b) General rule of withholding.(c) Definitions.

(1) Withholding.(2) Foreign person.(3) Payee.(4) Individual(5) Foreign corporations.(6) Beneficial owner.(7) Chapter 3 of the Internal

Revenue Code.

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(d) Claim of U.S. status by payee orbeneficial owner.(1) In general.(2) Payments to a payee that is a

U.S. person.(3) Payments to a foreign person

acting for a U.S. payee.(e) Beneficial owner’s claim of for-

eign status.(1) Withholding agent’s reliance.(2) Beneficial owner withholding

certificate.(3) Intermediary withholding

certificate.(4) Applicable rules.(5) Qualified intermediaries.

(f) Presumptions.(1) In general.(2) Reportable payments to non-

exempt recipients.(3) Special rules for scholarships,

grants, pensions, annuities, etc.(4) Special rules for pass-through

entities.(5) Failure to act in accordance

with presumptions.(6) Reportable payment.(7) Adjustment, refund, or credit

of overwithheld tax.(g) Effective date.

(1) In general.(2) Transition rules.

§1.1441–2 Income subject towithholding.

(a) In general.(b) Fixed or determinable annual or

periodical income.(1) In general.(2) Exceptions.(3) Original issue discount.(4) Securities lending transactions.

(c) Other income subject to with-holding.

(d) Items of income not subject towithholding under section 1441.(1) Exemptions for which no

withholding certificate ordocumentation is required.

(2) Exemptions for portfolio inter-est and income on bank, etc.deposits requiring a withhold-ing certificate or docu-mentation.

(e) Payment.(1) General rule.(2) Income allocated under section

482.(3) Blocked income.(4) Special rules for dividends.(5) Certain interest accrued by a

foreign corporation.(6) Payments other than in U.S.

dollars.

(f) Effective date.

§1.1441–3 Amounts subject towithholding.

(a) Withholding on gross amount.(b) Withholding on payments on cer-

tain obligations.(1) Withholding at time of pay-

ment of interest.(2) No withholding between inter-

est payment dates.(c) Corporate distributions.

(1) General rule.(2) Determination of accumulated

and current earnings and pro-fits on the date of payment.

(3) Special rules in the case ofdistributions from a regulatedinvestment company.

(4) Overwithholding of tax.(d) Withholding on certain gains.(e) Payments other than in U.S.

dollars.(1) In general.(2) Payments in foreign currency.(3) Tax liability of beneficial

owner satisfied by withholdingagent.

(f) Conduit financing arrangements.(g) Effective date.

§1.1441–4 Certain exemptions fromwithholding.

(a) Certain income connected with aU.S. trade or business.(1) In general.(2) Withholding agent’s reliance

on a claim of effectively con-nected income.

(3) Income on notional principalcontracts.

(4) Failure to act in accordancewith presumption.

(b) Compensation for personal serv-ices of an individual.(1) Exemption from withholding.(2) Manner of obtaining withhold-

ing exemption under taxtreaty.

(6) Personal exemption.(c) Special rules for scholarship and

fellowship income.(1) In general(2) Alternate withholding election

(d) Annuities received underqualified plans.

(e) Income of foreign central bankof issue or the Bank for Interna-tional Settlements.

(f) Effective date.(1) General rule.

(2) Transition rules.

§1.1441–5 Withholding on paymentsto pass-through entities.

(a) Domestic partnerships.(1) Exemption from withholding

on payment to domestic part-nerships.

(2) Withholding by a domesticpartnership.

(b) Foreign partnerships.(1) In general.(2) Special rules in the case of

tiered partnerships.(3) Presumptions. (4) Example.

(c) Trusts and estates. [Reserved](d) Effective date.

(1) General rule.(2) Transition rules.

§1.1441–6 Claim of a reduced rateof tax under an income tax treaty.

(a) In general.(b) Reliance on claim of treaty

benefits.(1) In general.(2) Special rules for certain

dividends.(3) Competent authorities agree-

ment.(4) Special rules for payments to

certain foreign entities.(c) Proof of tax residence in a treaty

country.(1) In general.(2) Certification of taxpayer iden-

tifying number.(3) Certificate of residence. (4) Documentary evidence estab-

lishing residence in the treatycountry.

(d) Joint owners. (e) Related party dividends under

certain treaties.(f) Effective date.

(1) General rule.(2) Transition rules.

§1.1441–7 General provisions relatingto withholding agents.

(a)Withholding agent defined.(b) Standards of knowledge.

(1) In general.(2) Reason to know.(3) Universal accounts.

(c) Authorized agent.(1) In general.(2) Authorized foreign agent.

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(3) Notification.(4) Liability of U.S. withholding

agent.(5) Filing of returns.

(d) United States obligations.(e) Assumed obligations.(f) Conduit financing arrangements.

[Reserved](g) Effective date.

§1.1441–8T Foreign government andinternational organization exemptionfrom withholding (temporary).

(a) Foreign governments.(b) Statement claiming exemption.(c) Effective date.

(1) In general.(2) Transition rules.

§1.1441–9 Exemption fromwithholding on exempt income of aforeign tax-exempt organization andforeign private foundations.

(a) Income not subject to tax undersection 511.

(b) Statement claiming exemption.(c) Effective date.

(1) In general.(2) Transition rules.

Par. 6. Section 1.1441–1 is revised toread as follows:

§1.1441–1 Requirement for thededuction and withholding of tax onpayments to foreign persons.

(a) Purpose and scope. This sectionand §§1.1441–2 through 1.1441–9provide rules for withholding undersection 1441 when a payment is madeto a foreign person. This sectionprovides definitions of terms used inchapter 3 of the Internal Revenue Codeand regulations under that chapter. Itprescribes procedures to determinewhether a tax must be withheld underchapter 3 of the Internal RevenueCode, including presumptions for deter-mining whether a withholding agentshould treat a payee as a United States(U.S.) person or a foreign person.Special procedures regarding paymentsto foreign persons that act as intermedi-aries are also provided. Section1.1441–2 describes the income subjectto withholding under section 1441.Section 1.1441–3 provides rules regard-ing the amount subject to withholding.Section 1.1441–4 provides exemptionsfrom withholding for certain incomeeffectively connected with the conduct

of a trade or business in the UnitedStates, including certain compensationfor the personal services of an individ-ual. Section 1.1441–5 provides rulesregarding withholding on paymentsmade to pass-through entities. Section1.1441–6 provides rules regardingclaiming a reduced rate of withholdingunder an income tax treaty. Section1.1441–7 defines the term withholdingagent and provides rules regardingwithholding agents’ obligations to with-hold. Section 1.1441–8T provides rulesfor income received by a foreigngovernment that is excluded from grossincome under section 892. Section1.1441–9 provides rules for paymentsto foreign tax exempt organizations andforeign private foundations.

(b) General rule of withholding. Awithholding agent (as defined in§1.1441–7(a)) must withhold 30 per-cent of the gross amount of a payment(as defined in §1.1441–2(e)) of incomesubject to withholding made to a payeethat is a foreign person unless thebeneficial owner of the income is aforeign person entitled to a reducedrate of tax and for the withholdingagent holds an appropriate withholdingcertificate or documentation or unlessthe beneficial owner of the income is aU.S. person. For this purpose, a pay-ment to the U.S. agent of a foreignperson is treated as a payment to aforeign person if the withholding agenthas actual knowledge or reason toknow of the agency relationship. Forthe documentation upon which a with-holding agent may rely in order to treata payee or beneficial owner as a U.S.person, see paragraph (d) of thissection. For the documentation uponwhich a withholding agent may rely inorder to treat a payee or a beneficialowner as a foreign person, see para-graph (e) of this section. For applicablepresumptions if the withholding agentcannot associate the payment with therequired documentation at the time ofpayment, see paragraph (f) of thissection. For definitions of foreignperson, payee, and beneficial owner,see paragraphs (c)(2), (3), and (6) ofthis section, respectively. For the deter-mination of income subject to with-holding, see §1.1441–2(a). For a defini-tion of an offshore account, see§1.6049–5(d)(3). For withholding pro-cedures applicable to payments to U.S.and foreign partnerships, respectively,see §1.1441–5(a) and (b). For with-holding procedures applicable to pay-ments to U.S. and foreign trusts andestates, see §1.1441–5(c).

(c) Definitions—(1) Withholding.The term withholding means the deduc-tion and withholding of tax at theapplicable rate from the payment ofincome.

(2) Foreign person. The term for-eign person means a nonresident alienindividual, a foreign corporation, aforeign partnership, a foreign trust, aforeign estate, and any other personthat is not a United States person forpurposes of chapter 3 of the InternalRevenue Code. A United States personis a person described in section7701(a)(30), the U.S. government (in-cluding an agency or instrumentalitythereof), or a State and the District ofColumbia (including an agency or in-strumentality thereof).

(3) Payee—(i) General rule. Exceptas otherwise provided in paragraph(c)(3)(ii) of this section, a payee is theperson to whom a payment is made.See §1.1441–2(e) for the determinationof when a payment is considered made.Treatment of a person as a payee hasconsequences for purposes of withhold-ing under chapter 3 of the InternalRevenue Code (see paragraph (b) ofthis section (relating to the general ruleof withholding)) as well as for pur-poses of reporting income under theprovisions of chapter 61 of the InternalRevenue Code and backup withholdingunder section 3406. See paragraph(d)(3) of this section for when awithholding agent may treat a paymentto a foreign person as a payment madeto a payee that is a U.S. person if theforeign person is acting for or repre-senting the U.S. person.

(ii) Payments to a foreign part-nership. For purposes of chapter 3 ofthe Internal Revenue Code, section3406, and chapter 61 of the InternalRevenue Code, a payment made to aforeign partnership shall be treated as apayment made to the partners ratherthan to the partnership. A withholdingagent may, however, treat a payment toa foreign partnership as made to thepartnership (rather than to its partners)if, with respect to the partnership, itholds an intermediary withholding cer-tificate described in paragraph (e)(3)(ii)of this section (relating to a certificatefrom a qualified intermediary) or anintermediary withholding certificate de-scribed in paragraph (e)(3)(iii) of thissection (relating to a certificate from aforeign partnership) representing thatthe income to which the certificaterelates is effectively connected with the

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conduct of a trade or business in theUnited States. In addition, if thewithholding agent holds an intermedi-ary withholding certificate described inparagraph (e)(3)(iv) of this section(relating to a certificate from an agent,nominee, representative, etc.), then thepayee shall be the person on whosebehalf the partnership is receiving thepayment. In the case of tiered foreignpartnerships that are not treated aspayees under the provisions of thisparagraph (c)(3)(ii), the payees shall bethe partners of the next higher-tierforeign partnership. Thus, the rules ofthis paragraph (c)(3) shall applythrough any number of tiers of foreignpartnerships in order to determinewhich partner is treated as the payee.For example, if a payment is made to aforeign partnership (second tier) andone of the partners of the second tierpartnership is another foreign part-nership (first tier) with two individualpartners, the payment to the second tieris treated as made to the individualpartners of the first tier (unless thesecond tier partnership has furnishedone of the intermediary withholdingcertificates referred to in this paragraph(c)(3)(ii)). If one of the partners in thefirst tier is a domestic partnership, thedomestic partnership is treated as thepayee under the provisions of para-graph (c)(3)(i) of this section, eventhough one of the partners of thedomestic partnership might be a foreignpartnership. If the first tier foreignpartnership is a nominee and furnishesan intermediary withholding certificatedescribed in paragraph (e)(3)(iv) of thissection, the person on whose behalf thefirst tier partnership receives the pay-ment is treated as the payee. See§1.1441–5(b) for rules regarding proce-dures applicable to beneficial owners’claims of reduced rate of withholdingunder chapter 3 of the Internal RevenueCode.

(4) Individual—(i) Alien individual.The term alien individual means anindividual who is not a citizen or anational of the United States. See §1.1–1(c).

(ii) Nonresident alien individual.The term nonresident alien individualmeans a person described in section7701(b)(1)(B), an alien individual whois a resident of a foreign country underthe residence article of an income taxtreaty and §301.7701(b)–7(a)(1) of thischapter, or an alien individual who is aresident of Puerto Rico, Guam, the

Commonwealth of Northern MarianaIslands, the U.S. Virgin Islands, orAmerican Samoa as determined under§301.7701(b)–1(d) of this chapter. Analien individual who has made anelection under section 6013(g) or (h) tobe treated as a resident of the UnitedStates is nevertheless treated as anonresident alien individual for pur-poses of withholding under chapter 3of the Internal Revenue Code.

(5) Foreign corporations. For pur-poses of this section, a corporationcreated or organized in Guam, theCommonwealth of Northern MarianaIslands, the U.S. Virgin Islands, andAmerican Samoa, is not treated as aforeign corporation if the requirementsof subparagraphs (A), (B), and (C) ofsection 881(b)(1) are met for suchcorporation. Further, a payment madeto a foreign government or an interna-tional organization shall be treated as apayment made to a foreign corporationfor purposes of withholding underchapter 3 of the Internal RevenueCode.

(6) Beneficial owner—(i) Generalrule. In the case of a payment ofincome, the term beneficial ownermeans the person required under U.S.tax principles to include the amountpaid in gross income under section 61(determined without regard to an exclu-sion or exemption from gross incomeunder the Internal Revenue Code).Thus, a nominee, agent, custodian, orany person acting in a similar capacityis not the beneficial owner. In the caseof a scholarship, the student receivingthe scholarship is the beneficial ownerof that scholarship.

(ii) Special rules for certainentities—(A) General rule. The benefi-cial owners of income paid to apartnership are those persons that,under U.S. tax principles, are thetaxpayers with respect to that incomein their separate or individual capaci-ties. For example, a partnership (firsttier) that is a partner in another partner-ship (second tier) is not the beneficialowner of income paid to the second tierpartnership since the first tier part-nership is not liable for income taxunder U.S. tax principles. See, how-ever, §1.1441–5(a) for applicable with-holding procedures for payments to adomestic partnership. See also§1.1441–5(b)(2) for applicable with-holding procedures for payments to aforeign partnership where one of thepartners (at any level in the chain oftiers) is a domestic partnership.

(B) Special rules when an incometax treaty applies. For purposes ofclaiming a reduction in the rate ofwithholding on income paid to aforeign entity based on an income taxtreaty between the United States and aforeign country, the tax principles ineffect under the laws of that foreigncountry shall apply to determinewhether the entity or the personsholding an interest in that entity arerequired to include the amounts inincome and, therefore, whether, underthe principles of this paragraph (c)(6),the entity or the interest holders in theentity are the beneficial owners of theincome. See §1.1441–6(b)(4)(iii) per-mitting a withholding agent to treat, atits option, payments made to a singleforeign entity as beneficially owned inpart by the entity and, in part, by anyone or more persons holding an interestin the entity. The possibility of dualtreatment may also occur if a reducedrate of tax is claimed under the InternalRevenue Code for certain types of in-come and under a U.S. income taxtreaty for other types of income or ifreduced rates are claimed under dif-ferent tax treaties. For purposes of thisparagraph (c)(6)(ii)(B), the term foreignentity does not include a trust or anestate. See §1.1441–6(b)(4) for proce-dures governing claims of benefitsunder an income tax treaty.

(C) Trusts. The provisions of para-graphs (c)(6)(i) and (c)(6)(ii)(A) of thissection shall not apply to a trust,whether domestic or foreign. The bene-ficial owner of income paid to a trustshall be determined under the provi-sions of §1.1441–3(f) and (g), as ineffect on the date preceding the date onwhich this document is published as afinal regulation in the Federal Register.

(7) Chapter 3 of the Internal Reve-nue Code. For purposes of the regula-tions under sections 1441, 1442, and1443, any reference to chapter 3 of theInternal Revenue Code shall not in-clude references to sections 1445 and1446, unless the context indicatesotherwise.

(d) Claim of U.S. status by payee orbeneficial owner—(1) In general. Pay-ments made to a U.S. person are notsubject to the withholding of tax undersection 1441, absent actual knowledgeor reason to know that the U.S. personmay be acting as an agent for a foreignperson. See paragraph (b) of this sec-tion. Absent actual knowledge or rea-son to know otherwise, a withholding

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agent may apply the provisions of thisparagraph (d) to a payment of incomeotherwise subject to withholding todetermine whether to treat the paymentas made to a U.S. person. See para-graph (f) of this section for applicablepresumptions if the withholding agentcannot associate the payment with therequired documentation prior to thetime of payment.

(2) Payments to a payee that is aU.S. person—(i) Reportable payments.If a reportable payment (as defined insection 3406(b)) is made to a payeethat is not an exempt recipient (asdefined under the applicable informa-tion reporting provisions of chapter 61of the Internal Revenue Code), thewithholding agent may treat the pay-ment as made to a U.S. person if thepayee complies with the proceduresdescribed in §§31.3406(d)–1 through31.3406(d)–5 of this chapter (includingrequiring a payee to furnish its tax-payer identifying number) and thewithholding agent meets all the require-ments described in §31.3406(h)–3(e) ofthis chapter regarding reliance by apayor on a Form W–9).

(ii) Payments to exempt recipientsand certain other payments. If areportable payment is made to a payeethat is an exempt recipient (as definedunder the applicable information report-ing provisions of chapter 61 of theInternal Revenue Code) or is a scholar-ship, grant, pension, or annuity, awithholding agent may treat the pay-ment as made to a U.S. person if thepayee provides a certificate of U.S.status. For purposes of this paragraph(d)(2)(ii), a certificate of U.S. status isa Form W–9 (or such other form as theInternal Revenue Service may pre-scribe) that is signed under penalties ofperjury by the payee and contains allrequired information. For purposes ofthis paragraph (d)(2)(ii), required infor-mation consists of the payee’s name,permanent residence address, and tax-payer identifying number. The proce-dures described in §31.3406(h)–3(a) ofthis chapter shall apply to payments tojoint payees. A withholding agent thatreceives a Form W–9 in order to satisfythis paragraph (d)(2)(ii) must retain theform in accordance with the provisionsof paragraph (e)(4)(iii) of this sectionrelating to the retention of withholdingcertificates. The rules of this paragraph(d)(2)(ii) are only intended to provide amethod by which a withholding agentmay determine that a payee is not a

foreign person and do not otherwiseimpose a requirement that documenta-tion be furnished by an exempt recip-ient or for payments subject to thisparagraph (d)(2)(ii).

(3) Payments to a foreign personacting for a U.S. payee. Absent actualknowledge or reason to know other-wise, for purposes of chapter 3 of theInternal Revenue Code, section 3406,and chapter 61 of the Internal RevenueCode, a withholding agent may treat apayment to a foreign person as a pay-ment made to a payee that is a U.S.person if it receives an intermediarywithholding certificate described inparagraph (e)(3)(iv) of this sectionregarding the foreign person to whichis attached the applicable certificationdescribed in paragraph (d)(2) of thissection concerning the U.S. payee onwhose behalf the foreign person isreceiving the payment. See paragraph(e)(5) of this section for applicableprocedures in the case of a payment toa foreign person acting as a qualifiedintermediary. See also, §1.1441–5(b)(1)for applicable procedures in the case ofa payment to a foreign partnership thatis not a qualified intermediary.

(e) Beneficial owner’s claim of for-eign status—(1) Withholding agent’sreliance. Absent actual knowledge orreason to know otherwise, a withhold-ing agent may rely on a claim that thebeneficial owner of income is a foreignperson, if, prior to the payment, itcomplies with the requirements de-scribed in paragraphs (e)(1)(i), (ii), and(iii) of this section. For this purpose, awithholding agent acting through anauthorized foreign agent is deemed tocomply with such requirements to theextent its authorized foreign agent socomplies. See §1.1441–7(c)(2) for thedescription of an authorized foreignagent. In the case of a payment to aperson other than an individual, awithholding agent may rely on theclaim of entity classification made onthe basis of the certification (or docu-mentation, if applicable) furnished tothe withholding agent, unless it hasactual knowledge or reason to knowthat the classification claimed isincorrect.

(i) The withholding agent holds abeneficial owner withholding certificatedescribed in paragraph (e)(2)(i) of thissection or an intermediary withholdingcertificate described in paragraph(e)(3)(i) of this section.

(ii) The withholding agent complieswith the electronic confirmation proce-

dures described in paragraph (e)(4)(v)of this section, if required.

(iii) The withholding agent has notbeen notified by the Internal RevenueService that any of the information onthe withholding certificate is incorrector unreliable.

(2) Beneficial owner withholdingcertificate—(i) In general. A beneficialowner withholding certificate is a state-ment by which the beneficial owner ofthe income paid represents that it is aforeign person and, if applicable,claims a reduced rate of withholdingunder section 1441. A separate with-holding certificate must be submitted toeach withholding agent. If the benefi-cial owner receives more than one typeof income from a single payor, thebeneficial owner may submit one with-holding certificate to the single payorfor the different types of income. Seeparagraph (c)(6)(ii)(B) of this sectionand §1.1441–6(b)(4)(i) for the deter-mination of beneficial owner when abenefit is claimed under an income taxtreaty. A beneficial owner of an inter-est in a mutual fund that has a commoninvestment advisor or common princi-pal underwriter with other mutual funds(within the same family of funds) may,in the discretion of the mutual fund,provide one withholding certificate forshares acquired or owned in any of thefunds. See §31.3406(h)–3(a)(2) of thischapter.

(ii) Requirements for validity of cer-tificate. A beneficial owner withholdingcertificate is valid only if it is providedon a Form W–8 (or, in the case ofpersonal services income described in§1.1441–4(b), a Form 8233), its valid-ity period has not expired, it is signedunder penalties of perjury by thebeneficial owner and it contains all ofthe information described in this para-graph (e)(2)(ii). The required informa-tion is the name, permanent residenceaddress, and taxpayer identifying num-ber (TIN) of the beneficial owner (ifrequired), the basis for the reduced rateof withholding claimed, if applicable,(including any applicable tax treatyprovisions), and any other informationas may be required (in addition to, orin lieu of, the information described inthis paragraph (e)(2)(ii)) by the regula-tions under section 1441 or by a formor accompanying instructions. A per-manent residence address is the addressin the country where the person claimsto be a resident for purposes of thatcountry’s income tax. The address of a

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financial institution with which thebeneficial owner maintains an account,a post office box, or an address usedsolely for mailing purposes is not aresidence address for this purpose. Ifthe beneficial owner is an individualwho does not to have a tax residence inany country, the address is where thebeneficial owner normally resides. Ifthe beneficial owner is a corporation,then the address is where the corpora-tion maintains its principal office in itscountry of incorporation. Instead of theForm W–8 (or the Form 8233, if appli-cable), the withholding agent may relyon an acceptable substitute form orsuch other form as the Internal Reve-nue Service may prescribe. See para-graph (g)(2) of this section for con-tinued validity of certificates during thetransition period. See paragraph (e)(4)-(vii) of this section for circumstancesin which a taxpayer identifying numberis required on a beneficial ownerwithholding certificate.

(3) Intermediary withholding certi-ficate—(i) In general. An intermediarywithholding certificate is a statementby which a foreign payee representsthat it is not the beneficial owner of theincome paid or is a statement furnishedby a partnership for its partners. It isused either to make representationsregarding the status of beneficialowners of the income or to transmitappropriate documentation to the with-holding agent. This paragraph (e)(3)describes the requirements for thevalidity of an intermediary withholdingcertificate issued either by a qualifiedintermediary, by a foreign partnershipthat is not a qualified intermediary, orby any other person that is neither aqualified intermediary nor a foreignpartnership.

(ii) Intermediary withholding certifi-cate from a qualified intermediary. Inthe case of an intermediary withholdingcertificate issued by a qualified inter-mediary (described in paragraph (e)(5)-(ii) of this section), the certificate isvalid only if it is furnished on a FormW–8 (or an acceptable substitute formor such other form as the InternalRevenue Service may prescribe), it issigned under penalties of perjury by anofficer or partner of the qualifiedintermediary with authority to sign forthe intermediary, and it contains theinformation and certifications describedin this paragraph (e)(3)(ii).

(A) The name, permanent residenceaddress (as described in paragraph

(e)(2)(ii) of this section), and theemployer identification number of thequalified intermediary.

(B) A certification that the issuer isa qualified intermediary.

(C) A certification that the issuerhas obtained, as required in the with-holding agreement with the InternalRevenue Service, the appropriate cer-tificates (such as Forms W–8 or W–9)or any other documentation regardingits account holders or partners.

(D) A statement whether the quali-fied intermediary is assuming primarywithholding responsibility for theamounts to which the certificate relates.

(E) If the information is not assum-ing primary withholding responsibility,the information and certificates re-quired under paragraph (e)(5)(iv)(B) ofthis section regarding the basis for anyreduced rate of withholding taxclaimed.

(F) Any other information or cer-tification as may be required (inaddition to, or in lieu of, the informa-tion and certifications described in thisparagraph (e)(3)(ii)) by the form oraccompanying instructions.

(iii) Intermediary withholding certifi-cate from a foreign partnership. In thecase of an intermediary withholdingcertificate issued under the provisionsof §1.1441–5(b) by a foreign part-nership that is not a qualified inter-mediary, the certificate is valid only ifit is furnished on a Form W–8 (or anacceptable substitute form or such otherform as the Internal Revenue Servicemay prescribe), it is signed underpenalties of perjury by a partner withauthority to sign for the partnership,and it contains the information andcertifications described in this para-graph (e)(3)(iii).

(A) The name, permanent residenceaddress (as described in paragraph(e)(2)(ii) of this section), and theemployer identification number of thepartnership.

(B) The basis for the reduced rate ofwithholding claimed, expressed in rela-tion to the distributive share of eachpartner to which the certificate relates.

(C) The appropriate withholding cer-tificates for the partners as requiredunder §1.1441–5(b)(1) (except for anintermediary withholding certificatefurnished in order to claim a reducedrate for income effectively connectedwith the conduct of a trade or businessin the United States).

(D) A statement that the income iseffectively connected with the conductof a trade or business in the UnitedStates, if applicable.

(E) Any other information or cer-tification as may be required (inaddition to, or in lieu of, the informa-tion described in this paragraph(e)(3)(iii)) by the form or accompany-ing instructions.

(iv) Intermediary withholding certifi-cate from an agent, nominee, repre-sentative, etc. In the case of anintermediary withholding certificateissued by a person that is not aqualified intermediary and is not actingfor its own account, the certificate isvalid if it is described in this paragraph(e)(3)(iv). In addition, a certificatefurnished to qualify interest as portfoliointerest for purposes of sections 871(h)and 881(c) or to qualify dividends onpublicly traded stock (as defined in§1.1441–6(b)(2)) is valid if it is de-scribed in §1.871–14(c)(2)(iii). A cer-tificate is described in this paragraph(e)(3)(iv) if it is furnished on a FormW–8 (or an acceptable substitute form,or such other form as the InternalRevenue Service may prescribe), it issigned under penalties of perjury by aperson authorized to sign for the issuerof the certificate, and it contains theinformation and certifications describedin this paragraph (e)(3)(iv).

(A) The name, permanent residentaddress (as described in paragraph(e)(2)(ii) of this section) and thetaxpayer identifying number of theissuer of the certificate.

(B) A certification that the issuer isnot acting for its own account and isusing the certificate as a form totransmit beneficial owner documenta-tion for the payment to which thecertificate relates (or other applicabledocumentation concerning the personfor whom the intermediary is receivingthe payment.

(C) If furnishing an intermediarycertificate to transmit more than onewithholding certificate, the certificatemay indicate the basis for the reducedrate of withholding claimed, basedupon the attached withholdingcertificates.

(D) Any other information or cer-tification as may be required (inaddition to, or in lieu of the informa-tion and certification described in thisparagraph (e)(3)(iv)) by the form oraccompanying instructions.

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(4) Applicable rules—(i) Jointowners. In the case of a payment tojoint owners, a withholding certificatemust be provided by each owner claim-ing to be a foreign person.

(ii) Period of validity—(A) Threeyear period. Except as otherwiseprovided in paragraph (e)(4)(ii)(B) ofthis section, a beneficial owner with-holding certificate or an intermediarywithholding certificate shall remainvalid for three years or until such timeas a change in circumstances makesany information on the certificateincorrect.

(B) Validity period where TIN pro-vided. A withholding certificate fur-nished with a taxpayer identifyingnumber shall remain valid until suchtime as a change in circumstancesmakes any information on the certifi-cate incorrect but only if the incomefor which such certificate is furnishedis required to be reported under§1.1461–1(c)(2)(ii) or the taxpayeridentifying number furnished on thecertificate is reported to the InternalRevenue Service under the proceduresdescribed in §1.1461–1(d).

(C) Withholding certificate for effec-tively connected income. Notwithstand-ing paragraph (e)(4)(ii)(B) of this sec-tion, the period of validity of awithholding certificate furnished to awithholding agent to claim a reducedrate of tax for income that is effec-tively connected with the conduct of atrade or business within the UnitedStates shall be limited to three years.

(D) Computation of three-yearperiod. The three-year validity periodshall start from the date that thecertificate is signed until the last day ofthe third succeeding calendar year. Forexample, a certificate signed on Sep-tember 30, 1998 remains valid throughDecember 31, 2001.

(E) Change in circumstances. If achange in circumstances makes anyinformation on the certificate incorrect,then the issuer of the certificate mustinform the withholding agent within 30days of the change and issue a newcertificate. If a beneficial owner with-holding certificate is used to claimforeign status only (and not, also,residence in a particular foreign coun-try for purposes of an income taxtreaty), a change of address is a changein circumstances for purposes of thisparagraph (e)(4)(ii)(E) only if itchanges to an address in the UnitedStates. Further, a change of address

within a foreign country is not achange in circumstances for purposesof this paragraph (e)(4)(ii)(E). A with-holding agent may require a newcertificate at any time prior to apayment, even though the withholdingagent has no actual knowledge orreason to know that any informationstated on the certificate has changed.

(iii) Retention of withholding certifi-cate. A withholding agent must retaineach withholding certificate for as longas it may be relevant to the determina-tion of the withholding agent’s taxliability under section 1461 and§1.1461–1.

(iv) Electronic transmission of infor-mation. Under procedures issued by theInternal Revenue Service, a withhold-ing agent may be permitted to receivein electronic form the informationrequired to be included on a withhold-ing certificate or a certificate of U.S.status.

(v) Electronic confirmation of infor-mation on withholding certificate. Un-der procedures issued by the InternalRevenue Service, a withholding agentmay be required to use an electronicon-line system to confirm with theInternal Revenue Service informationconcerning any taxpayer identifyingnumber stated on a withholding certifi-cate or a certificate of U.S. status.

(vi) Acceptable substitute form. Forpurposes of the regulations under sec-tion 1441, 1442, and 1443, the termacceptable substitute in the case of aForm W–8 or Form 8233 described inparagraph (e)(2) or (e)(3) of thissection is a document prepared andfurnished based on the rules set forth in§31.3406(h)–3(c)(1) of this chapter (re-lating to substitutes for a Form W–9).

(vii) Requirement of taxpayer identi-fying number. A taxpayer identifyingnumber must be stated on a withhold-ing certificate when required by thisparagraph (e)(4)(vii). A taxpayer identi-fying number is required to be statedon a beneficial owner certificate if thebeneficial owner is claiming the benefitof a reduced rate under an income taxtreaty (other than with respect todividends on stock traded on a U.S.established financial market), an ex-emption from withholding because in-come is effectively connected with aU.S. trade or business, an exemptionunder section 871(f) for certain an-nuities received under qualified plans,or an exemption based on a foreignorganization’s tax exempt status under

section 501(c) or private foundationstatus. In addition, a taxpayer identify-ing number is required to be stated onall intermediary withholding certifi-cates. A taxpayer identifying number isan IRS individual tax identificationnumber, an employer identificationnumber, or a social security number asdescribed in section 6109 and§301.6109–1 of this chapter, or anyother identifier the Commissioner maydesignate.

(5) Qualified intermediaries—(i)General rule. A qualified intermediary,as defined in paragraph (e)(5)(ii) of thissection, may furnish an intermediarywithholding certificate to a withholdingagent for purposes of certifying onbehalf of beneficial owners, intermedi-aries (such as agents or nomineesacting for the accounts of others), otherqualified intermediaries or U.S. payeesfor the purpose of claiming reducedrates of withholding tax under section1441, 1442, or 1443. Such certificate isin lieu of transmitting withholdingcertificates or other required documen-tation to a withholding agent. While thequalified intermediary is generally re-quired to obtain withholding certificatesor other appropriate documentary evi-dence from beneficial owners or payeespursuant to its agreement with theInternal Revenue Service, it is notrequired to attach such documentationto the intermediary withholdingcertificate.

(ii) Definition of qualified intermedi-ary. The term qualified intermediarymeans a foreign person that is a partyto a withholding agreement with theInternal Revenue Service and that is—

(A) A financial institution (as de-fined in §1.165–12(c)(1)(iv)) or a clear-ing organization (as defined in §1.163–5(c)(2)(i)(D)(8));

(B) A partnership; or(C) Any other person acceptable to

the Internal Revenue Service. (iii) Withholding agreement—(A) In

general. The Internal Revenue Servicemay, upon request, enter into a with-holding agreement with a foreign per-son described in paragraph (e)(5)(ii) ofthis section pursuant to such proceduresas the Internal Revenue Service mayprescribe. The withholding agreementshall include the terms, conditions andprocedures that the Internal RevenueService shall deem appropriate to in-sure the collection of the tax due andreporting of information under sections1441, 1461, 3406 and chapter 61 of theInternal Revenue Code.

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(B) Terms of the withholding agree-ment. Generally, the agreement mustinclude provisions dealing with defin-ing, obtaining, and maintaining appro-priate certification and documentationupon which the foreign person mayrely to ascertain the nationality andresidence of beneficial owners and U.S.payees, reporting account informationto the Internal Revenue Service orotherwise making the account informa-tion available to the Internal RevenueService, and, if applicable, acting as anacceptance agent to perform the dutiesdescribed in §301.6109–1(d)(3)(iv)(A)of this chapter (as proposed in projectnumber INTL–0024–94, published onJune 8, 1995 (60 FR 30211)). In addi-tion the agreement must specify themanner in which the Internal RevenueService will verify compliance with theagreement. In appropriate cases, theInternal Revenue Service may agree torely on audits performed by an inter-mediary’s approved external auditor’srecords (including workpapers of theauditor and reports prepared by theauditor indicating the methodologyemployed to verify the entity’s com-pliance with the agreement). For thispurpose, the agreement shall specifywhich auditor or class of auditors isapproved. An external auditor may notbe approved unless it is subject toregulatory supervision under the lawsof the country in which a significantpart of the intermediary activities underthe agreement are expected to occur, itsinternal procedures require it to verifythat the intermediary complies with theterms of the withholding agreement andto report non-compliance findings un-der the agreement in the same manneras it is required to report other findingsof non-compliance with applicable lo-cal laws and regulatory requirements,and the auditor’s relevant records (i.e.,workpapers and reports) are availableto the Internal Revenue Service. Theagreement must include provisions forthe assessment and collection of tax inthe event that failure to comply withthe terms of the agreement result in thefailure by the withholding agent or thequalified intermediary to withhold anddeposit the required amount of tax.Further, the agreement shall providethat a qualified intermediary that with-holds any amount of tax must makedeposits of the tax as required under§1.1461–1(a). The Internal RevenueService may require the posting of abond conforming to the requirements of§301.7101–1 of this chapter as to form

of bond or surety required. The agree-ment shall specify the scope of theagreement in the case of a foreignperson with branches or relevant inter-mediary activities in more than onecountry. To determine the terms of anyparticular withholding agreement, theInternal Revenue Service will considerappropriate factors including whetheror not the foreign person agrees toassume primary responsibility as awithholding agent, the type of local‘‘know-your-customer’’ laws and prac-tices to which it is subject, the extentand nature of supervisory and regula-tory control exercised under the laws ofthe foreign country over the foreignperson, the volume of investments inU.S. securities (determined in dollaramounts and number of accountholders), and financial condition of theforeign person.

(iv) Assignment of primary withhold-ing responsibility—(A) In general. Apartnership that is a qualified inter-mediary acting for its own accountmust assume primary withholding re-sponsibility. Any other qualified inter-mediary may assume primary withhold-ing responsibility only if it is permittedto do so under its agreement with theInternal Revenue Service. A withhold-ing agent and a qualified intermediarymay arrange on who of the withholdingagent or the qualified intermediaryshall have primary responsibility forany amount required to be withheldunder this section and section 3406 forany one or more classes of beneficialowners or payees and for any or moretypes of income expected to be paid tothe intermediary. In a relationshipbetween a withholding agent and aqualified intermediary, the qualifiedintermediary may agree to assumeprimary withholding responsibility forsome types of income and not others.However, unless otherwise specified inthe agreement, primary withholdingresponsibility for a type of incomemust be assumed for all beneficialowners and payees of that income orfor none of them.

(B) Applicable procedures when aqualified intermediary does not assumeprimary withholding responsibility.When a qualified intermediary does notassume primary withholding respon-sibility, the intermediary withholdingcertificate must contain the informationdescribed in this paragraph (e)(5)(iv)-(B) or in any agreement between thequalified intermediary and the Service.

The certificate must separately identifythe assets that are associated with eachU.S. payee to which the certificaterelates and that generate the type ofincome described in §1.1441–2(a) (i.e.,income that would be subject to with-holding if paid to a foreign person).The qualified intermediary must furnisha Form W–9 for each U.S. payee thatis not an exempt recipient and thename and address of each U.S. payeethat is an exempt recipient. The inter-mediary withholding certificate mustalso separately identify the assets asso-ciated with non-U.S. payees to whichthe certificate relates and the applicablewithholding tax rate or rates. If dif-ferent withholding tax rates apply, theintermediary withholding certificatemust indicate the applicable rate foreach class of non-U.S. payees to whichdifferent withholding rates apply andthe assets associated with each class.For payments that the intermediarywithholding certificate states are madeto U.S. payees, a withholding agentdealing with a qualified intermediarythat has not assumed primary withhold-ing responsibility must comply withapplicable reporting requirements underchapter 61 of the Internal RevenueCode in the same manner as if it hadreceived a Form W–9 (or acceptablesubstitute form) directly from the U.S.payee. The withholding agent must alsocomply with the return requirementsunder section 1461 and §1.1461–1(b)(2)(ii) and (c)(4)(ii) for paymentsmade to non-U.S. payees.

(C) Applicable procedures whenqualified intermediary assumes primarywithholding responsibility. A withhold-ing agent relying on an intermediarywithholding certificate from a qualifiedintermediary representing that thequalified intermediary assumes primarywithholding responsibility as permittedunder its agreement with the InternalRevenue Service is relieved from theobligation to withhold on paymentsmade to the intermediary. The with-holding agent must comply with thereturn requirements under section 1461and §1.1461–1(b)(2)(ii) and (c)(4)(ii)for payments made to the qualifiedintermediary.

(v) Special rules for qualified inter-mediaries that are foreign partnerships.A foreign partnership that is a qualifiedintermediary shall be a withholdingagent with respect to its partner’sdistributive share of income subject towithholding that is paid to the part-

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nership. Therefore, it shall withholdunder the same procedures and at thesame time as is prescribed for with-holding by a domestic partnership. See§1.1441–5(a)(2) for withholding proce-dures applicable to domestic part-nerships. In addition, the partnershipshall not be relieved from its obligationto make a return on Form 1065 as re-quired under section 6031 and theregulations under that section and tofurnish the statements required undersection 6031(b) and the regulationsunder that section.

(f) Presumptions—(1) In general—(i) Reliance. Absent actual knowledgeor reason to know otherwise, a with-holding agent or a payor described in§31.3406(a)–2 of this chapter may relyon the presumptions of this paragraph(f) to determine whether to treat abeneficial owner or a payee as a U.S.or a foreign person when, beforemaking a payment of income subject towithholding, or a payment subject toreporting under chapter 61 of theInternal Revenue Code, the withholdingagent or payor cannot associate thepayment with the required documenta-tion. When applying the provisions ofthis section, any presumption of foreignstatus pursuant to this paragraph (f)shall have effect only for purposes ofapplying the provisions of paragraph(b) of this section (regarding the rulesof withholding) and may not be reliedupon for purposes of granting a re-duced rate of withholding under theInternal Revenue Code (e.g. section1441(c)(9) or (c)(10)) or under anincome tax treaty.

(ii) Required documentation. Forpurposes of this paragraph (f), the termrequired documentation means the ap-plicable documentation that is requiredto be furnished in connection with thepayment under this section, under§1.871–14(c)(2), or under chapter 61 ofthe Internal Revenue Code. A with-holding agent or payor is not able toassociate a payment with requireddocumentation if, for that payment, itlacks documentation, the documenta-tion it holds lacks information, or thewithholding agent or payor knows orhas reason to know that informationassociated with the required documen-tation is incorrect or unreliable. Forpurposes of this paragraph (f)(1), awithholding agent or payor has reasonto know that information is incorrect orunreliable if the withholding agent orpayor would have reason to know

under the rules of §1.1441–7(b)(2) orcannot reasonably rely on a Form W–9(or an acceptable substitute) under§31.3406(h)–3(e) of this chapter. Forpurposes of this paragraph (f)(1), aForm W–9 (or an acceptable substitute)must contain the information describedin §31.3406(h)–3(e)(2)(i) through (iv)of this chapter in order for a payor toreasonably rely on the Form W–9. Inthe case of other documentation, therequired information shall include onlythe name, permanent residence address,taxpayer identifying number (when re-quired), and signature under penaltiesof perjury (when required).

(2) Reportable payments to non-exempt recipients—(i) In general. Ex-cept as otherwise provided in para-graphs (f)(2)(ii) and (f)(4) of thissection, a reportable payment (as de-fined in paragraph (f)(6) of this sec-tion) made to a payee who is anindividual or other non-exempt recip-ient is presumed made to a U.S. payeefor purposes of chapter 61 of theInternal Revenue Code, section 3406,and this section if, before payment, thewithholding agent or payor cannotassociate the payment with the requireddocumentation (as determined underparagraph (f)(1)(i) of this section). Insuch a case, the withholding agent orpayor must treat the payment as apayment that may be subject to report-ing under chapter 61 of the InternalRevenue Code and the regulationsunder that chapter and to backupwithholding under section 3406 and theregulations under that section.

(ii) Special grace period for certainreportable payments in the case ofindicia of a foreign payee—(A) Gen-eral rule. This paragraph (f)(2)(ii)(A)applies to payments of dividends, inter-est, original issue discount, brokerproceeds described in §1.6045–1(d)(5),and exchanges of personal property orservices through barter exchanges de-scribed in §1.6045–1(e)(2). A withhold-ing agent or payor may treat the payeeas a beneficial owner that is a foreignperson for the grace period described inthis paragraph (f)(2)(ii)(A) if, at thetime a payment is first credited to anaccount, the withholding agent or payorhas the name and an address in aforeign country for the account holderor a facsimile copy or an electronictransmission of the information con-tained in a withholding certificatedescribed in paragraph (e)(2) or (e)(3)of this section. The grace period is 90

days from the date that the withholdingagent or payor first credits the accountor, if shorter, until the end of thecalendar year. If this paragraph (f)(2)-(ii)(A) applies, the withholding agentmay then treat the payee as a beneficialowner that is a foreign person and is,therefore, required to withhold undersection 1441 on the basis of thispresumption from the time that theamounts are credited to the account.

(B) Additional withholding in theevent of payments or withdrawals. If, atany time before provision or correctionof the required documentation withinthe grace period specified in paragraph(f)(2)(ii)(A) of this section, the with-holding agent loses control over anypart or all of the amounts in an accountdescribed in paragraph (f)(2)(ii)(A) ofthis section (such as by making anactual payment from the account orallowing withdrawal of any part or allof the amounts in the account, otherthan for purposes of withholding anamount of tax), then the withholdingagent or payor must treat the payee asa U.S. person for all amounts creditedto the account during the grace period.Accordingly, the payor must withholdto the extent required under section3406 on all reportable payments madeto the account during the period towhich the grace period applies andthereafter. The amount of backup with-holding is equal to 31 percent of thereportable payments reduced by anyamount previously withheld from theamounts credited to the account.

(C) Application of withholding uponexpiration of grace period. If, upon thetermination of the grace period de-scribed under paragraph (f)(2)(ii)(A) ofthis section, the required documentationhas not been furnished or corrected, thepayee is then presumed to be a U.S.person for purposes of section 3406and chapter 61 of the Internal RevenueCode. Accordingly, the payor mustwithhold to the extent required undersection 3406 on all reportable paymentscredited to the account during the graceperiod and thereafter (until appropriatedocumentation has been furnished orcorrected). Any amount withheld fromthe payments subject to the graceperiod may be credited toward anyamount of backup withholding dueunder section 3406. If the requireddocumentation is furnished or correctedon or before the expiration of the graceperiod described in paragraph (f)(2)-(ii)(A) of this section and establishes

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that the beneficial owner is a foreignperson, then any amount withheld onany payment made during the graceperiod will be treated as having beenwithheld under section 1441. To theextent such amount exceeds the amountof tax ultimately determined to beowed under section 1441, the excessshall be treated as an amount ofoverwithholding subject to adjustmentunder §1.1461–2(a), or refund or creditunder §1.1464–1. If, on the other hand,U.S. status is established by requireddocumentation on or before expirationof the grace period, then any amountwithheld from the payments madeduring the grace period may be cred-ited towards any amount of backupwithholding due under section 3406. Tothe extent such tax exceeds the amountrequired to be withheld under section3406, the excess shall be treated aserroneously withheld from the payeeand shall be subject to adjustments asprovided in §31.6413(a)–3 of thischapter.

(iii) Joint owners or payees. A with-holding agent or payor may presumethat a payment made to joint owners orpayees for whom it cannot associatethe required documentation for allpayees is made to U.S. individuals. Forpurposes of applying this paragraph(f)(2)(iii), the grace period rules inparagraph (f)(2)(ii)(A) of this sectionshall apply only if each payee qualifiesfor it. In that case, the rules ofparagraph (f)(2)(ii)(B) of this sectionwould apply when any one of the jointaccount holders receives a payment,makes a withdrawal, or reinvests anyportion of the funds in the account thatare subject to the grace period.

(iv) Special rules for exempt recip-ients. If the payee is an exemptrecipient described in §1.6049–4(c)-(1)(ii) and the withholding agent orpayor has actual knowledge of thepayee’s employer identification num-ber, then the withholding agent orpayor may presume that the payee is aforeign person if the employer identi-fication number begins with the twodigits ‘‘98.’’ The withholding agent orpayor may also presume that the payeeis foreign if the withholding agent’s orpayor’s communications with the payeeare mailed to an address in a foreigncountry, or if the payment is madeoutside the United States (as defined in§1.6049–5(e)). In other cases, the with-holding agent or payor may presumethat the exempt recipient is a U.S.

person and, therefore, subject to section3406 and chapter 61 of the InternalRevenue Code and the regulationsunder those provisions. If a withhold-ing agent or payor treats a payee as aforeign person pursuant to the pre-sumption of this paragraph (f)(2)(iv), itmust treat the payee as the beneficialowner and apply the provisions ofsection 1441, §1.871–14, and chapter61 of the Internal Revenue Code ac-cordingly. If the withholding agenttreats the payee as a foreign person, itis subject to the return requirements of§1.1461–1(b) and (c). The presumptionof this paragraph (f)(2)(iv) may berebutted by providing the requireddocumentation to the withholding agentor payor.

(3) Special rules for scholarships,grants, pensions, annuities, etc.—(i)Scholarships and grants. A paymentrepresenting scholarship or fellowshipgrant income (as defined in section117) is presumed made to a U.S.person if the withholding agent orpayor has a record of the payee’s U.S.visa status in its records. In that case,the withholding agent or payor hasreason to know that such individual isa foreign person and, therefore, thepresumption of this paragraph (f)(3)(i)shall not apply.

(ii) Pensions, annuities, etc.. A with-holding agent or payor may presumethat a payment from a trust describedin section 401(a), an annuity plandescribed in section 401(a), an annuityplan described in section 403(a), or apayment with respect to any annuity,custodial account, or retirement incomeaccount described in section 403(b) ismade to a U.S. or foreign person underthe rules of this paragraph (f)(3)(ii).

(A) Such payment is presumed madeto a U.S. person, if the withholdingagent or payor has a Social Securitynumber for the payee and a mailingaddress as described in this paragraph(f)(3)(ii)(A). A mailing address is anaddress used for purposes of informa-tion reporting or otherwise commu-nicating with the payee that is anaddress in the United States or incertain foreign countries with which theUnited States has an income tax treaty.For this purpose, a income tax treatymust provide that the payee, if anindividual resident in that country,would be entitled to an exemption fromU.S. tax on amounts described in thisparagraph (f)(3)(ii).

(B) Such payment is presumed madeto a foreign person in all cases not

described in paragraph (f)(3)(ii)(A) ofthis section.

(4) Special rules for pass-throughentities—(i) Payments to partnerships.In the case of a payment to a partner-ship, the presumptions of this para-graph (f)(4)(i) shall apply to determinewhether to treat the partnership as adomestic or foreign partnership. Thisdetermination must be made beforedetermining who are the payees underparagraph (c)(3) of this section. If thewithholding agent or payor has actualknowledge of the partnership’semployer identification number, thenthe withholding agent or payor maypresume that the partnership is aforeign partnership if the employeridentification number begins with thetwo digits ‘‘98.’’ The withholdingagent or payor may also presume thatthe partnership is foreign if the with-holding agent’s or payor’s communica-tions with the partnership are mailed toan address in a foreign country, or ifthe payment is made outside the UnitedStates (as defined in §1.6049–5(e)). Inall other cases, the withholding agentor payor may presume that the part-nership is domestic. The presumptionsin this paragraph (f)(4)(i) may berebutted by providing the requireddocumentation to the withholding agentor payor.

(ii) Payments to a foreign part-nership. A withholding agent or payorthat makes a reportable payment to apartnership that it treats as a foreignpartnership may presume that a partneris a U.S. payee that is not an exemptrecipient if, before payment, the with-holding agent cannot associate thepayment with the required documenta-tion for the partner. See paragraph(c)(3)(ii) of this section treating part-ners of a foreign partnership as payees.In such case, the withholding agent orpayor must treat the portion of thepayment allocable to the partner asmade to a U.S. payee who is not anexempt recipient. Thus, the paymentmay be subject to reporting underchapter 61 of the Internal RevenueCode and the regulations under thatchapter and to backup withholdingunder section 3406 and the regulationsunder that section. The portion of apayment allocable to a partner shall bedetermined based on the distributiveshares of the partnership income alloca-ble to each partner.

(iii) Partners’ distributive shares—(A) Domestic partnership. For purposes

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of this paragraph (f)(4)(iii)(A), a do-mestic partnership may presume that apartner is a U.S. payee that is not anexempt recipient if, at the time it isrequired to withhold on the amount, thepartnership cannot associate the pay-ment with the required documentationfor that partner and the amount relatesto a reportable payment made to thepartnership.

(B) Foreign partnership. For pur-poses of this paragraph (f)(4)(iii)(B), aforeign partnership that is a qualifiedintermediary may treat a partner as aforeign payee if, at the time it isrequired to withhold on the amount, itcannot associate the amount with therequired documentation for that partner.

(5) Failure to act in accordancewith presumptions. A withholding agentthat, contrary to the presumptions inthis paragraph (f), grants a claim ofreduced rate of withholding undersection 1441 on income subject towithholding will be liable under section1461 for the tax required to be with-held under section 1441, without thebenefit of a reduced rate unless thewithholding agent can demonstrate tothe satisfaction of the District Directoror the Assistant Commissioner (Interna-tional) that the proper amount of tax, ifany, was in fact paid to the InternalRevenue Service. Proof of payment oftax may be established on the basis ofa Form 4669 (or such other form as theInternal Revenue Service may pre-scribe), establishing the amount of tax,if any, actually paid by the beneficialowner on the income. Proof that a re-duced rate of withholding was appro-priate may also be established on thebasis of the required documentationdescribed in paragraph (f)(1)(ii) of thissection. However, if the required docu-mentation was not received by thewithholding agent before the time thepayment was made or within the graceperiod specified in paragraph (f)(2)-(ii)(A) of this section, then the Com-missioner, or his or her delegate, mayrequire additional proof if it determinesthat the delays in obtaining the requireddocumentation affect its reliability. Thewithholding agent will be liable forinterest under section 6601 regardlessof whether the underlying tax liabilityis due. In addition, the withholdingagent may be subject to penalties.

(6) Reportable payment. Solely forpurposes of the presumptions in thisparagraph (f), a reportable payment isany payment of income subject to

withholding (as defined in §1.1441–2(a)) or any payment described insection 3406(b), notwithstanding theprovisions in sections 6041, 6041A,6042, 6044, 6045, 6049, 6050A, 6050Nand the regulations under those sectionsthat provide exemptions from reportingbased upon the status of the payee as aforeign person. For example, a paymentof interest described in §1.6049–5(b)-(14) as a non-reportable payment ifpaid to a foreign person is treated as areportable payment for purposes of thisparagraph (f). Accordingly, the with-holding agent or payor must determineunder the presumptions described inthis paragraph (f) whether to treat thebeneficial owner or payee as a foreignor U.S. person. See sections 6041through 6049 and sections 6050A and6050N and the regulations under thosesections for reporting requirements foramounts treated as reportable paymentsfor purposes of this paragraph (f).

(7) Adjustment, refund, or credit ofoverwithheld tax. If, as a result of thepresumption rules of paragraph (f) ofthis section, the amount withheld undersection 1441 is greater than the taxdue, adjustments may be made in ac-cordance with the procedures describedin §1.1461–2(a). Alternatively, refundsor credits may be claimed in accord-ance with the procedures described in§1.1464–1, relating to refunds orcredits claimed by the beneficialowner, or §1.6414–1, relating to re-funds or credits claimed by the with-holding agent. If an amount waswithheld under section 3406, see§31.6413(a)–3(a)(1) of this chapter.

(g) Effective date—(1) In general.This section applies to payments of in-come made after December 31, 1997.

(2) Transition rules. For purposes ofparagraph (e)(2)(i) and (d)(2)(ii) of thissection, a withholding agent that holdsa valid Form W–8, 1001, 4224, 1078,or a statement described in §1.1441–5(b) (as contained in 26 CFR Part 1,edition revised April 1, 1995) on thedate that is 60 days after theseregulations are published as final reg-ulations in the Federal Register maytreat it as a valid withholding certifi-cate until its validity expires underapplicable provisions as in effect onApril 22, 1996. In addition, the docu-mentation requirements for dividendson stock traded on a U.S. establishedfinancial market described in §1.1441–6(b)(2) shall apply only to accountsestablished after the date that is 60

days after these regulations are pub-lished as final regulations in theFederal Register. For accountsestablished on or before that date, thedocumentation requirements under thissection shall apply to payments madeafter December 31, 1999.

Par. 7. Section 1.1441–2 is revised toread as follows:

§1.1441–2 Income subject towithholding.

(a) In general. For purposes of theregulations under section 1441, theterm income subject to withholdingmeans items of income from sourceswithin the United States (not includingitems listed in paragraph (d)(1) of thissection) that constitute either fixed ordeterminable annual or periodical in-come described in paragraph (b) of thissection or other income subject towithholding described in paragraph (c)of this section. Withholding applies tothe gross amount of the payment madeto a foreign person. See part I (section861 and following), subchapter N,chapter 1 of the Internal RevenueCode, and the regulations under suchpart for rules governing the determina-tion of the source of income. Seesection 884(f) and the regulationsthereunder to determine the circum-stances under which interest paid by aforeign corporation is U.S. sourceincome.

(b) Fixed or determinable annual orperiodical income—(1) In general. Forpurposes of chapter 3 of the InternalRevenue Code, fixed or determinableannual or periodical income is allincome included in gross income undersection 61 (including original issuediscount), except for the items listed inparagraph (b)(2) of this section.

(2) Exceptions. For purposes ofchapter 3 of the Internal RevenueCode, the items of income described inthis paragraph (b)(2) are not fixed ordeterminable annual or periodical income—

(i) Gains derived from the sale ofproperty (including market discountand option premiums), except for gainsdescribed in paragraph (b)(3) or (c) ofthis section;

(ii) Insurance premiums within themeaning of section 4372 paid to aforeign insurer or reinsurer;

(iii) Items of U.S. source incomethat are excluded from gross income

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under any provision of law withoutregard to the identity of the holder,such as interest excluded from grossincome under section 103(a); and

(iv) Any other income that the Inter-nal Revenue Service may determine, inpublished guidance, is not fixed ordeterminable annual or periodicalincome.

(3) Original issue discount. Amountsof original issue discount are fixed ordeterminable annual or periodical in-come. However, based on the authorityof section 1441(c)(8), only the originalissue discount described in this para-graph (b)(3) may be subject to with-holding.

(i) Amounts paid by original issuer.Amounts paid by the original issuer (orits paying agent) to the beneficialowner on any obligation issued afterMarch 31, 1972 and payable more than6 months from the date of originalissue that represent original issue dis-count realized by the beneficial ownerupon the retirement of the obligation,or upon payment by the issuer on theobligation, to the extent that theamount is subject to tax under section871(a)(1)(C) or under section 881(a)-(3). This paragraph (b)(3)(i) only ap-plies to original issue discount asdefined in section 1273(a)(1). There-fore, it does not apply to marketdiscount as defined in section1278(a)(2).

(ii) Amounts paid by related obligor.Amounts paid by the obligor (or itspaying agent) on obligations issuedafter the date that is 60 days after theseregulations are published as final reg-ulations in the Federal Register andpayable more than 6 months from thedate of original issue representing anamount of original issue discount if theobligor is related to the original issuer(within the meaning of section 163(e)-(3)), to the extent such accrued amountis subject to tax under section871(a)(1)(C)(ii) or under section881(a)(3)(B).

(iii) Amounts paid in a sale betweenrelated parties. Amounts paid on thesale or exchange of obligations issuedafter the date that is 60 days after theseregulations are published as final reg-ulations in the Federal Register andpayable more than 6 months from thedate of original issue representing anamount of original issue discount if theseller is related to the purchaser withinthe meaning of section 163(e)(3), to theextent such accrued amount is subject

to tax under section 871(a)(1)(C)(i) orunder section 881(a)(3)(A).

(iv) Amounts actually known to betaxable original issue discount.Amounts paid on obligations issuedafter the date that is 60 days after theseregulations are published as final reg-ulations in the Federal Register andpayable more than 6 months from thedate of original issue representing anamount of original issue discount if theobligor (or the seller in the case of asale or exchange of obligations) hasactual knowledge of the amount subjectto tax under section 871(a)(1)(C) orunder section 881(a)(3).

(v) Amounts for which required doc-umentation is not furnished. Anyamount of original issue discount paidon obligations issued after the date thatis 60 days after the publication of theseregulations as final regulations in theFederal Register and payable more than6 months from the date of originalissue representing an amount that failsto qualify as portfolio interest undersection 871(h) or 881(c) (because ofthe failure to furnish the statementdescribed in section 871(h)(5) and§1.871–14(c)(2)), to the extent theamount is subject to tax under section871(a)(1)(C)(ii) or under section881(a)(3)(B). The applicable rate ofwithholding tax shall be applied to theentire amount of stated interest, if any,and original issue discount on theobligation as determined on the date oforiginal issue if the withholding agentdoes not know what proportion of thepayment on the obligation representstaxable income. Adjustments to anyamount of overwithheld tax may bemade in compliance with the proce-dures described in §1.1461–2(a). Alter-natively, refunds may be claimed incompliance with the procedures in§1.1464–1.

(4) Securities lending transactions.[Reserved]

(c) Other income subject to with-holding. Withholding is also requiredon the gross amount of the followingitems of income:

(1) Gains described in sections631(b) or (c), relating to treatment ofgain on disposal of timber, coal, ordomestic iron ore with a retainedeconomic interest.

(2) Gains subject to the 30 percenttax under section 871(a)(1)(D) or sec-tion 881(a)(4), relating to contingentpayments received from the sale orexchange of patents, copyrights, andsimilar intangible property.

(d) Items of income not subject towithholding under section 1441—(1)Exemptions for which no withholdingcertificate or documentation is re-quired. The items of income describedin this paragraph (d)(1) are not subjectto withholding of tax under section1441 regardless of the fact that nowithholding certificate or other docu-mentation has been furnished toestablish foreign or U.S. status.

(i) Portfolio interest paid on bearerobligations that are described in section871(h)(2)(A) or 881(c)(2)(A) and§1.871–14(b). See §1.6049–5(b)(7) re-garding exemption from reporting un-der section 6049, and thus, frombackup withholding under section 3406.

(ii) Original issue discount on anyobligation payable less than 6 monthsfrom the date of original issue de-scribed in section 871(g)(1)(B)(i). See§1.6049–5(b)(10), (11), and (14) forexemptions from reporting under sec-tion 6049, and thus, from backupwithholding under section 3406.

(iii) Any amount of original issuediscount not described in paragraph(b)(3) of this section. See §1.6049–5(b)(10) and (11) for exemptions fromreporting under section 6049, and thus,from backup withholding under section3406.

(iv) Proceeds from a wager placedby a nonresident alien individual in thegames of blackjack, baccarat, craps,roulette, or big-6 wheel.

(2) Exemptions for portfolio interestand income on bank, etc. deposits re-quiring a withholding certificate ordocumentation—(i) In general. Nowithholding is required under sections1441(c)(9) and (c)(10) on interest andoriginal issue discount that eitherqualifies as portfolio interest on anobligation in registered form describedin section 871(h)(2)(B) or 881(c)(2)(B)(including interest on a foreign-targetedregistered obligation described in§1.871–14(e)) or is paid on depositsdescribed in section 871(i)(2)(A). Awithholding agent may exempt fromwithholding an amount of interest andoriginal issue discount paid on depositsdescribed in section 871(i)(2)(A) onlyif, prior to the payment, the withhold-ing agent complies with the proceduresdescribed in §1.871–14(c). The preced-ing sentence does not apply to amountsof original issue discount described inparagraph (d)(1)(ii) of this section or in§1.6049–5(b)(10) or (11).

(ii) Transition rule. The documenta-tion requirements for interest on de-

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posits described in section 871(i)(2)(A)shall apply to payments made afterDecember 31, 1997 with respect to ac-counts established after the date that is60 days after these regulations arepublished as final regulations in theFederal Register. For accounts estab-lished on or before that date, thedocumentation requirements under thissection shall apply to payments madeafter December 31, 1999.

(e) Payment—(1) General rule. Apayment is considered made when theamount would be includible in theincome of the beneficial owner underthe U.S. tax principles governing thecash basis method of accounting. Apayment is considered made whether itis made directly to the beneficial owneror paid to another person for the bene-fit of the beneficial owner (e.g., to theagent of the beneficial owner). Thus, apayment of income is considered madeto a beneficial owner if it is paid incomplete or partial satisfaction of thebeneficial owner’s debt to a creditor.

(2) Income allocated under section482. A payment is considered made tothe extent income subject to withhold-ing is allocated under section 482.Further, income arising as a result of asecondary adjustment made in conjunc-tion with a reallocation of incomeunder section 482 from a foreignperson to a related U.S. person isconsidered paid to a foreign personunless the taxpayer to whom the in-come is reallocated has entered into arepatriation agreement with the InternalRevenue Service and the agreementeliminates the liability for the withhold-ing tax. For purposes of determiningthe liability for withholding tax, thepayment of income is deemed to haveoccurred on the dates of the transac-tions that give rise to the allocation ofincome and the secondary adjustments,if any.

(3) Blocked income. Income is notconsidered paid if it is blocked underexecutive authority, such as the Presi-dent’s exercise of emergency powerunder the Trading with the Enemy Act,50 U.S.C. App. 5, or the InternationalEmergency Economic Powers Act, 50U.S.C. 1701 et seq. However, on thedate that the blocking restrictions areremoved, the income that was blockedis considered constructively received bythe beneficial owner (and therefore paidfor purposes of this section) and subjectto withholding under §1.1441–1.

(4) Special rules for dividends. Forpurposes of sections 1441 and 6042, in

the case of stock for which the recorddate is earlier than the payment date,dividends are considered paid on thepayment date. In the case of a corpo-rate reorganization, if a beneficialowner is required to exchange stockheld in a former corporation for stockin a new corporation before dividendsthat are to be paid with respect to thestock in the new corporation will bepaid on such stock, the dividend isconsidered paid on the date that thepayee or beneficial owner actuallyexchanges the stock and receives thedividend. See §31.3406(a)–4(a)(2) ofthis chapter.

(5) Certain interest accrued by aforeign corporation. For purposes ofsections 1441 and 6049, a foreigncorporation shall be treated as havingmade a payment of interest as of thelast day of the taxable year if it hasmade an election under §1.884–4(c)(1)to treat accrued interest as if it werepaid in that taxable year.

(6) Payments other than in U.S.dollars. For purposes of section 1441, apayment includes amounts paid in amedium other than U.S. dollars. See§1.1441–3(e) for rules regarding theamount subject to withholding in thecase of such payments.

(f) Effective date. This section ap-plies to payments of income made afterDecember 31, 1997.

Par. 8. Section 1.1441–3 is amendedby:

1. Revising the heading of thesection.

2. Revising paragraphs (a) through(e).

3. Removing paragraph (f).4. Redesignating paragraph (j) as

paragraph (f).5. Revising paragraph (g).6. Removing paragraphs (h) and (i).7. Removing the OMB parenthetical

and the authority citation at the end ofthe section.

The revisions read as follows:

§1.1441–3 Amounts subject towithholding.

(a) Withholding on gross amount.Except as otherwise provided in regula-tions under section 1441, the amountsubject to withholding under §1.1441–1is the gross amount of income subjectto withholding. The gross amount ofincome subject to withholding may not

be reduced by any deductions, exceptto the extent that one or more personalexemption is allowed as provided under§1.1441–4(b)(6).

(b) Withholding on payments on cer-tain obligations—(1) Withholding attime of payment of interest. Whenmaking a payment on an interest-bearing obligation, a withholding agentmust withhold under §1.1441–1 uponthe gross amount of stated interestpayable on the interest payment date,regardless of whether the paymentconstitutes a return of capital or thepayment of income within the meaningof section 61. To the extent an amountwas withheld on an amount of capitalrather than interest, adjustments to anyamount of overwithheld tax may bemade under the procedures described in§1.1461–2(a). Alternatively, refunds orcredits may be claimed by the benefi-cial owner under the procedures de-scribed in §301.6402–2 of this chapter.

(2) No withholding between interestpayment dates—(i) In general. A with-holding agent is not required to with-hold tax under §1.1441–1 upon interestaccrued on the date of a sale of debtobligations when that sale occurs be-tween two interest payment dates, eventhough the interest is subject to taxunder section 871 or section 881. See§1.6045–1(c) for reporting require-ments by brokers with respect to saleproceeds. The exemption from with-holding granted by this paragraph(b)(2) is not subject to the withholdingcertificate procedures described in§1.1441–1(e)(1). However, the excep-tion is not a determination that theaccrued interest is not fixed or deter-minable annual or periodical income.

(ii) Anti-abuse rule. The exemptionin paragraph (b)(2)(i) of this sectiondoes not apply if the sale of securitiesis part of a plan the principal purposeof which is to avoid tax by selling andrepurchasing securities and the with-holding agent has actual knowledge orreason to know of such plan.

(c) Corporate distributions—(1)General rule. Subject to the provisionsof this paragraph (c), a corporationmaking a distribution with respect to itsstock is not required to withhold undersection 1441,1442, or 1443 on theportion of the distribution—

(i) That is treated as a nontaxabledistribution payable in stock or stockrights;

(ii) That is treated as a distributionin part or full payment in exchange forstock;

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(iii) That is not paid out of accumu-lated earnings and profits or currentearnings and profits;

(iv) That is paid by a regulatedinvestment company and is a capitalgain dividend (as defined in section852(b)(3)(C)) or an exempt interestdividend (as defined in section852(b)(5)(A)); or

(v) That is paid by a real propertyholding corporation (defined in section897(c)(2)) or a real estate investmenttrust (defined in section 856) and issubject to withholding under section1445 and the regulations under thatsection.

(2) Determination of accumulatedand current earnings and profits on thedate of payment—(i) General rule. Inorder for a corporation to determine theamount of withholding tax due on anydistribution with respect to stock, thedistributing corporation may, at itsoption, either treat the entire distribu-tion as a dividend as defined in section316 or may treat only a portion of thedistribution as a dividend if, prior to,and at a time reasonably close to thedate of payment, the distributing corpo-ration makes a reasonable estimate ofthe portion of the distribution that isnot a dividend based upon expectedearnings and profits as relevant factsand circumstances shall indicate. Areasonable estimate may be made basedon the procedures described in§31.3406(b)(2)–4(c)(2) of this chapter.

(ii) Procedures in case of under-withholding. A distributing corporationthat determines at the end of thetaxable year of the distribution that itunderwithheld under section 1441 shallbe liable under section 1461 for theamount underwithheld. No penaltiesshall be imposed for failure to withholdand deposit tax if—

(A) The corporation made a reason-able estimate as provided in paragraph(c)(2)(i) of this section; and

(B) Either—(1) The corporation pays over the

underwithheld amount on or before thedate that it is required to file a returnon Form 1042 for the calendar year ofthe distribution pursuant to §1.1461–2(b); or

(2) The corporation is not a calendaryear taxpayer and it files an amendedreturn on Form 1042X (or such otherform as the Commissioner may pre-scribe) for the calendar year in whichthe distribution is made and pays the

additional amount of tax and interestwithin 60 days of the close of thetaxable year of the distribution.

(iii) Reliance on reasonable estimateby intermediary. For purposes of deter-mining whether the payment of acorporate distribution is a dividend, awithholding agent that is not the dis-tributing corporation may rely on repre-sentations made by the distributingcorporation regarding the reasonableestimate of expected earnings andprofits made pursuant to paragraph(c)(2)(i) of this section. Failure by thewithholding agent to withhold therequired amount due to an erroneousestimate that the Internal RevenueService has determined was not reason-ably made shall be imputed to thedistributing corporation. Therefore, theInternal Revenue Service may collectany additional amount from the dis-tributing corporation and subject thecorporation to applicable interest andpenalties as a withholding agent.

(3) Special rules in the case ofdistributions from a regulated invest-ment company. If the amount of distri-butions designated as subject to section852(b)(3)(C) or 852(b)(5)(A) exceedsthe amount permitted to be designatedunder those sections for the taxableyear, then no penalties will be assertedfor any resulting underwithholdingprovided the designations were based ona reasonable estimate (made pursuant toparagraph (c)(2)(i) of this section) andadjustments to the amount withheld aremade within the time period describedin paragraph (c)(2)(ii)(B) of this section.Any adjustment to the amount of taxdue and paid to the Internal RevenueService by the withholding agent as aresult of underwithholding shall not betreated as a distribution for purposes ofsection 562(c) and the regulations there-under. Any amount of U.S. tax that aforeign shareholder is treated as havingpaid on the undistributed capital gain ofa regulated investment company undersection 852(b)(3)(D) may be claimed bythe foreign shareholder as a credit orrefund under §1.1464–1. The proceduresdescribed in paragraph (c)(2)(iii) of thissection shall apply in the case ofdistributions made to an intermediary.

(4) Overwithholding of tax. If thetax on any distribution has beenoverwithheld, adjustments may bemade in accordance with the proce-dures described in §1.1461–2(a). Alter-natively, refunds or credits may beclaimed in accordance with §1.1464–1,

relating to refunds or credits claimedby the beneficial owner, or §1.6414–1,relating to refunds or credits claimedby the withholding agent.

(d) Withholding on certain gains.Absent actual knowledge or reason toknow otherwise, a withholding agentmay rely on a claim regarding theamount of gain described in §1.1441–2(c) if the beneficial owner withholdingcertificate, or other appropriate with-holding certificate, states the beneficialowner’s basis in the property givingrise to the gain. In the absence of awithholding certificate, the withholdingagent may withhold an amount under§1.1441–1 that is necessary to assurethat the tax withheld is not less than 30percent of the recognized gain. For thispurpose, the recognized gain is deter-mined without regard to any deductionallowed by the Internal Revenue Codefrom the gains. The amount so with-held shall not exceed 30 percent of theamount payable by reason of the trans-action giving rise to the recognizedgain. Adjustments to any amount ofoverwithheld tax may be made inaccordance with the procedures de-scribed in §1.1461–2(a). Alternatively,refunds or credits may be claimed inaccordance with §1.1464–1, relating torefunds or credits claimed by thebeneficial owner, or §1.6414–1, relat-ing to refunds or credits claimed by thewithholding agent.

(e) Payments other than in U.S.dollars—(1) In general. The amount ofa payment made in a medium otherthan U.S. dollars is measured by thefair market value of the property orservices provided in lieu of U.S.dollars. The withholding agent mayliquidate the property prior to paymentin order to withhold the requiredamount of tax under section 1441 orobtain payment of the tax from analternative source. However, the obliga-tion to withhold under section 1441 isnot deferred even if no alternativesource can be located. Thus, for pur-poses of withholding under chapter 3of the Internal Revenue Code, theprovisions of §31.3406(h)–2(b)(2)(ii) ofthis chapter (relating to backup with-holding from another source) shall notapply. If the withholding agent satisfiesthe tax liability related to such pay-ments, the rules of paragraph (e)(3) ofthis section apply.

(2) Payments in foreign currency. Ifthe amount subject to withholding taxis paid in a currency other than the

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U.S. dollar, the amount of withholdingtax under section 1441 shall be deter-mined by applying the applicable rateof withholding to the foreign currencyamount and converting the amountwithheld into U.S. dollars on the dateof payment at the spot rate (as definedin §1.988–1(d)(1)) or pursuant to areasonable spot rate convention. Forexample, a withholding agent may usea month-end spot rate or a monthlyaverage spot rate. A spot rate conven-

tion must be used consistently for allnon-dollar amounts withheld and fromyear to year. Such convention cannotbe changed without the consent of theCommissioner. The U.S. dollar amountso determined shall be treated by thebeneficial owner as the amount of taxpaid on the income for purposes ofdetermining the final U.S. tax liabilityand, if applicable, claiming a refund orcredit of tax.

(3) Tax liability of beneficial owner

satisfied by withholding agent—(i)General rule. In the event the satisfac-tion of a tax liability of a beneficialowner by a withholding agent con-stitutes income to the beneficial ownerand such income is of a type that issubject to withholding, the amount ofthe payment deemed made by the with-holding agent for purposes of thisparagraph (e)(3) shall be determinedunder the following gross-up formula:

Payment = Gross payment without withholding1–(tax rate)

(ii) Example. The following exampleillustrates the provisions of this para-graph (e)(3):

Example. College X awards a qualified schol-arship within the meaning of section 117(b) toforeign student, FS, who is in the United Stateson an F visa. FS is a resident of a country thatdoes not have an income tax treaty with theUnited States. The scholarship is $20,000 to beapplied to tuition, mandatory fees and books,plus benefits in kind consisting of room andboard and roundtrip air transportation. College Xagrees to pay any U.S. income tax owed by FSwith respect to the scholarship. The fair marketvalue of the room and board measured by theamount College X charges non-scholarship stu-dents is $6,000. The cost of the roundtrip airtransportation is $2,600. Therefore, the total fairmarket value of the scholarship received by FS is$28,600. However, the amount taxable is limitedto the fair market value of the benefits in kind($8,600) because the portion of the scholarshipamount for tuition, fees, and books is not in-cluded in gross income under section 117. Underthe gross-up formula, College X is deemed tomake a payment of $10,000 ($8,600 divided by(1–.14). The U.S. tax that must be deducted andwithheld from the payment under section 1441(b)is $1,400 (.14 3 $10,000). College X reportsscholarship income of $30,000 and $1,400 ofU.S. tax withheld on Forms 1042 and 1042–S.

* * * * * *

(g) Effective date. This section ap-plies to payments of income made afterDecember 31, 1997.

Par. 9. Section 1.1441–4 is amendedby:

1. Revising the section heading.2. Revising paragraphs (a) and

(b)(1)(ii).3. Adding paragraph (b)(1)(vi).4. Revising the last sentence of

paragraph (b)(2)(i).5. Revising the introductory text of

paragraph (b)(2)(ii).6. Paragraph (b)(2)(ii) is amended

by:

a. Revising paragraph (b)(2)(ii)(A).b. Redesignating paragraph (b)(2)-

(ii)(H) as paragraph (b)(2)(ii)(J) andamending newly designated paragraph(b)(2)(ii)(J) by removing the period andadding ‘‘; and’’ in its place.

c. Redesignating paragraphs (b)(2)-(ii)(B), (C), (D), (E), (F) and (G) asparagraphs (b)(2)(ii)(D), (E), (F), (G),(H) and (I), respectively.

d. Adding new paragraphs (b)(2)(ii)-(B), (C), and (K).

e. Amending newly designated para-graph (b)(2)(ii)(I) by removing thelanguage ‘‘, and’’ and adding a semi-colon in its place.

f. Amending newly designated para-graphs (b)(2)(ii)(D), (E), (F), (G), and(H) by removing the comma at the endof the paragraphs and adding a semi-colon in its place.

7. The concluding text of paragraph(b)(2)(iv) is amended by:

a. Removing the language ‘‘ten’’and adding ‘‘20’’ in its place.

b. Removing the language ‘‘Directorof Foreign Operations’’ and adding‘‘Assistant Commissioner (Interna-tional)’’ in its place.

8. Revising paragraph (b)(2)(v).9. Adding paragraph (b)(2)(vi).

10. Adding paragraph (b)(6).11. Revising paragraphs (c), (d), (e),

and (f).12. Removing paragraphs (g), (h),

and (i).13. Removing the OMB parentheti-

cal and the authority citation at the endof the section.

The revisions and additions read asfollows:

§1.1441–4 Certain exemptions fromwithholding.

(a) Certain income connected with aU.S. trade or business—(1) In general.No withholding is required under sec-tion 1441 on income otherwise subjectto withholding if the income is (or isdeemed to be) effectively connectedwith the conduct of a trade or businesswithin the United States and is includ-ible in the beneficial owner’s grossincome for the taxable year. Forpurposes of this paragraph (a), anamount is not deemed to be includiblein gross income if the amount is (or isdeemed to be) effectively connectedwith the conduct of a trade or businesswithin the United States and thebeneficial owner claims an exemptionfrom tax under an income tax treatybecause the income is not attributableto a permanent establishment in theUnited States. To claim a reduced rateof withholding because the income isnot attributable to a permanentestablishment, see §1.1441–6(b)(1).This paragraph (a) does not apply toincome of a foreign corporation towhich section 543(a)(7) applies for thetaxable year or to compensation forpersonal services performed by anindividual. See paragraph (b) of thissection for compensation for personalservices performed by an individual.

(2) Withholding agent’s reliance ona claim of effectively connectedincome—(i) In general. Absent actualknowledge or reason to know other-wise, a withholding agent may rely ona claim of exemption based upon para-graph (a)(1) of this section if, prior tothe payment to the foreign person, thewithholding agent complies with therequirements of §1.1441–1(e)(1) and is

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furnished either a beneficial ownerwithholding certificate (including onethat is transmitted with an intermediarywithholding certificate described in§1.1441–1(e)(3)(iv)), or an intermedi-ary withholding certificate described in§1.1441–1(e)(3)(ii) from a partnershipacting for its own account (regardlessof whether the distributive share infor-mation is stated on the certificate andwhether the certificates described in§1.1441–1(e)(3)(iii)(C) are attached).For purposes of this paragraph (a), awithholding certificate is not validunless it includes a taxpayer identifyingnumber. A statement on the withhold-ing certificate that the income iseffectively connected with the conductof a trade or business in the UnitedStates and that the income will bereported by the beneficial owner on anincome tax return will satisfy therequirement of §1.1441–1(e)(2)(ii) or(e)(3)(iii) that the certificate describethe basis for the claim of reduced rate.A withholding agent may presume thatthe income is not effectively connectedwith the conduct of a trade or businessin the United States if the withholdingcertificate is silent or if the withholdingagent cannot associate the paymentwith the required documentation (asdefined in §1.1441–1(f)(1)). See§1.1441–1(e)(4)(ii)(B)(2) for the periodof validity applicable to a certificateprovided under this section. A with-holding certificate shall be effectiveonly for the item or items of incomespecified therein. In compliance with§1.1441–1(e)(3)(ii)(A), the validity ofthe certificate expires when subsequentcircumstances arising during the tax-able year indicate that the income towhich the certificate relates is not, or isno longer expected to be, effectivelyconnected with the conduct of a tradeor business within the United States.

(ii) Exemption of certain foreignpartnerships and foreign corporations.[Reserved] For guidance prior to thedate these regulations are published asfinal regulations in the Federal Regis-ter, see §1.1441–4(f) as contained inthe 26 CFR Part 1, edition revisedApril 1, 1995.

(iii) Payment to joint owners. In thecase of payments to joint owners, awithholding certificate must beprovided by each beneficial ownerclaiming a reduced rate certifying thatthe income is effectively connectedwith the conduct of a trade or businesswithin the United States.

(3) Income on notional principalcontracts. A withholding agent thatpays income attributable to a notionalprincipal contract described in §1.863–7(a) shall have no obligation to with-hold on the amounts paid under theterms of the notional principal contractregardless of whether a withholdingcertificate is provided. For rules regard-ing the obligation to file a return, see§§1.1461–1(c)(1)(i) and 1.6041–1(d)(5).

(4) Failure to act in accordancewith presumption. A withholding agentthat does not withhold, contrary to thepresumption set forth in paragraph(a)(2) of this section that income is noteffectively connected with the conductof a trade or business within the UnitedStates, shall be liable for the taximposed under section 1461, withoutthe benefit of a reduced rate, unless thewithholding agent can demonstrate tothe satisfaction of the District Directoror the Assistant Commissioner (Interna-tional) that the income is effectivelyconnected and was included in theFederal income tax return of thebeneficial owner and that the properamount of tax, if any, has been paid tothe Internal Revenue Service. Proof ofpayment of tax may be established onthe basis of a Form 4669 (or such otherform as the Internal Revenue Servicemay prescribe) establishing the amountof tax, if any, actually paid by thebeneficial owner on the income. Proofthat a reduced rate of withholding wasappropriate may be established by anappropriate withholding certificate de-scribed in §1.1441–1(e)(1)(i). However,if the required documentation was notreceived by the withholding agentbefore the time the payment was madeor within the period specified in§1.1441–1(f)(2)(i)(B)(1), then the Dis-trict Director or the Assistant Commis-sioner (International) may require addi-tional proof if it determines that thedelays in obtaining the required docu-mentation affect its reliability. Thewithholding agent will be liable forinterest under section 6601 regardlessof whether the underlying tax liabilityis due. In addition, the withholdingagent may be subject to penalties.

(b) Compensation for personal serv-ices of an individual—(1) Exemptionfrom withholding. * * *

* * * * * *

(ii) Such compensation that wouldbe subject to withholding under section

3402 but for the provisions of section3401(a) (not including paragraph (a)(6)of that section) and the regulationsunder that section. This paragraph(b)(1)(ii) does not apply to payments toa nonresident alien individual from anytrust described in section 401(a), anyannuity plan described in section403(a), or any annuity, custodial ac-count, or retirement income accountdescribed in section 403(b). Thus, forexample, payments to a nonresidentalien individual from a trust describedin section 401(a) are subject to with-holding under section 1441 and notunder section 3405 or 3406.

* * * * * *

(vi) Compensation that is exemptfrom withholding under section 3402by reason of section 3402(e), providedthat the employee and his employerenter into an agreement under section3402(p) to provide for the withholdingof income tax upon payments ofamounts described in §31.3401(a)–3(b)(1) of this chapter. An employeewho desires to enter into such anagreement should furnish his employerwith Form W–4 (withholding exemp-tion certificate) (or such other form asthe Internal Revenue Service mayprescribe). See section 3402(f) and ther e g u l a t i o n s t h e r e u n d e r a n d§31.3402(p)–1 of this chapter.

(2) Manner of obtaining withholdingexemption under tax treaty—(i) Ingeneral. * * * The exemption fromwithholding becomes effective for pay-ments made at least 20 days after acopy of the accepted statement isforwarded to the Assistant Commis-sioner (International).

(ii) Statement claiming withholdingexemption. The statement claiming anexemption from withholding shall bemade on Form 8233 (or an acceptablesubstitute). Form 8233 shall be dated,signed by the beneficial owner underthe penalties of perjury, and contain thefollowing information:

(A) The individual’s name, perma-nent residence address, taxpayer identi-fying number, and the U.S. visa num-ber, if any;

(B) The individual’s current immi-gration status and visa type;

(C) The individual’s original date ofentry into the United States;

* * * * * *

(K) Any other information as theform may require.

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* * * * * *

(v) Copies of Form 8233. The with-holding agent shall forward one copyof each Form 8233 that is acceptedunder paragraph (b)(2)(iv) of this sec-tion to the Assistant Commissioner(International), within five days of hisor her acceptance. The Assistant Com-missioner (International) may reviewthe forms so submitted. The withhold-ing agent shall retain a copy of Form8233.

(vi) Electronic filing. Under proce-dures published by the Internal Reve-nue Service, Forms 8233 may be filedelectronically with the Internal RevenueService.

* * * * * *

(6) Personal exemption—(i) In gen-eral. To determine the tax to bewithheld at source under §1.1441–1from remuneration paid for personalservices performed within the UnitedStates by a nonresident alien individualand from scholarship and fellowshipincome described in paragraph (c) ofthis section, a withholding agent maytake into account one personal exemp-tion pursuant to sections 873(b)(3) and151 regardless of whether the incomeis effectively connected. The exemptiondoes not need to be prorated for pur-poses of withholding under section1441.

(ii) Multiple exemptions. More thanone personal exemption may beclaimed in the case of a resident of acontiguous country or a national of theUnited States under section 873(b)(3).In addition, residents of a country withwhich the United States has an incometax treaty in effect may be eligible toclaim more than one personal exemp-tion if the treaty so provides. Claimsfor more than one personal exemptionshall be made on the withholdingcertificate furnished to the withholdingagent. The exemptions do not need tobe prorated for purposes of withholdingunder section 1441.

(iii) Special rule where both schol-arship and compensation income isreceived. The fact that both scholarshipincome and compensation income arereceived during the taxable year doesnot entitle the taxpayer to claim morethan one personal exemption amount(or more than the additional amountspermitted under paragraph (b)(6)(ii) ofthis section). Thus, if a nonresidentalien student receives taxable scholar-

ship amounts from one payor and com-pensation income from another payor,no more than the total personal exemp-tion amount permitted under the Inter-nal Revenue Code or under an incometax treaty may be taken into account byboth payors.

(c) Special rules for scholarship andfellowship income—(1) In general. Un-der section 871(c), certain amountspaid as a scholarship or fellowship forstudy, training, or research in theUnited States to a nonresident alienindividual temporarily present in theUnited States as a nonimmigrant undersubparagraph (F), (J), (M), or (Q) ofsection 101(a)(15) of the Immigrationand Nationality Act are treated asincome effectively connected with theconduct of a trade or business withinthe United States. Such amounts (asdescribed in the second sentence ofsection 1441(b)) are subject to with-holding tax under section 1441, but atthe lower rate of 14 percent. That ratemay be reduced under the provisions ofan income tax treaty. Claims of areduced rate under an income tax treatyshall be made under the proceduresdescribed in §1.1441–6(b)(1). There-fore, claims for amounts described inthis paragraph (c)(1) may not be shownon a Form 8233. However, if the payeeis receiving both compensation forpersonal services and income describedin this paragraph (c)(1) from the samewithholding agent, claims for bothtypes of income may be shown onForm 8233.

(2) Alternate withholding election. Awithholding agent may elect to with-hold on the amounts described inparagraph (c)(1) of this section at therates applicable under section 3402, asif the income were wages. Such elec-tion shall be made by obtaining a FormW–4 (or an acceptable substitute orsuch other form as the Internal Reve-nue Service may prescribe) from thebeneficial owner. Such Form W–4 shallalso serve as notice to the beneficialowner that the income is being treatedas wages for purposes of withholdingtax under section 1441.

(d) Annui t ies rece ived underqualified plans. Withholding is notrequired under section §1.1441–1 in thecase of any amount received as anannuity if the amount is exempt fromtax under section 871(f) and theregulations under that section. A state-ment on the beneficial owner withhold-ing certificate that the annuity is

excluded from gross income by reasonof section 871(f) and the basis for thatexclusion satisfies the requirement of§1.1441–1(e)(2)(ii) that the beneficialowner state the basis for the claim ofreduced rate. A beneficial owner with-holding certificate furnished for pur-poses of claiming the benefits of theexemption under this paragraph (d) isnot valid unless it includes a taxpayeridentifying number. See §1.1441–1(f)(3)(ii) regarding applicable pre-sumptions if the withholding agentdoes not hold the required documenta-tion prior to payment.

(e) Income of a foreign central bankof issue or the Bank for InternationalSettlements. Section 895 provides forthe exclusion from gross income ofcertain income derived by a foreigncentral bank of issue, or by the Bankfor International Settlements, from obli-gations of the United States or of anyagency or instrumentality thereof orfrom bank deposits. Absent actualknowledge or reason to know that aforeign central bank of issue, or theBank for International Settlements, isoperating outside the scope of theexclusion granted by section 895, thewithholding agent may rely on a claimof exemption if, prior to making thepayment, the withholding agent com-plies with the requirements of §1.1441–1(e)(1). The following statement on abeneficial owner withholding certificatesatisfies the requirement in §1.1441–1(e)(2)(ii) that the beneficial ownerstate the basis for the claim of reducedrate:

(1) The bank is a foreign centralbank of issue, or the Bank for Interna-tional Settlements; and

(2) The bank does not, and will not,hold the obligations or the bank de-posits covered by the withholdingagreement for, or use them in connec-tion with, the conduct of a commercialbanking function or other commercialactivity.

(f) Effective date—(1) General rule.This section applies to payments ofincome made after December 31, 1997.

(2) Transition rules. A withholdingagent that holds a valid Form 4224 ona date that is 60 days after the datethese regulations are published as finalregulations in the Federal Register maytreat it as a valid withholding certifi-cate until its validity expires underapplicable provisions as in effect onApril 22, 1996.

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§1.1441–4T [Removed]

Par. 10. Section 1.1441–4T isremoved.

Par. 11. Section 1.1441–5 is revisedto read as follows:

§1.1441–5 Withholding on paymentsto pass-through entities.

(a) Domestic partnerships—(1) Ex-emption from withholding on paymentto domestic partnerships. A payment ofincome to a domestic partnership is notsubject to withholding of tax undersection 1441 even though it may havepartners that are foreign persons. Apayor (within the meaning of section3406) may rely, in accordance with theprocedures under §1.1441–1(d), on aForm W–9 fu rn i shed by thepartnership.

(2) Withholding by a domesticpartnership—(i) In general. A domesticpartnership is required to withhold taxunder §1.1441–1 as a withholdingagent on the gross amount of items ofincome subject to withholding that areincludible in the distributive share ofincome of a partner that is a foreignperson. Pursuant to the authorityprovided under section 702(a), eachpartner shall take into account sepa-rately its distributive share of items ofincome subject to withholding, and thusthe partnership, pursuant to section703(a)(1), shall separately state theseitems of gross income when computingits taxable income. A partnership shallwithhold when any distributions thatinclude items of income subject towithholding are made. To the extent aforeign partner’s distributive share ofan item of income subject to withhold-ing has not been actually distributed,the partnership is required to withholdon the partner’s distributive share ofthat item of income on the earlier ofthe date that the statement requiredunder section 6031(b) and §1.6031–1(b) to be provided to that partner ismailed or otherwise furnished to thepartner or the due date for furnishingthat statement as provided under§1.6031–1(b)(1). If a partnership with-holds on a distributive share before theincome is actually distributed to thepartner, then withholding is not re-quired when the income is subse-quently distributed.

(ii) Reliance on a partner’s claimfor reduced withholding. Absent actualknowledge or reason to know other-

wise, a domestic partnership may relyon a claim for reduced withholding bya partner, if prior to the time thepartnership is required to withhold, thepartnership complies with the require-ments of §1.1441–1(d) or (e)(1),whichever is applicable, with respect tothe partner. See the presumptions de-scribed in §1.1441–1(f)(4)(iii)(A) appli-cable to a domestic partnership indetermining the U.S. or foreign statusof its partners.

(b) Foreign partnerships—(1) Ingeneral. A withholding agent must treata payment to a foreign partnership as apayment to its partners, except to theextent the partnership is treated as apayee under §1.1441–1(c)(3)(ii). See§1.1441–1(e)(5)(v) for payments to aforeign partnership that claims to be aqualified intermediary. If the part-nership is not treated as a payee, awithholding agent may, absent actualknowledge or reason to know other-wise, rely on a claim for a reduced rateof withholding by a partner if, prior tothe payment, the withholding agentholds an intermediary withholding cer-tificate described in §1.1441–1(e)(3)-(iii) pertaining to the partner. Thecertificate will be considered to pertainto the partner if the appropriate with-holding certificate for the partner isattached to the intermediary withhold-ing certificate. The appropriate with-holding certificate for the partner maybe a beneficial owner withholdingcertificate described in §1.1441–1(e)(2)(for a partner claiming to be a foreignperson and a beneficial owner, deter-mined under the provisions of §1.1441–1(c)(6)), the applicable certificates de-scribed in §1.1441–1(d)(2) (for a part-ner claiming to be a U.S. payee), anintermediary withholding certificate de-scribed in §1.1441–1(e)(3)(ii) or (iv)(for a partner that is a qualifiedintermediary or not otherwise acting forits own account), or an intermediarywithholding certificate described in§1.1441–1(e)(3)(iii) representing thatthe income to which the certificaterelates is effectively connected with theconduct of a trade or business in theUnited States. A claim must be pre-sented for each portion of the paymentthat represents an item of incomeincludible in the distributive share ofthe partner. When making a claim forseveral partners, the partnership maypresent a single intermediary withhold-ing certificate to which the partners’certificates are attached.

(2) Special rules in the case oftiered partnerships. If a foreign ordomestic partnership is a partner of aforeign partnership, the rules of thisparagraph (b)(2) shall apply.

(i) A withholding agent may treatany portion of a payment made to aforeign partnership that represents anitem of income includible in thedistributive share of a partner (at anylevel in the chain of tiers) that is adomestic partnership as a payment to aU.S. person if the domestic partnershipcomplies with the procedures describedin §1.1441–1(d) (relating to the claimof U.S. status by a payee or beneficialowner).

(ii) A withholding agent may treatany portion of a payment made to aforeign partnership that represents anitem of income includible in thedistributive share of a partner (at anylevel in the chain of tiers) that is aforeign partnership as a payment to aforeign person if the withholding agentmay treat the foreign partnership as thepayee pursuant to the provisions in§1.1441–1(c)(3)(ii).

(iii) Where the partner in the foreignpartnership to whom the payment ismade (second tier) is a foreign part-nership (first tier), the appropriatewithholding certificate for the partner isan intermediary withholding certificatedescribed in §1.1441–1(e)(3)(iii) issuedby the second tier, and an intermediarywithholding certificate described in§1.1441–1(e)(3)(iii) issued by the firsttier to which is attached an appropriatewithholding certificate for each of thepartners of the first tier. The rules ofthis paragraph (b)(2)(iii) shall apply toany number of tiers of foreign part-nerships.

(3) Presumptions. A withholdingagent may apply the presumption de-scribed in §1.1441–1(f)(4)(ii) to anyportion of a payment for which thewithholding agent does not receive therequired documentation (as defined in§1.1441–1(f)(1)(ii)).

(4) Example. The rules of this para-graph (b) may be illustrated by thefollowing example:

Example. (i) Facts. FP is a foreign partnershiporganized under the laws of Country X derivinginterest that would qualify as portfolio interestdescribed in section 871(h)(2)(B) if the statementdescribed in section 871(h)(5) is furnished. FPhas three partners, A, B, and C. FP furnishes tothe withholding agent an intermediary withhold-ing certificate described in §1.1441–1(e)(3)(iii)to which it attaches a Form W–9 for A and a

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beneficial owner withholding certificate for B.No documentation is attached for C.

(ii) Analysis. Absent actual knowledge orreason to know otherwise, the withholding agentmay rely on A’s Form W–9 to treat A as a U.S.person and, therefore, does not withhold on A’sshare of the payment. The withholding agentmust comply with any information reportingobligations under sections 6042 (i.e., issue aForm 1099) with respect to A. Absent actualknowledge or reason to know otherwise, thewithholding agent may also rely on B’s claim forportfolio interest treatment for its share of thepayment. The withholding agent must report thepayment to B on Forms 1042 and 1042–S.Because the withholding agent cannot associatethe required documentation (as defined §1.1441–1(f)(1)) for C’s share of the interest income, thewithholding agent may, for purposes of section3406, treat that amount as a reportable paymentmade to a U.S. payee that is not an exemptrecipient. See §1.1441–1(f)(4)(ii).

(c) Trusts and estates. [Reserved](d) Effective date—(1) General rule.

This section applies to payments ofincome made after December 31, 1997.

(2) Transition rules. A withholdingagent that holds a valid withholdingcertificate on the date that is 60 daysafter the date these regulations arepublished as final regulations in theFederal Register may treat it as a validwithholding certificate until its validityexpires under applicable provisions asin effect on April 22, 1996.

Par. 12. Section 1.1441–6 is revisedto read as follows:

§1.1441–6 Claim of a reduced rateof tax under an income tax treaty.

(a) In general. Under an income taxtreaty in effect between the UnitedStates and a foreign country, the rate oftax to be withheld on a payment ofincome subject to withholding may bereduced if the beneficial owner of theincome is a resident of the foreigncountry. Other requirements or condi-tions of the treaty, or revenue proce-dures issued thereunder, for claimingtreaty benefits must also be satisfied,such as a limitation of benefits provi-sion. If the requirements of this sectionare met, the amount withheld from thepayment may be reduced at source toaccount for the treaty benefit. See also§1.1441–4(b)(2) for rules regardingclaims of reduced rate of withholdingunder an income tax treaty in the caseof compensation from personalservices.

(b) Reliance on claim of treaty bene-fits—(1) In general. Absent actualknowledge or reason to know other-

wise, a withholding agent may rely ona claim that a beneficial owner isentitled to a reduced rate of withhold-ing based upon an income tax treaty if,prior to the payment, the withholdingagent complies with the requirementsof §1.1441–1(e)(1). Except as other-wise provided in paragraph (b)(2) or(b)(3) of this section, for purposes ofthis paragraph (b)(1), a beneficialowner withholding certificate men-tioned in §1.1441–1(e)(1) means abeneficial owner withholding certificatedescribed in §1.1441–1(e)(2), that in-cludes the beneficial owner’s taxpayeridentifying number and states that thetaxpayer has complied with the ad-vance ruling requirements described inparagraph (e) of this section (if applica-ble), and, if the beneficial owner is aperson related to the withholding agentwithin the meaning of section 267(b)and 707(b), that the beneficial ownerwill file the statement required under§1.6114–1(b) (if applicable). The re-quirement to file an information returnunder section 6114 for income subjectto withholding applies only to amountspaid during the calendar year that, inthe aggregate, exceed $500,000. See§301.6114–1(b) of this chapter. Seeparagraph (d) of this section for cir-cumstances under which the withhold-ing agent may be notified by theInternal Revenue Service that the cer-tificate cannot be relied upon to grantbenefits under an income tax treaty. Abeneficial owner’s taxpayer identifyingnumber on a withholding certificate isvalid for purposes of establishing proofof residence in a treaty country only ifthe taxpayer identifying number iscertified by the Internal Revenue Serv-ice. However, absent actual knowledgeor reason to know otherwise, a with-holding agent may rely on a taxpayeridentifying number that appears correcton its face, without having to inquire asto whether the taxpayer identifyingnumber is certified, if the permanentresidence address on the certificate isin the country whose tax treaty withthe United States is invoked. See theconfirmation and notification proce-dures described in §1.1441–1(e)(4)(iv)and (v).

(2) Special rules for certain divi-dends. In the case of dividends onstock traded on a U.S. establishedfinancial market, a withholding agentmay rely on a beneficial owner with-holding certificate described in§1.1441–1(e)(2). For this purpose, aU.S. established financial market is a

national securities exchange that isregistered under section 6 of theSecurities Exchange Act of 1934 (15U.S.C. 78F), or an interdealer quotationsystem sponsored by a national se-curities association registered undersection 15A of the Securities ExchangeAct of 1934. In the case of paymentsmade outside the United States (asdefined in §1.6049–5(e)) with respectto an offshore account (as defined in§1.6049–5(d)(3)), a withholding agentmay also consider that it holds awithholding certificate if it holds acertificate of residence described inparagraph (c)(3) of this section ordocumentary evidence described inparagraph (c)(4) of this section that thewithholding agent has reviewed andmaintains in its records. The withhold-ing agent maintains the reviewed docu-ments by retaining either the docu-ments viewed or a photocopy thereofand noting in its records the date onwhich, and by whom, the documentswere received and reviewed. This para-graph (b)(2) shall not apply to divi-dends that are exempt from withhold-ing based on a claim that the dividendsare effectively connected with theconduct of a trade or business in theUnited States.

(3) Competent authorities agree-ment. The procedures described in thissection may be modified to the extentthe U.S. competent authority may agreewith the competent authority of acountry with which the United Stateshas an income tax treaty in effect.

(4) Special rules for payments tocertain foreign entities—(i) Determina-tion of beneficial owner. Under§1.1441–1(c)(6)(ii)(B), the tax princi-ples in effect under the laws of thecountry whose tax treaty with theUnited States is invoked apply incertain cases to determine the benefi-cial owner of income entitled to claima reduced rate of withholding underthat income tax treaty. Thus, if abeneficial owner, as determined under§1.1441–1(c)(6)(ii)(B), is not a residentof the country whose law has beenapplied to determine beneficial ownerstatus, then a payment to a foreignentity will not qualify for a reducedrate under that country’s tax treaty withthe United States even if the foreignentity receiving the payment isorganized in that foreign country. Con-versely, if a beneficial owner, asdetermined under §1.1441–1(c)(6)-(ii)(B), is a resident of the country

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whose law has been applied to deter-mine beneficial owner status, then thebeneficial owner’s share of a paymentto a foreign entity will qualify for areduced rate under the applicable in-come tax treaty (provided other re-quirements for qualification are met)even if the foreign entity receiving thepayment is not organized in, or is not aresident of, the foreign country inwhich the beneficial owner is resident.

(ii) Withholding certificates. Theperson claiming a reduced rate of taxunder an income tax treaty shall applythe rules of §1.1441–1(c)(6)(ii)(B) andparagraph (b)(4)(i) of this section todetermine the beneficial owner ofincome and entitlement to a reducedrate under an income tax treaty. Thebeneficial owner so determined mayprovide, as appropriate, a beneficialowner withholding certificate describedin paragraph (b)(1) or (b)(2) of thissection. Thus, for example, if thebeneficial owner, as determined under§1.1441–1(c)(6)(ii)(B), is the interestholder rather than the entity, then theentity shall be treated as a foreignpartnership for purposes of determiningwhich withholding certificate is appro-priate. If, conversely, the beneficialowner, as determined under §1.1441–1(c)(6)(ii)(B), is the entity rather thanthe interest holders, then the entityshall be treated as a corporation forpurposes of determining which with-holding certificate is appropriate.

(iii) Request for dual treatment. Asset forth in §1.1441–1(c)(6)(ii)(B), awithholding agent may make paymentsto a foreign entity that is simul-taneously claiming a reduced rate oftax on its own behalf and a reducedrate on behalf of persons in theircapacity as interest holders in thatentity. In such a case, the withholdingagent may, at its option, accept suchdual claims based, as appropriate, onbeneficial owner withholding certifi-cates described in paragraph (b)(1) or(2) of this section or documentaryevidence described in §1.6049–5(c)(2)-(ii) furnished by such persons withrespect to their respective share of suchpayments, even though the withholdingagent holds different withholding cer-tificates that requires it to treat theentity inconsistently with respect todifferent payments or with respect todifferent portions of the same payment.See paragraph (b)(4)(v) Example 2 ofthis section.

(iv) Reciprocal application by treatypartners. Paragraph (b)(4) of this sec-

tion and the principles of §1.1441–1(c)-(6)(ii)(B) will not apply if the U.S.competent authority determines that atreaty partner is not reciprocally apply-ing the principles of §1.1441–1(c)(6)-(ii)(B) to entities organized under thelaws of the United States or to interestholders residing in the United States. Insuch case, the rules set forth in§1.1441–1(c)(6) shall apply withoutregard to the rules in §1.1441–1(c)-(6)(ii)(B). This determination shall beeffective upon publication of relevantguidance by the Service and shall applyprospectively only.

(v) Examples. This paragraph (b)(4)is illustrated by the followingexamples:

Example 1—(i) Facts. Entity A is a businessorganization formed under the laws of country Ythat has an income tax treaty with the UnitedStates. Under the laws of country Y, A is subjectto tax at the entity level and, therefore, is treatedas the beneficial owner of income it receives andas a resident of country Y for purposes of theU.S.-Y tax treaty. A receives U.S. sourceroyalties from withholding agent R and claims areduced rate of withholding under the U.S.-Y taxtreaty on its own behalf (rather than on behalf ofits interest holders). A furnishes a beneficialowner withholding certificate described in para-graph (b)(1) of this section claiming to be thebeneficial owner of the royalties.

(ii) Analysis. For purposes of claiming treatybenefits under the U.S.-Y treaty, A is treated asthe beneficial owner of the royalties under§1.1441–1(c)(6)(ii)(B) since, under the tax law ofcountry Y, A is required to include the royaltiesin income. R may treat A as the beneficial ownerof the income for purposes of granting thebenefit of a reduced rate under the U.S.-Y taxtreaty.

Example 2—(i) Facts. The facts are the sameas under Example 1, except that one of A’sinterest holders, T, is a corporation residing incountry X. The U.S.-X tax treaty reduces the rateon royalties to zero whereas the rate on royaltiesunder the U.S.-Y tax treaty is only reduced to 5percent. Under the laws of country X, A istaxable on a flow-through basis and not at theentity level and T is required to include inincome its distributive share of A’s income. Tclaims to be the beneficial owner of its share ofthe royalty income paid to A and provides abeneficial owner certificate to A claiming thebenefit of a zero rate under the U.S.-X tax treaty.A furnishes to R a beneficial owner withholdingcertificate for itself for the portion of thepayment for which A alone claims to be thebeneficial owner. In addition, it furnishes to R anintermediary withholding certificate described in§1.1441–1(e)(3)(iii) to which it attaches T’sbeneficial owner withholding certificate for theportion of the payment for which T claims to bethe beneficial owner.

(ii) Analysis. For purposes of claiming treatybenefits under the U.S.-Y treaty, A is treated asthe beneficial owner of all of the royalty incomereceived from R under §1.1441–1(c)(6)(ii)(B),since, under the tax law of country Y (i.e., underthe laws of the country whose treaty benefits areclaimed), A is subject to tax on that income.

However, for purposes of claiming benefits underthe U.S.-X treaty, T may also be treated as thebeneficial owner of its share of the royaltyincome under §1.1441–1(c)(6)(ii)(B), since, un-der the tax law of country X (i.e., the laws of thecountry whose treaty benefits are claimed), T isrequired to include in income its share of A’sincome. Therefore, R may treat the royaltypayment to a single foreign entity (A) asbeneficially owned by different persons as aresult of claims presented under different treaties.R may, at its option, grant dual treatment, that is,a reduced rate of zero percent under the U.S.-Xtreaty on the portion of the royalty payment forwhich T claims to be the beneficial owner and areduced rate of 5 percent under the U.S.-Y treatyfor the balance. However, under paragraph(b)(4)(iii) of this section, the withholding agentmay, at its option, treat A as the sole beneficialowner of the royalty and grant benefits under theU.S.-Y treaty only.

Example 3. (i) Entity A is a business organi-zation formed under the laws of country Y. Areceives from withholding agent R U.S. sourceroyalties and U.S. source interest income that ispotentially eligible for the portfolio interestexemption under section 871(h) and 881(c) ofthe Internal Revenue Code. A’s interest holdersare S, an individual who resides in country Y, T,an individual who resides in country X, and U,an individual resident in the United States. TheUnited States has a tax treaty with both countryY and country X. The U.S.-Y tax treaty reducesthe rate on royalties to 5 percent, and the U.S.-Xtax treaty reduces the rate to zero. A is classifiedas a partnership under U.S. tax principles. Underthe tax laws of country Y, A is taxable on aflow-through basis, and S is required to includein income her distributive share of A’s income.Under the tax laws of country X, A is taxable ona flow-through basis and T is required to includein income her distributive share of A’s income.A furnishes R an intermediary withholding certi-ficate described in §1.1441–1(e)(3)(iii) to whichit attaches—

(A) A Form W–9 for U; and

(B) Beneficial owner withholding certificatesfor S and T that claim the portfolio interestexemption and a reduced rate of withholdingunder the U.S. treaties with Y and X,respectively.

(ii) Analysis. For purposes of claiming bene-fits under the U.S.-Y treaty, S is treated as thebeneficial owner of his distributive share ofroyalty income received from R under §1.1441–1(c)(6)(ii)(B) since, under the tax law of countryY (i.e., the laws of the country whose treatybenefits are claimed in the case of S), S is theperson required to include in income her dis-tributive share of the royalty. Therefore, R maywithhold on S’s proportionate share of theroyalty income paid to A at the 5 percent rateunder the U.S.-Y tax treaty. For purposes ofclaiming benefits under the U.S.-X tax treaty, Tis treated as the beneficial owner of herdistributive share of royalty income under§1.1441–1(c)(6)(ii)(B), since, under the laws ofcountry X (i.e., the laws of the country whosetreaty benefits are claimed in the case of T), T isthe person required to include in income herdistributive share of the royalty. Therefore, Rmay withhold on T’s proportionate share of theroyalty income paid to A at the zero rate underthe U.S.-X treaty, even though A is notorganized in, or a resident of, country X. R mayrely on U’s Form W–9 to treat U as a U.S.person. Therefore, R does not withhold on U’s

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share of the royalty payment. R also does notwithhold on any portion of the interest paid to Abecause S and T have furnished beneficial ownercertificates and U has furnished a Form W–9.

(c) Proof of tax residence in a treatycountry—(1) In general. A beneficialowner establishes proof of its taxresidence in a treaty country for pur-poses of its claim to the withholdingagent that a reduced rate of tax appliesunder an income tax treaty by comply-ing with the procedures described inthis paragraph (c) or with such otherprocedures as the Internal RevenueService may prescribe in publishedguidance. For purposes of this section,the residence of a beneficial ownermust be determined in accordance withthe provisions of the applicable U.S.income tax treaty as may be clarifiedby any applicable regulations there-under or technical explanations thereof,and any procedures issued by theInternal Revenue Service on the deter-mination or proper method of certifyingresidence under particular income taxtreaties.

(2) Certification of taxpayer identify-ing number—(i) In general. A taxpayermay certify its taxpayer identifyingnumber as required under paragraph(b)(1) of this section by having thetaxpayer identifying number certifiedby the Internal Revenue Service eitherdirectly as provided under paragraph(c)(2)(ii) of this section or through aqualified intermediary as provided inparagraph (c)(2)(iii) of this section.

(ii) IRS-certified TIN. The InternalRevenue Service may certify a taxpayeridentifying number based upon a cer-tificate of residence described in para-graph (c)(3) of this section or docu-mentary evidence described in para-graph (c)(4) of this section. The certifi-cate or documentary evidence must befurnished to the Internal Revenue Serv-ice by or on behalf of the beneficialowner upon application for the tax-payer identifying number or at anyother time, as permitted under suchprocedures as the Internal RevenueService may prescribe. If the taxresidence of the beneficial ownerchanges, the beneficial owner shallpromptly notify the Internal RevenueService of that change. In addition, theInternal Revenue Service may ex-change information for the purpose ofconfirming with the appropriate taxauthority of the other country that thebeneficial owner continues to be a taxresident of that country. The Internal

Revenue Service may from time totime, in its discretion, request that thebeneficial owner reconfirm its re-sidence in the treaty country.

(iii) Special rules for qualified inter-mediaries. The Internal Revenue Serv-ice may certify a taxpayer identifyingnumber based upon the certification ofa qualified intermediary described in§1.1441–1(e)(5)(ii) regarding the taxresidence of any of its account holders,or persons owning an interest in thequalified intermediary, under proce-dures agreed upon with the InternalRevenue Service. If a new account orinterest holder has a taxpayer identify-ing number at the time it opens anaccount or acquires an interest, thequalified intermediary may rely on astatement by the account or interestholder that appropriate proof of taxresidence in the treaty jurisdiction waspreviously provided to the InternalRevenue Service. In such case, thequalified intermediary must notify theInternal Revenue Service each time theaccount or interest holder’s addresschanges to another country or when theaccount or interest holder terminates itsrelationship with the qualified inter-mediary.

(3) Certificate of residence. A cer-tificate of residence is generally acertificate issued by the competentauthority (or another appropriate taxauthority) of the treaty country ofwhich the taxpayer claims to be aresident that certifies that the taxpayerhas filed its most recent income taxreturn as a resident of that country. Acertificate of residence is valid for aperiod of three years or such longerperiod as the Internal Revenue Servicemay prescribe. The competent au-thorities may agree to a differentprocedure for certifying residence, inwhich case such procedure shall governfor payments made to a person claim-ing to be a resident of the country withwhich such an agreement is in effect.

(4) Documentary evidence establish-ing residence in the treaty country.Generally, documentary evidence usedto establish residence in a treatycountry must include the name, ad-dress, and photograph of the personseeking to prove residence, must be anofficial document issued by an author-ized governmental body (i.e., a govern-ment or agency thereof, or amunicipality), and must have beenissued no more than three years priorto presentation to the withholding

agent. A document older than threeyears may be relied upon as proof ofresidence only if it is accompanied byadditional evidence of the person’sresidence in the treaty country (i.e., abank statement, utility or medical bills).Documentary evidence must be in theform of original documents or a cer-tified copy thereof.

(d) Joint owners. In the case of apayment to joint owners, all ownersmust furnish a withholding certificateor, if applicable, documentary evidenceor a certificate of residence. Theapplicable rate of tax on a payment ofincome to joint owners shall be thehighest applicable rate.

(e) Related party dividends undercertain treaties. Income tax treatiesbetween the United States and Austria,Denmark, Ireland, and Switzerland re-duce the rate of tax on dividendsbetween related corporations to 5 per-cent subject to the condition that therelationship between the domestic andforeign corporations was not arrangedor maintained for the purpose ofsecuring the reduced rate. A domesticcorporation that makes a distribution toa resident of one of these countriesmay treat this condition as satisfied if,prior to the payment, a request hasbeen made to the Internal RevenueService for a private letter rulingdetermining that the relationship be-tween the corporation and the share-holder was not arranged or maintainedfor such purpose and the Service haseither issued a favorable ruling (and theruling has not been revoked) or isconsidering the ruling request.

(f) Effective date—(1) General rule.This section applies to payments ofincome made after December 31, 1997.

(2) Transition rules. For purposes ofthis section, a withholding agent thatholds a valid Form 1001 or 8233 onthe date that is 60 days after theseregulations are published as final reg-ulations in the Federal Register maytreat it as a valid withholding certifi-cate until its validity expires underapplicable provisions as in effect onApril 22, 1996. In addition, the docu-mentation requirements for dividendson stock traded on a U.S. establishedfinancial market described in paragraph(b)(2) of this section shall apply onlyto accounts established after the datethat is 60 days after these regulationsare published as final regulations in theFederal Register. For accounts estab-lished on or before that date, the

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documentation requirements under thissection shall apply to payments madeafter December 31, 1999.

Par. 13. Section 1.1441–7 is revisedto read as follows:

§1.1441–7 General provisions relatingto withholding agents.

(a) Withholding agent defined. Forpurposes of chapter 3 of the InternalRevenue Code, the term withholdingagent means any person, U.S. orforeign, that has the control, receipt,custody, disposal, or payment of anitem of income of a foreign personsubject to withholding. See §1.1441–1(b) (dealing with general rules ofwithholding) and §1.1441–1(f) (dealingwith presumptions of U.S. or foreignstatus in the absence of requireddocumentation) for determiningwhether a payment is considered madeto a foreign person. Any person whomeets the definition of a withholdingagent is required to deposit any taxwithheld under §1.1461–1(a) and tomake the returns prescribed by§1.1461–1(b) and (c). When severalpersons qualify as withholding agentswith respect to a single payment, onlyone tax is required to be withheld andonly one return (on Form 1042, asrequired under §1.1461–1(b)), is re-quired to be made.

(b) Standards of knowledge—(1) Ingeneral. If a withholding agent doesnot withhold the full amount eventhough it has actual knowledge orreason to know that a claim of U.S.status or of a reduced rate of tax undersection 1441 is incorrect, the withhold-ing agent may be liable for tax,interest, and penalties under sections1461 and 1463 and the regulationsunder those sections. A withholdingagent that has received notification bythe Internal Revenue Service that aclaim of U.S. status or of a reducedrate is incorrect has actual knowledgebeginning on the date that is 30calendar days after the date the noticeis received. A withholding agent thatfails to act in accordance with thepresumptions set forth in §1.1441–1(f)may be liable for tax, interest, andpenalties. See §1.1441–1(f)(5).

(2) Reason to know—(i) In general.A withholding agent will be consideredto have reason to know if it has suf-ficient knowledge of the underlyingfacts such that a reasonably prudentperson in the position of the withhold-

ing agent would question the claimmade or if the withholding agent hasactual knowledge of sufficient facts toput it on notice that the claim is false.

(ii) Limits on duty to inquire incertain cases. In the case of portfoliointerest, interest on deposits describedin section 871(i)(2)(A), and dividendsdescribed in §1.1441–6(b)(2), a with-holding agent’s duty to inquire withrespect to a beneficial owner withhold-ing certificate is limited to the circum-stances listed in this paragraph(b)(2)(ii). Where one or more of thecircumstances described in this para-graph (b)(2)(ii) exist for a withholdingcertificate, the withholding agent mayrely on the withholding certificate onlyafter documentation is provided insupport of the claim of foreign status,or reduced rate of tax under a taxtreaty, and the certificate is corrected,if appropriate.

(A) The permanent residence addresson the withholding certificate is anaddress in the United States.

(B) The payment is directed to aP.O. Box, an in-care-of address, a U.S.address, or an account with a financialinstitution in the United States.

(C) In the case of income for whichbenefits are claimed under an incometax treaty, the permanent residenceaddress or mailing address is not in thecorresponding treaty country.

(D) The beneficial owner notifies thewithholding agent of an address formailing purposes and that address is—

(1) Different from the permanentresidence or mailing address stated onthe withholding certificate provided tothe withholding agent by or for thebeneficial owner; and

(2) The address is one that is de-scribed in paragraph (b)(2)(ii)(A), (B),or (C) of this section.

(E) Such other circumstances as theInternal Revenue Service may prescribein published guidance.

(3) Universal accounts. A withhold-ing agent that is a financial institutiondealing with the public and with whicha customer may open an account shallapply the rules of this paragraph (b) onan account-by-account basis, except tothe extent it uses a universal accountsystem that uses a customer identifierthat can be used to retrieve sys-temically any other accounts of thecustomer. See §31.3406(c)–1(c)(3)(ii)and (c)(3)(iii)(C) of this chapter.

(c) Authorized agent—(1) In gen-eral. The acts of an agent of a

withholding agent (including the receiptof withholding certificates, the paymentof amounts of income subject towithholding, and the deposit of taxwithheld) shall be imputed to thewithholding agent on whose behalf it isacting. However, if the agent is aforeign person, a withholding agentthat is a U.S. person may treat the actsof the foreign agent as its own forpurposes of determining whether it hascomplied with the provisions of thissection, but only if the agent is anauthorized foreign agent, as defined inparagraph (c)(2) of this section.

(2) Authorized foreign agent. Anagent is an authorized foreign agentonly if—

(i) There is a written agreementbetween the withholding agent and theforeign person acting as agent;

(ii) The notification procedures de-scribed in paragraph (c)(3) of thissection have been complied with;

(iii) Books and records and relevantpersonnel of the foreign agent areavailable for examination by the Inter-nal Revenue Service in order to evalu-ate the withholding agent’s compliancewith the provisions of chapter 3,section 3406, and chapter 61 of theInternal Revenue Code, and the regula-tions under those provisions; for thispurpose, the foreign agent’s actualknowledge or reason to know shall beimputed to the U.S. withholding agent;and

(iv) The U.S. withholding agent re-mains fully liable for the acts of itsagent and does not assert any of thedefenses that may otherwise be avail-able under common law principles ofagency in order to avoid tax liabilityunder the Internal Revenue Code.

(3) Notification. A withholding agentthat appoints an authorized agent to acton its behalf for purposes of §1.871–14(c)(2), for the withholding provisionsof chapter 3 of the Internal RevenueCode, or for the reporting provisions ofchapter 61 of the Internal RevenueCode, is required to file notice of suchappointment with the Office of theAssistant Commissioner (International).Such notice shall be filed before thefirst payment for which the authorizedagent acts as such.

(4) Liability of U.S. withholdingagent. A withholding agent actingthrough an authorized foreign agent isliable for any failure of the agent, suchas failure to withhold an amount or

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make payment of tax, in the samemanner and to the same extent as if theagent’s failure had been the failure ofthe U.S. withholding agent. Such lia-bility shall exist irrespective of the factthat the authorized foreign agent is alsoa withholding agent and is itselfseparately liable for failure to complywith the provisions of the regulationsunder sections 1441, 1442, or 1443.However, liability for tax, interest, andpenalties shall not be collected morethan once.

(5) Filing of returns. See §1.1461–1(b)(2)(iii) and (c)(4)(iii) regarding re-turns required to be made where a U.S.withholding agent acts through anauthorized foreign agent.

(d) United States obligations. If theUnited States is a withholding agent foran item of interest, including originalissue discount, on obligations of theUnited States or of any agency or in-strumentality thereof, the withholdingobligation of the United States isassumed and discharged by—

(1) The Commissioner of the PublicDebt, for interest paid by checks issuedthrough the Bureau of the Public Debt;

(2) The Treasurer of the UnitedStates, for interest paid by him or her,whether by check or otherwise;

(3) Each Federal Reserve Bank, forinterest paid by it, whether by check orotherwise; or

(4) Such other person as may bedesignated by the Internal RevenueService.

(e) Assumed obligations. If, in con-nection with the sale of a corporation’sproperty, payment of the bonds or otherobligations of the corporation is as-sumed by the assignee, the assignee,whether an individual, partnership, orcorporation, shall be a withholdingagent to the extent amounts subject towithholding tax are paid to a foreignperson. Thus, the assignee shall deductand withhold such taxes under§1.1441–1 as would be required to bewithheld by the assignor had no suchsale or transfer been made.

(f) Conduit financing arrangements.[Reserved]

(g) Effective date. This section ap-plies to payments of income made afterDecember 31, 1997.

Par. 14. Section 1.1441–8T isamended as follows:

1. The section heading is revised.2. Paragraph (b) is revised.

3. Paragraph (c) is added.The revisions and addition read as

follows:

§1.1441–8T Foreign government andinternational organization exemptionfrom withholding (temporary).

* * * * * *

(b) Statement claiming exemption.Absent actual knowledge or reason toknow otherwise, the withholding agentmay rely upon a claim of exemptionmade by the foreign government orinternational organization, if, prior tomaking the payment, the withholdingagent satisfies the requirements of§1.1441–1(e)(1). For purposes of thisparagraph (b), a beneficial owner with-holding certificate means a certificatedescribed in §1.1441–1(e)(2). A state-ment on the withholding certificate thatthe income is, or will be, exempt fromtaxation under section 892 and theregulations under that section willsatisfy the requirement in §1.1441–1(e)(2)(ii) that the beneficial ownerstate on the certificate the basis for theclaim of reduced rate.

(c) Effective date—(1) In general.This section applies to payments ofincome made after December 31, 1997.

(2) Transition rules. For purposes ofthis section, a withholding agent thatholds a valid Form 8709 on the datethat is 60 days after these regulationsare published as final regulations in theFederal Register may treat it as a validwithholding certificate until its validityexpires under applicable provisions asin effect on April 22, 1996.

Par. 15. Section 1.1441–9 is added toread as follows.

§1.1441–9 Exemption fromwithholding on exempt income of aforeign tax-exempt organization andforeign private foundations.

(a) Income not subject to tax undersection 511. No withholding of tax isrequired under §1.1441–1 on income ofa foreign organization described insection 501(c) of the Internal RevenueCode that is not subject to the taximposed by section 511 of the InternalRevenue Code and is exempt from taxunder section 501(a). See §1.1443–1for withholding rules applicable toforeign private foundations.

(b) Statement claiming exemption.Absent actual knowledge or reason to

know otherwise, a withholding agentmay rely upon a claim of exemption bythe foreign tax-exempt organization if,prior to making the payment, the with-holding agent meets the requirementsof §1.1441–1(e)(1) (except that thecertificate must contains a taxpayeridentifying number). The requirementin §1.1441–1(e)(2)(ii) that the benefi-cial owner state on the certificate thebasis for the claim of reduced rate shallbe satisfied by the beneficial ownercertifying that the income is not, orwill not be, subject to tax under section511 and that the Internal RevenueService has issued a determinationletter (and the date thereof). If theorganization cannot certify that it hasbeen issued such a letter, it mustprovide an opinion of counsel that it istax exempt under section 501(c).

(c) Effective date—(1) In general.This section applies to payments ofincome made after December 31, 1997.

(2) Transition rules. For purposes ofthis section, a withholding agent thatholds a valid Form W–8, 1001 or 4224on the date that is 60 days after thedate these regulations are published asfinal regulations in the Federal Registermay treat it as a valid withholdingcertificate until its validity expiresunder applicable provisions as in effecton April 22, 1996.

Par. 16. Sections 1.1442–1 and1.1442–2 are revised to read asfollows:

§1.1442–1 Withholding of tax onforeign corporations.

For regulations concerning the with-holding of tax at source under section1442 in the case of foreign corpora-tions, see §§1.1441–1 through 1.1441–7and 1.1441–9.

§1.1442–2 Exemption under a taxtreaty.

For regulations providing for a claimof reduced withholding tax under sec-tion 1442 by certain foreign corpora-tions pursuant to the provisions of anincome tax treaty, see §1.1441–6.

Par. 17. Section 1.1442–3 is added toread as follows:

§1.1442–3 Tax exempt income of aforeign tax-exempt corporation.

For regulations providing for a claimof exemption for income exempt from

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tax under section 501(a) of a foreigntax-exempt corporation, see §1.1441–9.See §1.1443–1 for withholding rulesapplicable to foreign foundations.

§1.1443–1 [Amended]

Par. 18. Section 1.1443–1 isamended by:

1. Amending the second sentence ofparagraph (b)(4)(i) by removing thewords ‘‘an affidavit of the foreignorganization or’’.

2. Amending the third sentence inparagraph (b)(4)(i) by removing thewords ‘‘an affidavit or’’.

Par. 19. Section 1.1461–1 is revisedto read as follows:

§1.1461–1 Payment and returns oftax withheld.

(a) Payment of withheld tax—(1)Deposits of tax. Every withholdingagent who withholds tax pursuant tochapter 3 of the Internal Revenue Codeshall deposit such amount of tax with aFederal reserve bank or authorizedfinancial institution as provided in§1.6302–2(a). If for any reason thetotal amount of tax required to bereturned for any calendar year pursuantto paragraph (b) of this section has notbeen deposited pursuant to §1.6302–2,the withholding agent shall pay thebalance of tax due for such year atsuch place as the Internal RevenueService shall specify. The tax shall bepaid when filing the return requiredunder paragraph (b)(2) of this sectionfor such year, unless the InternalRevenue Service specifies otherwise.See paragraph (b)(2) of this sectionwhen there are multiple withholdingagents.

(2) Penalties for failure to pay tax.For penalties and additions to the taxfor failure to timely pay the taxrequired to be withheld under chapter 3of the Internal Revenue Code, seesections 6656, 6672, and 7202 and theregulations under those sections.

(b) Income tax return—(1) Generalrule. A withholding agent shall makean income tax return on Form 1042 (orsuch other form as the Internal Reve-nue Service may prescribe) for incomepaid during the preceding calendar yearthat the withholding agent is requiredto report on an information return onForm 1042–S (or such other form asthe Internal Revenue Service may

prescribe) under paragraph (c)(1) ofthis section. See section 6011 and§1.6011–1(c). The withholding agentmust file the return on or beforeFebruary 28 of the calendar yearfollowing the year in which the incomewas paid. The return must show theaggregate amount of income paid andtax withheld required to be reported onall the Forms 1042–S for the precedingcalendar year by the withholding agent,in addition to such information as isrequired by the form and accompanyinginstructions. Withholding certificates orother statements or information pro-vided to a withholding agent are notrequired to be attached to the return. Areturn must be filed under this para-graph (b)(1) even though no tax wasrequired to be withheld during thepreceding calendar year. The withhold-ing agent must retain a copy of Form1042 for the applicable statute oflimitations on assessments and collec-tion with respect to the items ofincome required to be reported on theForm 1042. See section 6501 and theregulations thereunder for the applica-ble statute of limitations. Adjustmentsto the total amount of tax withheld, asdescribed in §1.1461–2, shall be statedon the return as prescribed by the formand accompanying instructions.

(2) Multiple withholding agents—(i)General rule. Except as otherwiseprovided in paragraph (b)(2)(ii) and(iii) of this section, no Form 1042 isrequired to be filed under paragraph(b)(1) of this section if a return is filedby another withholding agent reportingthe same income in compliance withthe provisions of this paragraph (b) andany remaining tax due is paid with thereturn as required under paragraph (a)of this section.

(ii) Payment to a qualified inter-mediary. A U.S. withholding agentmaking a payment to a qualifiedintermediary (as defined in §1.1441–1(e)(5)(ii)) must file a return underparagraph (b)(1) of this section, regard-less of whether the qualified intermedi-ary assumes primary withholding re-sponsibility for the payment, asdescribed in §1.1441–1(e)(5)(iv) andregardless of whether the qualifiedintermediary is also required to file areturn under the terms of its agreementwith the Internal Revenue Service. Aqualified intermediary’s agreement withthe Internal Revenue Service shallspecify the extent, if any, to which theintermediary is subject to filing require-ments under this section.

(iii) Payment to or through an au-thorized foreign agent. Both the U.S.withholding agent making a payment toor through an authorized foreign agent(defined in §1.1441–7(c)) and the au-thorized foreign agent are required tofile a return under paragraph (b)(1) ofthis section.

(3) Amended returns. An amendedreturn may be filed on a Form 1042Xor such other form as the InternalRevenue Service may prescribe. Anamended return must include suchinformation as the form and accom-panying instructions shall require, in-cluding, with respect to any in-formation that has changed from thetime of the filing of the return, theinformation that was shown on theoriginal return and the correctedinformation.

(c) Information returns—(1) Filingrequirement—(i) In general. A with-holding agent must make an informa-tion return on Form 1042–S (or suchother form as the Internal RevenueService may prescribe) to report theitems of income specified in paragraph(c)(2) of this section that were paidduring the preceding calendar year.One Form 1042–S shall be prepared foreach beneficial owner (except as other-wise provided in paragraph (c)(4) ofthis section regarding multiple with-holding agents). The Form 1042–Sshall be prepared in such manner as theform and accompanying instructionsprescribe. One copy of the Form 1042–S shall be filed with the InternalRevenue Service on or before February28 of the calendar year following theyear in which the item of income waspaid. It shall be filed with a transmittalform as provided in the instructions tothe Form 1042–S and the transmittalform. Withholding certificates or otherstatements or documentation providedto a withholding agent are not requiredto be attached to the informationreturn. Another copy of the Form1042–S shall be furnished to the payeeon or before February 28 of thecalendar year following the year inwhich the item of income was paidafter the calendar year of payment. Thewithholding agent shall retain a copy ofeach Form 1042–S for the statute oflimitations on assessment and collec-tion applicable to the Form 1042 towhich the Form 1042–S relates.

(ii) Joint owners. In the case of jointowners, a single Form 1042–S may beprepared. However, any one of the

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owners may request that it be furnishedits own Form 1042–S. Where morethan one Form 1042–S is issued withrespect to a single payment to jointowners, the aggregate amount of in-come and tax withheld reported on theForms 1042–S cannot exceed theamount of income to the joint ownersand tax withheld thereon. If a singleForm 1042–S is prepared, the formshall state the name of only one ownerand that name shall be that of theperson whose status the withholdingagent relied upon to determine theapplicable rate of withholding tax.

(2) Income subject to reporting—(i)In general. Subject to the exceptions inparagraph (c)(2)(ii) of this section, theitems of income required to be reportedon a Form 1042–S are income subjectto withholding (as defined in §1.1441–2(a)), income on a notional principalcontract described in §1.1441–4(a)(3),and amounts described in sections 6041through 6050P that are paid to aforeign person and are not exempt fromreporting under sections 6041 through6050P or the regulations under thosesections.

(ii) Exceptions to reporting. Theitems of income listed in this paragraph(c)(2)(ii) are not required to be reportedon a Form 1042–S.

(A) Any item of income paid by apartnership, trust or estate to the extentthe item of income is required to bereported by the partnership, trust orestate under section 6031 or 6034.

(B) Any item required to be reportedon a Form W–2, including an itemrequired to be shown on Form W–2solely by reason of §1.6041–2 (relatingto return of information as to paymentsto employees) or §1.6052–1 (relating toinformation regarding payment ofwages in the form of group-term lifeinsurance).

(C) Any item of income required tobe reported on Form 1099, and suchother forms prescribed under sections6041 through 6050P and the regula-tions under these sections.

(D) Any item of income paid toforeign governments, international or-ganizations, and foreign central banksof issue that are exempt from tax undersection 892 or section 895.

(E) Income required to be reportedon Form 8288 (U.S. Withholding TaxReturn for Dispositions by ForeignPersons of U.S. Real Property Interests)or Form 8804 (Annual Return for

Partnership Withholding Tax (Section1446)).

(F) Income on deposits described insection 871(i)(2)(A), unless actuallysubject to withholding or specificallysubject to reporting under section 6049and the regulations under that section.

(G) Interest on a foreign-targetedregistered obligation described in§1.871–14(e), except as otherwise pro-vided in §1.871–14(e)(4)(ii)(A).

(3) Required information. Form1042–S shall include such informationas is required by the form and accom-panying instructions. The informationshall be based upon the informationprovided by or on behalf of the bene-ficial owner (e.g., a beneficial ownerwithholding certificate or documentaryevidence), as corrected and supple-mented based on the agent’s actualknowledge or reason to know. Inparticular, the Form 1042–S must in-clude the information described in thisparagraph (c)(3), if applicable.

(i) The name, address, and taxpayeridentifying number of the withholdingagent.

(ii) A description of each categoryof income paid (e.g., interest, divi-dends, royalties, etc.) and the aggregateamount in each category expressed inU.S. dollars.

(iii) The rate of withholding appliedand, if applicable, the basis for with-holding at a reduced rate.

(iv) The name, permanent residenceaddress, and taxpayer identifying num-ber (if required under §1.1441–1(e)(4)-(vii) to be shown on a beneficial ownerwithholding certificate or actuallyknown to the withholding agent makingthe return) of the beneficial owner.

(4) Multiple withholding agents—(i)In general. Except as otherwise pro-vided in paragraph (c)(4)(ii), (iii), and(v) of this section, no informationreturn is required to be filed underparagraph (c)(1)(i) of this section if areturn is filed by another withholdingagent reporting the same income incompliance with the provisions of thisparagraph (c).

(ii) Payment to a qualified inter-mediary. A withholding agent making apayment to a qualified intermediary(defined in §1.1441–1(e)(5)(ii)) mustreport the payment but may do so on asingle Form 1042–S.

(iii) Payment to an authorized for-eign agent—(A) Filing obligation offoreign authorized agent. An author-

ized foreign agent (as described in§1.1441–7(c)(2)) is subject to the filingrequirements described in paragraph(c)(1)(i) of this section because it is awithholding agent. Therefore, to theextent the U.S. withholding agent forwhich it is acting is not reporting theinformation required under this para-graph (c), it must report the informa-tion required to be reported underparagraph (c)(3) or (c)(4)(vi) of thissection.

(B) Filing obligations of the U.S.withholding agent. A U.S. withholdingagent making a payment to an author-ized foreign agent is exempted fromthe requirement under paragraph (c)(4)-(iv) of this section to make a return onForm 1042–S for each beneficial ownerand may, instead, make a single Form1042–S to report the payment made tothe authorized foreign agent. The ex-emption in this paragraph (c)(4)(iii)(B)shall apply only to the extent theauthorized foreign agent complies withthe filing requirements under paragraph(c)(4)(iii)(A) of this section.

(iv) Payment to other foreign personnot acting for its own account. Pay-ment of an item of income to an agent,nominee or representative for the bene-fit of other persons in respect of whomForms 1042–S are required may not beshown on a single Form 1042–S butmust be identified on separate Forms1042–S for each beneficial owner ifsuch agent, nominee, or representativeis a foreign person and is not aqualified intermediary or an authorizedforeign agent.

(v) Payment to a foreign part-nership. Payment of an item of incometo a foreign partnership that is not aqualified intermediary and acts for itsown account may not be shown on asingle Form 1042–S but must beidentified on separate Forms 1042–Sfor each beneficial owner (or partnerthat is a qualified intermediary orauthorized foreign agent).

(vi) Required information. An infor-mation return on a Form 1042–S by awithholding agent reporting paymentsto an intermediary or to a foreignpartnership described in paragraph(c)(4)(v) of this section must containthe information contained in this para-graph (c)(4)(vi). The information onthe Form 1042–S must be based uponthe withholding certificates furnishedby the payee, as corrected and supple-mented by the withholding agent’sactual knowledge or reason to know.

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(A) The name, address, and taxpayeridentifying number of the withholdingagent.

(B) A description of each categoryof income paid (e.g., interest, divi-dends, royalties, etc.) and the aggregateamount in each category expressed inU.S. dollars.

(C) The rate of withholding applied.(D) The basis for not withholding or

withholding at a reduced rate.(E) The name, address, and taxpayer

identifying number of the payee.(F) In the case of a payment to a

partnership acting for its own account,the name, address, and taxpayer identi-fying number (if required under§1.1441–1(e)(4)(vii) to be stated on thewithholding certificates or actuallyknown to the withholding agent) of theperson for whom a Form 1042–S is re-quired to be prepared pursuant to theprovisions of paragraph (c)(4)(v) of thissection.

(5) Magnetic media reporting. Awithholding agent that makes 250 ormore Form 1042–S information returnsfor a taxable year must file Form1042–S returns on magnetic media. See§301.6011–2 of this chapter for re-quirements applicable to a withholdingagent that files Forms 1042–S onmagnetic media and publications of theInternal Revenue Service relating tomagnetic media filing.

(d) Report of taxpayer identifyingnumbers. When so required or permit-ted under procedures issued by theInternal Revenue Service, a withhold-ing agent may attach to the Form 1042a list of all the taxpayer identifyingnumbers that have been furnished tothe withholding agent and upon whichthe withholding agent has relied togrant a reduced rate of withholding andthat are not otherwise required to bereported on a Form 1042–S under theprovisions of this section.

(e) Indemnification of withholdingagent. A withholding agent is indem-nified against the claims and demandsof any person for the amount of anytax it deducts and withholds in accord-ance with the provisions of chapter 3of the Internal Revenue Code and theregulations under that chapter. A with-holding agent that withholds based on areasonable belief that such withholdingis required under chapter 3 of theInternal Revenue Code is treated forpurposes of section 1461 and thisparagraph (e) as having withheld tax in

accordance with the provisions ofchapter 3 of the Internal Revenue Codeand the regulations under that chapter.In addition, a withholding agent isindemnified against the claims anddemands of any person for the amountof any payments made in accordancewith the grace period provisions setforth in §1.1441–1(f)(2)(ii)(A). Thisparagraph (e) does not apply to relievea withholding agent from tax liabilityunder chapter 3 of the Internal RevenueCode.

(f) Amounts paid not constitutinggross income. Any amount withheld inaccordance with §§1.1441–3(b)(1) and1.1441–3(d) shall be returned and paidin accordance with this section, eventhough the item or amount paid to thebeneficial owner may not constitutegross income in whole or in part. Forthis purpose, a reference in this sectionto an item or amount of income shall,where appropriate, be deemed to refer tothe amount subject to withholding under§§1.1441–3(b)(1) and 1.1441–3(d).

(g) Extensions of time for requestsmade for calendar year beginning afterthe date of publication of these regula-tions as final regulations in the FederalRegister—(1) Extension of time to fileForm 1042. The Internal RevenueService may grant an extension of timein which to file a Form 1042. Form2758, Application for Extension ofTime to File Certain Excise, Income,Information, and Other Returns, orsuch other form as the Internal Reve-nue Service may prescribe, must beused to request an extension of time.The request must contain a statementof the reasons for requesting theextension. The request must be mailedor delivered not later than February 28of the year following the end of thecalendar year for which the return willbe filed.

(2) Extension of time to file Form1042–S. The Internal Revenue Servicemay grant an extension of time inwhich to file Form 1042–S. Form 8809,Request for Extension of Time to FileInformation Returns, or such otherform as the Internal Revenue Servicemay prescribe, must be used to requestan extension of time. The request mustcontain a statement of the reasons forrequesting the extension. The requestmust be mailed or delivered not laterthan February 28 of the year followingthe calendar year for which the returnwill be filed.

(3) Extension of time to furnishForms 1042–S. The Internal Revenue

Service may grant an extension of timein which to furnish Forms 1042–S tobeneficial owners or intermediaries.Form 8809, request for Extension ofTime to File Information Returns, orsuch other form as the Internal Reve-nue Service may prescribe, must beused to request an extension of time.The request must contain the withhold-ing agent’s name and address, thewithholding agent’s taxpayer identify-ing number, the type of statement and astatement of the reasons for requestingthe extension. The request must besigned by the withholding agent or aperson who is duly authorized to sign areturn, statement, or other document.The request must be mailed or deliv-ered not later than February 28 of theyear following the end of the calendaryear for which the statement will befurnished.

(h) Penalties. For penalties and addi-tions to the tax for failure to filereturns in accordance with this section,see sections 6651, 6662, 6663, 6721,6722, 6723, 6724(c), 7201, 7203, andthe regulations under those sections.

(i) Effective date. This section shallapply to returns required for paymentsmade after December 31, 1997.

Par. 20. Section 1.1461–2 is revisedto read as follows:

§1.1461–2 Adjustments foroverwithholding or underwithholdingof tax.

(a) Adjustments of overwithheldtax—(1) In general. A withholdingagent that has overwithheld underchapter 3 of the Internal Revenue Codeand made a deposit of that tax asprovided in §1.6302–2(a) may adjustthe overwithheld amount either pur-suant to the reimbursement proceduredescribed in paragraph (a)(2) of thissection or pursuant to the set-offprocedure described in paragraph (a)(3)of this section. Adjustments under thisparagraph (a) may only be made withinthe time prescribed under paragraph(a)(2) or (3) of this section. After suchtime, an adjustment to the amountoverwithheld can only be claimed bythe beneficial owner with the InternalRevenue Service pursuant to the proce-dures described in chapter 65 of theInternal Revenue Code. For purposes ofthis section, the term overwithholdingmeans any amount actually withheld(determined before application of theadjustment procedures under this sec-

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tion) from an item of income pursuantto chapter 3 of the Internal RevenueCode in excess of the actual taxliability due, regardless of whethersuch overwithholding was in error orappeared correct at the time itoccurred.

(2) Reimbursement of tax—(i) Gen-eral rule. Under the reimbursementprocedure, the withholding agent mayrepay the beneficial owner for theamount overwithheld by reducing, bythe amount of tax actually repaid, theamount of any deposit of tax made bythe withholding agent under §1.6302–2(a)(1)(iii) for any subsequent paymentperiod occurring before the end of thecalendar year following the calendaryear of overwithholding. Any suchreduction that occurs for a paymentperiod in the calendar year followingthe calendar year of overwithholdingshall be allowed only if—

(A) The withholding agent states, ona timely filed (not including exten-sions) Form 1042–S for the calendaryear of overwithholding, the amount oftax withheld and the amount of anyactual repayment; and

(B) The withholding agent states ona timely filed (not including exten-sions) Form 1042 for the calendar yearof overwithholding, that the filing ofthe Form 1042 constitutes a claim forcredit in accordance with §1.6414–1.

(ii) Record maintenance. If the bene-ficial owner is repaid an amount ofwithholding tax under the provisions ofthis paragraph (a)(2), the withholdingagent shall keep as part of its records areceipt showing the date and amount ofrepayment and the withholding agentmust provide a copy or such receipt tothe beneficial owner. For this purpose,a canceled check or an entry in astatement is sufficient provided that thecheck or statement contains a specificnotation that it is a refund of taxoverwithheld.

(3) Set-offs. Under the set-off proce-dure, the withholding agent may repaythe beneficial owner by applying theamount overwithheld against anyamount which otherwise would be re-quired under chapter 3 of the InternalRevenue Code to be withheld from in-come paid by the withholding agent tosuch person before the earlier of thedue date for filing the Form 1042–S forthe calendar year of overwithholding orthe date that the Form 1042–S isactually filed with the Internal RevenueService. For purposes of making a

return on Form 1042 or 1042–S (or anamended form) for the calendar year ofoverwithholding and for purposes ofmaking a deposit of the amount with-held, the reduced amount shall beconsidered the amount required to bewithheld from such income underchapter 3 of the Internal RevenueCode.

(4) Examples. The principles of thisparagraph (a) are illustrated by thefollowing examples:

Example 1. (i) N is a nonresident alienindividual who is a resident of the UnitedKingdom. In December 1997, a domestic corpo-ration C pays a dividend of $100 to N, at whichtime C Corporation withholds $30 and remits thebalance of $70 to N. On February 10, 1998, priorto the time that C files its Form 1042, N advisesC Corporation that, pursuant to the income taxconvention with the United Kingdom, only $15tax should have been withheld from the $100dividend and requests reimbursement of the $15that was erroneously withheld. Although CCorporation has already deposited the $30 thatwas withheld, as required by §1.6302–2(a)(1)(iv),such corporation repays N in the amount of $15.

(ii) During 1997, C Corporation makes noother payments upon which tax is required to bewithheld under chapter 3 of the Internal RevenueCode; accordingly, its return on Form 1042 forsuch year, which is filed on February 28, 1998,shows total tax withheld of $30, an adjusted totaltax withheld of $15, and $30 previously paid forsuch year. Pursuant to §1.6414–1(b), C Corpora-tion claims credit for the overpayment of $15shown on the Form 1042 for 1997. Accordingly,it is permitted to reduce by $15 any depositrequired by §1.6302–2 to be made of taxwithheld during the calendar year 1998. TheForm 1042–S required to be filed by CCorporation with respect to the dividend of $100paid to N in 1997 is required to show taxwithheld of $30 and tax released of $15.

(iii) During 1998, C Corporation is required towithhold $200 under chapter 3 of the InternalRevenue Code, all of which is withheld in Juneof that year. Pursuant to §1.6302–2(a)(1)(iii), CCorporation deposits the amount of $185 on July15, 1998, that is, $200 less the $15 for whichcredit is claimed on the Form 1042 for 1997. OnFebruary 28, 1999, C Corporation files its returnon Form 1042 for calendar year 1998, whichshows total tax withheld of $200, $185 pre-viously deposited by C Corporation, and $15allowable credit.

Example 2. The facts are the same as inExample 1 except that paragraph (iii) of Example1 does not apply and C Corporation is requiredto deposit on a quarter-monthly basis the taxwithheld under chapter 3 of the Internal RevenueCode. C Corporation withholds tax of $100between February 8 and February 15, 1998, andcomplies with the quarter-monthly deposit re-quirement of §1.6302–2(a)(1)(ii) by depositing$75 [($100 3 90 percent) less $15] of thewithheld tax within 3 banking days afterFebruary 15, 1998, and by depositing $10 [($100– $15) less $75] within 3 banking days afterMarch 15, 1998.

(b) Withholding of additional taxwhen underwithholding occurs. A with-

holding agent may withhold the taxthat should have been withheld fromprevious payments from future pay-ments made to a beneficial owner.Such additional withholding of tax mayonly be made from payments madebefore the date that the Form 1042 isrequired to be filed (not includingextensions). See §1.6302–2 for makingdeposits of tax or §1.1461–1(a) formaking payment of the balance of taxdue for a calendar year.

(c) Definition. For purposes of thissection, the term payment period meansthe period for which the withholdingagent is required by §1.6302–2(a)(1) tomake a deposit of tax withheld underchapter 3 of the Internal RevenueCode.

(d) Effective date. This section ap-plies to payments of income made afterDecember 31, 1997.

§§1.1461–3 and 1.1461–4 [Removed]

Par. 21. Sections 1.1461–3 and1.1461–4 are removed.

Par. 22. Section 1.1462–1 isamended by:

1. Revising paragraph (a).2. Adding paragraph (c).3. Removing the OMB parenthetical

and the authority citation at the end ofthe section.

The revision and addition read asfollows:

§1.1462–1 Withheld tax as credit torecipient of income.

(a) Creditable tax. The entireamount of the income from which thetax is required to be withheld (includ-ing amounts calculated under the gross-up formula in §1.1441–3(e)(3)) shall beincluded in gross income in the returnrequired to be made by the beneficialowner of the income, without deductionfor the amount required to be withheld,but the tax so withheld shall be al-lowed as a credit against the totalincome tax computed in the beneficialowner’s return.

* * * * * *

(c) Effective date. This section ap-plies to payments of income made afterDecember 31, 1997.

Par. 23. Section 1.1463–1 is revisedto read as follows:

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§1.1463–1 Tax paid by recipient ofincome.

(a) Tax paid. If the tax required tobe withheld under chapter 3 of theInternal Revenue Code is paid by thebeneficial owner of the income or bythe withholding agent, it shall not bere-collected from the other, regardlessof the original liability therefor. How-ever, this section does not relieve theperson that did not withhold tax fromliability for interest or any penalties oradditions to tax otherwise applicable.

(b) Effective date. This section ap-plies to failures to withhold occurringafter December 31, 1989.

Par. 24. Section 1.6041–1, theamendments to paragraph (a)(1) asproposed in project number INTL–52–86 published on February 29, 1988, at53 FR 5993, are withdrawn.

Par. 25. Section 1.6041–1 isamended by:

1. Removing paragraph (a)(1)(iii).2. Redesignating paragraphs (a)(1)

introductory text and (a)(1)(i) as para-graphs (a)(1)(i) introductory text and(a)(1)(i)(A).

3. Adding a heading for paragraph(a)(1).

4. Amending newly designated para-graph (a)(1)(i)(A) by adding the word‘‘or’’ at the end of the paragraph.

5. Redesignating paragraph (a)(1)(ii)as paragraph (a)(1)(i)(B) and removingthe language ‘‘; or’’ at the end of theparagraph and adding a period in itsplace.

6. Designating the concluding textimmediately following newly desig-nated paragraph (a)(1)(i)(B) as para-graph (a)(1)(ii).

7. Removing the first sentence ofnewly designated paragraph (a)(1)(ii)and adding two new sentences in itsplace.

8. Adding paragraph (d)(5).The revisions and additions read as

follows:

§1.6041–1 Return of information asto payments of $600 or more

(a) General rule—(1) Informationreturns required—(i) * * *

(ii) The payments described in para-graphs (a)(1)(i)(A) and (B) of thissection shall not include any paymentswith respect to which a statement isrequired by, or may be required under

authority of section 6042(a) (relating todividends); section 6043(a)(2) (relatingto distributions in liquidation); section6044(a) (relating to patronage divi-dends); section 6045 (relating to bro-kers’ transactions with customers); sec-tion 6049(a)(1) and (a)(2) (relating tointerest); section 6050N(a) (relating toroyalties); or section 6050P(a) or (b)(relating to cancellation of indebted-ness). In addition, the payments de-scribed in paragraphs (a)(1)(i)(A) and(B) of this section shall not includeamounts excepted from the definition ofdividends under section 6042(b)(2) and§1.6042–3(b)(1), amounts described insection 6044(b), amounts excepted fromreporting under §1.6045–1(g)(1),amounts excepted from the definition ofinterest under section 6049(b)(2)(C) or(D), §1.6049–4(c)), or §1.6049–5(b)(6)through (14). * * *

* * * * * *

(d) * * *(5) Amounts paid after December

31, 1997, with respect to notionalprincipal contracts referred to in§1.1441–4(a)(3) that the payor or mid-dleman may treat as paid to a benefi-cial owner that is a foreign person andthat are not described in §1.6041–4(a)(2) or (4) shall be reported on aForm 1042 and 1042–S in accordancewith §1.1461–1(b) and (c), whether ornot effectively connected with theconduct of a trade or business in theUnited States. Although reportable,amounts described in this paragraph(d)(5) are not subject to backup with-holding under section 3406 if paidoutside the United States. See31.3406(g)–(1)(e) of this chapter.

* * * * * *

Par. 26. In §1.6041–3, paragraph (q),as proposed to be added in projectnumber LR–3–87 on June 9, 1988, at53 FR 21694, is withdrawn.

Par. 27. Section 1.6041–3 isamended by:

1. Revising the introductory text ofthe section.

2. Revising paragraph (a).3. Adding paragraph (q).The addition and revisions read as

follows:

§1.6041–3 Payments for which noreturn of information is requiredunder section 6041.

Returns of information are not re-quired under section 6041 and

§§1.6041–1 and 1.6041–2 for paymentsdescribed in paragraphs (a) through (q)of this section. See §1.6041–4 for re-porting exemptions regarding foreign-related items.

(a) Payments of income required tobe reported on Forms 1120–S, 941, W–2, and W–3, (however, see §1.6041–2with respect to Forms W–2 and W–3);

* * * * * *

(q) Payments to individuals as schol-arships or fellowship grants, as definedin §1.117–6(c)(3). This exception doesnot apply to any amount of a scholar-ship or fellowship grant that representspayment for services, as defined in§1.117–6(d)(2). See §1.1461–1(c) forapplicable reporting requirements withrespect to amounts paid to foreignpersons.

Par. 28. Section 1.6041–4 is revisedto read as follows:

§1.6041–4 Foreign-related items.

(a) Exempted foreign-related items.Returns of information are not requiredunder section 6041 and §§1.6041–1 and1.6041–2 for payments of the itemsdescribed in paragraphs (a)(1) through(4) of this section.

(1) Returns of information are notrequired for payments that a payor ormiddleman, as defined in paragraph(b)(1) of this section, may treat asmade to a beneficial owner that is aforeign person pursuant to §1.1441–1(e)(1) and from which the payor ormiddleman is either required to with-hold tax under section 1441 or theregulations under that section or wouldbe so required but for exceptions in theregulations under section 1441 (suchas, for example, under §1.1441–4 (deal-ing with effectively connected income)or §1.1441–6 (dealing with a reductionof rate of tax under an income taxtreaty)). See §1.1441–1(e)(4)(i) in thecase of payments to joint owners.

(2) Returns of information are notrequired for payments of amounts fromsources outside the United States madeby a non-U.S. payor or non-U.S.middleman (as defined in paragraph(b)(2) of this section) outside theUnited States. See §1.6049–5(e) forcircumstances in which a payment isconsidered to be made outside theUnited States.

(3) Returns of information are notrequired for payments of amounts from

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sources outside the United States that apayor or middleman may treat as paidto a beneficial owner that is a foreignperson (because such person has fur-nished a certificate described in§1.6049–5(c)(1)). For purposes of thisparagraph (a)(3), the provisions in§1.6049–5(c)(3) through (c)(6) (regard-ing operating rules related to thecertificate of foreign status) shall apply.

(4) Returns of information are notrequired for the period that the amountspaid represent assets blocked as de-scribed in §1.1441–2(e)(3). The exemp-tion in this paragraph (a)(4) shallterminate when payment is deemed tooccur in accordance with the provisionsof §1.1441–2(e)(3).

(b) Definitions—(1) Payor and mid-dleman. For purposes of this section,the term payor means any person whois required to make an informationreturn with respect to any reportablepayment, as described in section3406(b), including any middleman. Theterm middleman means any personwhose legal relationship to the payor orpayee (including any other middleman)is of a kind described in §1.6049–4(f)-(4) (as proposed in project numberINTL–52–86 published in 1988–1 C.B.892).

(2) Non-U.S. payor and non-U.S.middleman. For purposes of this sec-tion, the term non-U.S. payor or non-U.S. middleman means a payor ormiddleman other than—

(i) A person described in section7701(a)(30);

(ii) The government of the UnitedStates, the government of any State orpolitical subdivision thereof (or anyagency or instrumentality of any of theforegoing);

(iii) A controlled foreign corporationwithin the meaning of section 957(a);or

(iv) A foreign person 50 percent ormore of the gross income of which,from all sources for the three-yearperiod ending with the close of itstaxable year preceding the collection orpayment (or such part of such period asthe person has been in existence), waseffectively connected with the conductof trade or business within the UnitedStates.

(c) Applicable presumptions. Thepresumptions of §1.1441–1(f) shall ap-ply for determining the payee’s statuswhere the required documentation islacking, incorrect, or unreliable.

(d) Joint owners. In the case ofamounts paid to joint owners for whicha certificate or documentation is re-quired as a condition for being exemptfrom reporting under this paragraph(d), a payor or middleman must receivefrom each joint owner the requiredcertification or documentation. Whereany one of the joint owners has notfurnished such certification or docu-mentation, the payment is not exemptfrom reporting under this section.

(e) Payee. For determination ofpayee, see §1.1441–1(c)(3).

(f) Conversion into United Statesdollars of amounts paid in foreigncurrency. For rules concerning foreigncurrency conversion, see §1.6049–4(d)-(3)(i).

(g) Effective date—(1) General rule.The provisions of this section apply topayments made after December 31,1997.

(2) Transition rules. A payor thatholds a valid Form W–8 on the datethat is 60 days after these regulationsare published as final regulations in theFederal Register may treat it as a validcertificate until its validity expiresunder applicable provisions as in effecton April 22, 1996.

Par. 29. Section 1.6041A–1 as pro-posed to be added in project numberLR–214–82, published on January 7,1986, at 51 FR 626, is amended byadding a new paragraph (d)(3), to readas follows:

§1.6041A–1 Returns regardingpayments of remuneration for servicesand certain direct sales.

* * * * * *

(d) Exceptions to return require-ment. * * *

* * * * * *

(3) Foreign transactions—(i) In gen-eral. No return shall be required underparagraph (a) of this section withrespect to payments described in thisparagraph (d)(3).

(A) Returns of information are notrequired for payments of remunerationfor services that a payor or middleman,as defined in paragraph (d)(3)(ii)(A) ofthis section, may treat as made to abeneficial owner that is a foreignperson pursuant to §1.1441–1(e)(1) andfrom which the payor or middleman iseither required to withhold tax undersection 1441 or the regulations under

that section or would be so requiredbut for exceptions in the regulationsunder section 1441 (such as, forexample, under §1.1441–4 (dealingwith effectively connected income) or§1.1441–6 (dealing with a reduction ofrate of tax under an income taxtreaty)). See §1.1441–1(e)(4)(i) in thecase of payments to joint owners.

(B) Returns of information are notrequired for payments of remunerationfor services and certain direct salesfrom sources outside the United Statesmade outside the United States by anon-U.S. payor or non-U.S. middleman(as defined in paragraph (d)(3)(ii)(B) ofthis section). See §1.6049–5(e) forcircumstances in which a payment isconsidered to be made outside theUnited States.

(C) Payments of services and certaindirect sales from sources outside theUnited States that a payor or middle-man may treat as paid to a beneficialowner that is a foreign person (becausesuch person has furnished a certificatedescribed in §1.6049–5(c)(1)). For pur-poses of this paragraph (d)(3)(i)(C), theprovisions in §1.6049–5(c)(3) through(c)(6) (regarding operating rules relatedto the certificate of foreign status) shallapply. See §1.6041–1(d)(5) for report-able payments made to foreign persons.

(D) Amounts paid for services andcertain direct sales for the period thatthey represent assets blocked as de-scribed in §1.1441–2(e)(3). The exemp-tion in this paragraph (d)(3)(i)(D) shallterminate when payment is deemed tooccur in accordance with the provisionsof §1.1441–2(e)(3).

(ii) Definitions—(A) Payor and mid-dleman. For purposes of this section,the term payor means any person whois required to make an informationreturn with respect to any reportablepayment, as described in section3406(b), including any middleman andthe term middleman means any personwhose legal relationship to the payor orpayee (including any other middleman)is of a kind described in §1.6049–4(f)-(4) (as proposed in project numberINTL–52–86 published in 1988–1 C.B.892).

(B) Non-U.S. payor and non-U.S.middleman. For purposes of this sec-tion, the term non-U.S. payor or non-U.S. middleman means a payor ormiddleman other than—

(1) A person described in section7701(a)(30);

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(2) The government of the UnitedStates, the government of any State orpolitical subdivision thereof (or anyagency or instrumentality of any of theforegoing);

(3) A controlled foreign corporationwithin the meaning of section 957(a); or

(4) A foreign person 50 percent ormore of the gross income of which, fromall sources for the three-year periodending with the close of its taxable yearpreceding the collection or payment (orsuch part of such period as the personhas been in existence), was effectivelyconnected with the conduct of trade orbusiness within the United States.

(C) Applicable presumptions. Thepresumptions of §1.1441–1(f) shall ap-ply for determining the payee’s statuswhere the required documentation islacking, incorrect, or unreliable.

(D) Joint owners. In the case ofamounts paid to joint owners for whicha certificate of documentation is re-quired as a condition for being exemptfrom reporting under this paragraph(d)(3), the payor or middleman mustreceive from each joint owner thecertification described in paragraph(d)(3)(i)(A) or (C) of this section.Where any one of the joint owners hasnot furnished such certification, thepayment is not exempt from reportingunder this section unless described inparagraph (d)(3)(i)(B) or (D) of thissection.

(E) Payee. For determination ofpayee, see §1.1441–1(c)(3).

(iii) Effective date—(A) Generalrule. The provisions of this paragraph(d)(3) apply to payments made afterDecember 31, 1997.

(B) Transition rules. A payor thatholds a valid Form W–8 on a date thatis 60 days after these regulations arepublished as final regulations in theFederal Register may treat it as a validcertificate until its validity expiresunder applicable provisions as in effecton April 22, 1996.

* * * * * *

Par. 30. In §1.6042–3, paragraph (b),as proposed to be revised in projectnumber INTL–52–86, published onFebruary 29, 1988 (53 FR 5995) isamended by:

1. Removing paragraphs (b)(1) and(b)(2).

2. Redesignating paragraphs (b)(3)and (b)(4) as paragraphs (b)(1)(vii) and(b)(1)(viii), respectively.

Par. 31. Section 1.6042–3 isamended by:

1. Revising paragraph (a) introduc-tory text.

2. Removing paragraph (b) introduc-tory text.

3. Adding paragraph (b)(1) heading.4. Revising paragraph (b)(1) intro-

ductory text.5. Adding paragraphs (b)(1)(i)

through (b)(1)(vi).6. Revising paragraphs (b)(2)

through (b)(4).7. Adding paragraphs (b)(5) through

(b)(7).The additions and revisions read as

follows:

§1.6042–3 Dividends subject toreporting.

(a) In general. Except as provided inparagraph (b) of this section, the termdividend for purposes of this sectionand §§1.6042–2 and 1.6042–4 meansthe amounts described in paragraphs(a)(1) and (2) of this section.

* * * * * *

(b) Exceptions—(1) In general. Re-turns of information are not requiredunder section 6042 and §§1.6042–2 and1.6042–4 for amounts described inparagraphs (b)(1)(i) through (viii) ofthis section.

(i) Amounts paid by an insurancecompany to a policyholder, other than adividend upon its capital stock.

(ii) Payments (however denomi-nated) by a mutual savings bank,savings and loan association, or similarorganization, in respect of deposits,investment certificates, or withdrawableor repurchasable shares. See, however,section 6049 and the regulations underthat section for provisions requiringreporting of these payments.

(iii) Distributions or payments fromsources within the United States that apayor or middleman (as defined inparagraph (b)(2) of this section) maytreat as made to a beneficial owner thatis a foreign person pursuant to§1.1441–1(e)(1) or, in the case ofdividends paid on stock traded on aU.S. established financial market (asdefined in §1.1441–6(b)(2)), pursuantto §1.1441–6(b)(2) or (3), or §1.6049–5(c).

(iv) Distributions or payments fromsources outside the United States paid

outside the United States by a non-U.S.payor or a non-U.S. middleman (asdefined in paragraph (b)(2)(ii) of thissection). See §1.6049–5(e) for circum-stances in which a payment is consid-ered to be made outside the UnitedStates.

(v) Distributions or payments fromsources outside the United States that apayor or middleman may treat as paidto a beneficial owner that is a foreignperson (because such person has fur-nished a certificate or documentaryevidence as required under §1.6049–5(c)(1) or (2)). For purposes of thisparagraph (b)(1)(v), the provisions in§1.6049–5(c)(3) through (c)(6) (regard-ing operating rules related to thecertificate of foreign status) shall apply.

(vi) Distributions or payments forthe period that the amounts representassets blocked as described in §1.1441–2(e)(3). The exemption in this para-graph (b)(1)(vi) shall terminate whenpayment is deemed to occur in accord-ance with the rules of §1.1441–2(e)(3).

* * * * * *

(2) Definitions—(i) Payor and mid-dleman. For purposes of this section,the term payor means any person whois required to make an informationreturn with respect to any reportablepayment, as described in section3406(b) (including any middleman),and the term middleman means anyperson whose legal relationship to thepayor or payee (including any othermiddleman) is of a kind described in§1.6049–4(f)(4) (as proposed in projectnumber INTL–52–86 published in1988–1 C.B. 892).

(ii) Non-U.S. payor and non-U.S.middleman. For purposes of this sec-tion, the term non-U.S. payor or non-U.S. middleman means a payor ormiddleman other than—

(A) A person described in section7701(a)(30);

(B) The government of the UnitedStates, the government of any State orpolitical subdivision thereof (or anyagency or instrumentality of any of theforegoing);

(C) A controlled foreign corporationwithin the meaning of section 957(a);or

(D) A foreign person 50 percent ormore of the gross income of which,from all sources for the three-yearperiod ending with the close of itstaxable year preceding the collection or

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payment (or such part of such period asthe person has been in existence), waseffectively connected with the conductof trade or business within the UnitedStates.

(3) Applicable presumptions. Thepresumptions of §1.1441–1(f) shall ap-ply for determining the payee’s statusunder §1.6042–3 where the requireddocumentation is lacking, incomplete,incorrect, or unreliable.

(4) Joint owners. In the case ofamounts paid to joint owners for whicha certificate or documentation is re-quired as a condition for being exemptfrom reporting under this paragraph(b), the payor or middleman mustreceive from each joint owner therequired certification or documentation.Where any one of the joint owners hasnot furnished the required certificationor documentation, the payment is notexempt from reporting under this sec-tion.

(5) Payee. For determination ofpayee, see §1.1441–1(c)(3).

(6) Conversion into United Statesdollars of amounts paid in foreigncurrency. For rules concerning foreigncurrency conversion, see §1.6049–4(d)-(3)(i).

(7) Effective date—(i) General rule.The provisions of this paragraph (b)apply to payments made after Decem-ber 31, 1997.

(ii) Transition rules. A payor thatholds a valid Form W–8 on the datethat is 60 days after these regulationsare published as final regulations in theFederal Register may treat it as a validcertificate until its validity expiresunder applicable provisions as in effecton April 22, 1996.

Par. 32. Section 1.6045–1 as pro-posed to be amended in project numberINTL–52–86, published on February29, 1988, at 53 FR 5996, is amendedby:

1. Removing paragraph (a)(1).2. Removing paragraphs (g)(1)(i),

(g)(1)(ii), (g)(1)(iii) heading, (g)(1)(iii)-(A), (g)(2), (g)(3), and (g)(4).

3. Redesignating paragraph (g)(1)-(iii)(B) as follows:

ParagraphRedesignated asparagraph

(g)(1)(iii)(B) (g)(1)(ii)(g)(1)(iii)(B)(1) (g)(1)(ii)(A)introductory text introductory text(g)(1)(iii)(B)(1)(i) (g)(1)(ii)(A)(1)

(g)(1)(iii)(B)(1)(ii) (g)(1)(ii)(A)(2)(g)(1)(iii)(B)(2) (g)(1)(ii)(B)introductory text introductory text(g)(1)(iii)(B)(2)(i) (g)(1)(ii)(B)(1)(g)(1)(iii)(B)(2)(ii) (g)(1)(ii)(B)(2)(g)(1)(iii)(B)(2)(iii) (g)(1)(ii)(B)(3)(g)(1)(iii)(B)(2)(iv) (g)(1)(ii)(B)(4)(g)(1)(iii)(B)(2)(v) (g)(1)(ii)(B)(5)

4. Removing in newly designatedparagraph (g)(1)(ii)(A) introductorytext the language ‘‘subdivision 2 of thisparagraph (g)(1)(iii)(B)’’ and adding‘‘paragraph (g)(1)(ii)(B) introductorytext of this section’’ in its place.

5. Removing in newly designatedparagraph (g)(1)(ii)(B) introductory textthe language ‘‘subdivision (1) of thisparagraph (g)(1)(iii)(B)’’ and adding‘‘paragraph (g)(1)(ii)(A)’’ in its place.

6. Removing in newly designatedparagraph (g)(1)(ii)(B)(3) the language‘ ‘§1 .6049–5( j ) (4) ’ ’ and adding‘‘§1.6049–5(e)’’ in its place.

Par. 33. Section 1.6045–1(d)(6)(iii)as proposed to be added in projectnumber INTL–0015–91, published onMarch 17, 1992, at 57 FR 9224, iswithdrawn.

Par. 34. Section 1.6045–1 isamended by:

1. Revising the heading of paragraph(a) and republishing paragraph (a)introductory text.

2. Revising paragraph (a)(1).3. Revising paragraph (d)(6).4. Revising paragraph (g)(1) head-

ing; removing paragraph (g)(i) intro-ductory text; and revising paragraphs(g)(1)(i) and (g)(2) through (g)(4).

The revisions read as follows:

§1.6045–1 Returns of information ofbrokers and barter exchanges.

(a) Definitions. The following defini-tions apply for purposes of this section:

(1) The term broker means anyperson (other than a person who isrequired to report a transaction undersection 6043), U.S. or foreign, that, inthe ordinary course of a trade orbusiness during the calendar year,stands ready to effect sales to be madeby others. A broker includes an obligorthat regularly issues and retires its owndebt obligations or a corporation thatregularly redeems its own stock. How-ever, with respect to a sale (including aredemption or retirement) effected at anoffice outside the United States, abroker includes only a person described

as a U.S. payor or U.S. middleman in§1.6049–5(d)(1). In addition, a brokerdoes not include an international orga-nization described in §1.6049–4(c)(1)-(ii)(G) that redeems or retires anobligation of which it is the issuer.

* * * * * *

(d) * * *(6) Conversion into United states

dollars of proceeds paid in foreigncurrency—(i) Conversion rules. Whenthe amount subject to reporting is paidin a currency other than the U.S. dollar,the amount subject to reporting underthis section shall be determined byconverting such foreign currency intoU.S. dollars on the date of payment atthe spot rate (as defined in §1.988–1(d)(1)) or pursuant to a reasonablespot rate convention. For example, awithholding agent may use a month-end spot rate or a monthly average spotrate. A spot rate convention must beused consistently with respect to allnon-dollar amounts withheld and fromyear to year. Such convention cannotbe changed without the consent of theCommissioner or his or her delegate.

(ii) Effect of identification under§1.988–5(a), (b), or (c) where thetaxpayer effects a sale and a hedgethrough the same broker—(A) In gen-eral. In lieu of the amount reportableunder paragraph (d)(6)(i) of this sec-tion, the amount subject to reportingshall be the integrated amount com-puted under §1.988–5(a), (b) or (c) if—

(1) A taxpayer effects through abroker a sale in exchange for nonfunc-tional currency (as defined in §1.988–1(c)) and hedges all or a part of suchsale as provided in §1.988–5(a), (b) or(c) with the same broker; and

(2) The taxpayer complies with therequirements of §1.988–5(a), (b) or (c)and so notifies the broker prior to theend of the calendar year in which thesale occurs.

(B) Effective date. The provisions ofthis paragraph (d)(6)(ii) apply to trans-actions entered into on or after the datethat is 60 days after these regulationsare published as final regulations in theFederal Register.

* * * * * *

(g) Exempt foreign persons—(1)Brokers—(i) In general. No return ofinformation is required by a brokerwith respect to a customer who isconsidered to be an exempt foreign

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person under this paragraph (g)(1)(i).Unless it has actual knowledge orreason to know otherwise, a brokermay treat a customer as an exemptforeign person under the circumstancesdescribed in paragraph (g)(1)(i)(A)through (D) of this section. See§1.6045–1(c)(2)(ii) for reportable pro-ceeds paid to foreign persons.

(A) With respect to a sale effected atan office of a broker inside the UnitedStates, the broker may treat thecustomer as an exempt foreign personif the broker complies with the proce-dures described in paragraph (g)(3) ofthis section.

(B) With respect to a sale effected atan office of a broker outside the UnitedStates, the broker may treat thecustomer as an exempt foreign personif the broker complies with the proce-dures described in paragraph (g)(3) ofthis section or §1.6049–5(c)(2).

(C) With respect to a redemption orretirement of stock or an obligation(the interest or original issue discounton which is described in §1.6049–5(b)-(6), (7), (10), or (11)) or the dividendson which are described in §1.6042–3(b)(1)(iv)) that is effected at an officeof a broker outside the United Statesby the issuer (or its paying or transferagent), the broker may treat thecustomer as an exempt foreign personif the broker is not also acting in itscapacity as a custodian, nominee, orother agent of the payee.

(D) With respect to a sale effectedby a broker at an office of the brokereither inside or outside the UnitedStates, the broker may treat thecustomer as an exempt foreign personfor the period that those proceeds areassets blocked as described in §1.1441–2(e)(3). For purposes of this paragraph(g)(1)(i)(D) and section 3406, a pay-ment is deemed to occur in accordancewith §1.1441–2(e)(3).

* * * * * *

(2) Barter exchange. No return ofinformation is required by a barterexchange with respect to a client or amember that the barter exchange maytreat as a foreign person pursuant to theprocedures described in paragraph(g)(3) of this section.

(3) Certificate of foreign status—(i)In general. For purposes of this para-graph (g), a broker may treat acustomer as an exempt foreign personif the broker complies with the require-ments of §1.1441–1(e)(1) (dealing with

reliance by a withholding agent on abeneficial owner’s claim of foreignstatus). For purposes of this paragraph(g)(3)(i), the broker may rely on abeneficial owner withholding certificatedescribed in §1.1441–1(e)(2). For pur-poses of this paragraph (g)(3)(i), in thecase of an individual beneficial owner,the certificate shall include a certifica-tion that the beneficial owner has notbeen, and at the time the certificate isfurnished, reasonably expects not to bepresent in the United States for aperiod aggregating 183 days or moreduring the calendar year.

(ii) Applicable presumptions. Absentactual knowledge or reason to knowotherwise, the presumptions under§1.1441–1(f) shall apply in determiningthe payee’s status where the requireddocumentation is lacking, incorrect, orunreliable.

(iii) Joint owners. In the case ofamounts paid to joint owners for whicha certificate or documentation is re-quired as a condition for being exemptfrom reporting under paragraph (g)(1)-(i) of this section, a broker or barterexchange must receive from each jointowner the required certification ordocumentation. Where any one of thejoint owners has not furnished therequired certification or documentation,the transaction is not exempt fromreporting under paragraph (g)(1)(i) ofthis section.

(iv) Payee. For a determination ofpayee, see §1.1441–1(c)(3).

(v) Operating rules. For purposes ofthis paragraph (g), the provisions in§1.6049–5(c)(3) through (6) (regardingoperating rules related to the certificateof foreign status) shall apply.

(4) Effective date—(i) General rule.The provisions of this paragraph (g)apply to payments made after Decem-ber 31, 1997.

(ii) Transition rules. A payor thatholds a valid Form W–8 on a date thatis 60 days after these regulations arepublished as final regulations in theFederal Register may treat it as a validcertificate until its validity expiresunder applicable provisions as in effecton April 22, 1996.

* * * * * *

Par. 35. In §1.6049–4, paragraphs(c)(1)(ii)(A) and (c)(1)(ii)(G), as pro-posed in project number INTL–52–86,published on February 29, 1988, at 53FR 6000, are revised to read asfollows:

§1.6049–4 Return of information asto interest paid and original issuediscount includible in gross incomeafter December 31, 1982.

* * * * * *

(c) * * * (1)* * *(ii) * * *(A) Corporation. A corporation, as

defined in section 7701(a)(3), whetherdomestic or foreign, is an exemptrecipient. In addition, for purposes ofthis paragraph (c)(1), the term corpora-tion includes a partnership all of whosemembers are corporations described inthis paragraph (c)(1)(ii)(A), but only ifthe partnership files with the payor acertificate meeting the certification re-quirements set out below. Absent actualknowledge or reason to know other-wise, a payor may treat a payee as acorporation (and, therefore, as an ex-empt recipient) if one of the require-ments of paragraph (c)(1)(ii)(A)(1), (2),(3), (4), (5), or (6) of this section aremet before a payment is made.

(1) For payments other than interest,dividends, or broker proceeds, thename of the payee contains an unam-biguous expression of corporate statusthat is ‘‘Incorporated,’’ ‘‘Inc.,’’ ‘‘Cor-poration,’’ ‘‘Corp.,’’ ‘‘P.C.,’’ (but not‘‘Company’’ or ‘‘Co.’’) or contains theterm indemnity company, reinsurancecompany, or assurance company.

(2) For payments of interest, divi-dends or broker proceeds that are paidto a person with whom the payor doesnot have an account relationship, thepayor may rely on the test of paragraph(c)(1)(ii)(A)(1) of this section if thepayor also has a mailing address of thepayee in the United States.

(3) The payor has on file a corporateresolution or similar document clearlyindicating corporate status.

(4) The payor receives a Form W–9which includes an EIN and a statementfrom the payee that it is a domesticcorporation.

(5) The payor receives a withholdingcertificate described in §1.1441–1(e)-(2), that includes an employer identi-fication number and a statement fromthe payee that it is a foreign corpora-tion.

(6) The payor maintains an accountfor an entity claiming to be a corpora-tion and the account was established onor before a date that is 60 days afterthese regulations are published as finalregulations in the Federal Register and

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the name of the payee contains an un-ambiguous expression of corporate sta-tus that is ‘‘Incorporated,’’ ‘‘Inc.,’’‘‘Corporation,’’ ‘‘Corp.,’’ or ‘‘P.C.’’(but not Company or Co.), or containsthe term insurance company, indemnitycompany, reinsurance company, or as-surance company.

* * * * * *

(G) International organization. Aninternational organization and anywholly owned agency or instrumen-tality thereof are exempt recipients.The term international organizationshall have the meaning ascribed to it insection 7701(a)(18). Without requiringa certificate, a payor may treat a payeeas an international organization if thepayee is designated as an internationalorganization by executive order (pur-suant to 22 U.S.C. 288 through 288(f)).

* * * * * *

Par. 36. Section 1.6049–4 isamended by revising paragraph (d)(3)to read as follows:

* * * * * *

(d) * * *(3) Conversion into United States

dollars of amounts paid in foreigncurrency—(i) Conversion rules. Whenthe amount subject to reporting is paidin a currency other than the U.S. dollar,the amount subject to reporting underthis section shall be determined byconverting such foreign currency intoU.S. dollars on the date of payment atthe spot rate (as defined in §1.988–1(d)(1)) or pursuant to a reasonablespot rate convention. For example, awithholding agent may use a month-end spot rate or a monthly average spotrate. A spot rate convention must beused consistently with respect to allnon-dollar amounts withheld and fromyear to year. Such convention cannotbe changed without the consent of theCommissioner or delegate.

(ii) Special rule for §1.988–5(a)transactions where the payor on bothcomponents of a qualified hedgingtransaction is the same person—(A) Ingeneral. Interest or original issue dis-count on a qualified debt instrumentthat is part of a qualified hedgingtransaction under §1.988–5(a) shall becomputed for section 6049 reportingpurposes under the rules described in§1.988–5(a)(9)(ii) if—

(1) The payor on the qualified debtinstrument and the counterparty to the

§1.988–5(a) hedge are the same person;and

(2) The payee complies with therequirements of §1.988–5(a) and sonotifies its payor prior to the daterequired for filing Form 1099 asrequired by this section.

(B) Effective date. The provisions ofthis paragraph (d)(3)(ii) apply to trans-actions entered into on or after Decem-ber 31, 1997.

* * * * * *

Par. 37. Section 1.6049–5, as pro-posed to be amended in project numberINTL–52–86, published on February29, 1988, at 53 FR 6003, is amended asfollows:

1. Revising paragraphs (b) introduc-tory text and (b)(6) through (b)(8).

2 . Adding paragraphs (b)(10)through (b)(14).

3. Revising paragraphs (c) and (d).4. Removing paragraph (e) and re-

designating paragraph (j) as new para-graph (e).

5. Removing and reserving para-graph (f).

6. Revising paragraph (g).7. Removing paragraphs (h) and (i).8. Redesignating paragraph (k) as

paragraph (f) and removing the lastsentence.

9. Removing paragraph (l).The revisions and additions read as

follows:

§1.6049–5 Interest and original issuediscount subject to reporting afterDecember 31, 1982.

* * * * * *

(b) Interest excluded from reportingrequirement. The term interest or origi-nal issue discount (OID) does notinclude—

* * * * * *

(6) Amounts from sources outsidethe United States paid outside theUnited States by a non-U.S. payor or anon-U.S. middleman (as defined inparagraph (d)(2) of this section).

(7) Portfolio interest, as defined in§1.871–14(b)(1), paid with respect tobearer obligations described in section871(h)(2)(A) or 881(c)(2)(A) or withrespect to a foreign-targeted registeredobligation defined in §1.6049–5(j)(4)(as proposed in project number INTL–

52–86 (1988–1 C.B. 892)) (other thanby a U.S. middleman (as defined inparagraph (d)(1) of this section) that, asa custodian or nominee of the payee,collects the amount for, or on behalfof, the payee, regardless of whether themiddleman is also acting as agent ofthe payor).

(8) Portfolio interest, as defined in§1.871–14(c)(1), paid with respect toregistered obligations described in sec-tion 871(h)(2)(B) or 881(c)(2)(B).

* * * * * *

(10) Amounts paid outside theUnited States (other than by a U.S.middleman (as defined in paragraph(d)(1) of this section) that, as acustodian or nominee or other agent ofthe payee, collects the amount for, oron behalf of, the payee, regardless ofwhether the middleman is also actingas agent of the payor) with respect toan obligation that: has a face amount orprincipal amount of not less than$500,000; has a maturity (at issue) of183 days or less; satisfies the require-ments of sections 163(f)(2)(B)(i) and(ii)(I) (as if it were a registration-required obligation within the meaningof section 163(f)(2)(A)) and is issuedin accordance with the procedures of§1.163–5(c)(2)(i)(D); and has on itsface the following statement (or asimilar statement having the sameeffect)—‘‘By accepting this obligation,the holder represents and warrants thatit is not a United States person (otherthan an exempt recipient described insection 6049(b)(4) of the Internal Reve-nue Code and regulations thereunder)and that it is not acting for or on behalfof a United States person (other thanan exempt recipient described in sec-tion 6049(b)(4) of the Internal RevenueCode and the regulations thereunder).’’If the obligation is in registered form,it must be registered in the name of anexempt recipient described in §1.6049–4(c)(1)(ii). For purposes of this para-graph (b)(10), a middleman may treatan obligation as described in section163(f)(2)(B)(i) and (ii)(I) and the reg-ulations under that section if theobligation, or coupons detached there-from, whichever is presented for pay-ment, contains the statement describedin this paragraph (b)(10).

(11) Amounts paid with respect toan account or deposit with a U.S. orforeign branch of a domestic or foreigncorporation or partnership that is paidwith respect to an obligation described

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in paragraph (b)(11)(i) or (ii) of thissection, if the branch is engaged in thecommercial banking business; and theinterest or OID is paid outside theUnited States (other than by a U.S.middleman (as defined in paragraph(d)(1) of this section) that acts as acustodian, nominee, or other agent ofthe payee, and collects the amount for,or on behalf of, the payee, regardlessof whether the middleman is alsoacting as agent of the payor).

(i) An obligation is described in thisparagraph (b)(11)(i) if it is not inregistered form (within the meaning ofsection 163(f) and the regulations underthat section), is described in section163(f)(2)(B) and issued in accordancewith the procedures of §1.163–5(c)(2)-(i)(C) or (D), and, in the case of a U.S.branch, is part of a larger single publicoffering of securities. For purposes ofthis paragraph (b)(11)(i), a middlemanmay treat an obligation as described insection 163(f)(2)(B) if the obligation,and any detachable coupons, containsthe statement described in section163(f)(2)(B)(ii)(II) and the regulationsunder that section.

(ii) An obligation is described in thisparagraph (b)(11)(ii) if it producesincome described in section 871(i)(2)-(A); has a face amount or principalamount of not less than $500,000;satisfies the requirements of sections163(f)(2)(B)(i) and (ii)(I) (as if it werea registration-required obligation withinthe meaning of section 163(f)(2)(A))and is issued in accordance with theprocedures of §1.163–5(c)(2)(i)(C) or(D); has on its face, and on anydetachable coupons, the followingstatement (or a similar statement hav-ing the same effect)—‘‘By acceptingthis obligation, the holder representsand warrants that it is not a UnitedStates person (other than an exemptrecipient descr ibed in sect ion6049(b)(4) of the Internal RevenueCode and regulations thereunder) andthat it is not acting for or on behalf ofa United States person (other than anexempt recipient described in section6049(b)(4) of the Internal RevenueCode and the regulations thereunder).’’If the obligation is in registered form,it must be registered in the name of anexempt recipient described in §1.6049–4(c)(1)(ii). For purposes of this para-graph (b)(11)(ii), a middleman maytreat an obligation as described insections 163(f)(2)(B)(i) and (ii)(I) andthe regulations under that section if the

obligation, or any detachable coupon,contains the statement described in thisparagraph (b)(11)(ii).

(12) Amounts that the payor maytreat as paid to a beneficial owner thatis a foreign person pursuant to§1.1441–1(e)(1) and from which thepayor or middleman is either requiredto withhold tax under section 1441 orthe regulations under that section orwould be so required but for exceptionsin the regulations under section 1441(such as, for example, under §1.1441–4(dealing with effectively connected in-come) or §1.1441–6 (dealing with areduction of rate of tax under anincome tax treaty)).

(13) Amounts for the period thatthey represent an asset blocked asdescribed in §1.1441–2(e)(3)). Paymentof such amounts, including interest thatis past due and OID on obligations thatmature on or before the date that theassets are no longer blocked, is deemedto occur in accordance with the rules of§1.1441–2(e)(3).

(14) Amounts that are from sourcesoutside the United States or originalissue discount on any obligation pay-able less than 6 months from the dateof original issue described in section871(g)(1)(B)(i) and that a payor ormiddleman may treat as paid to abeneficial owner that is a foreignperson (because such person has fur-nished a certificate or documentaryevidence as required under paragraph(c) of this section).

(c) Treatment of payee as a foreignperson—(1) On-shore accounts or pay-ments inside the U.S. A payor ormiddleman making a payment withrespect to an on-shore account, asdefined in paragraph (d)(3) of thissection, or making a payment inside theUnited States, as defined in paragraph(e) of this section, may treat thepayment as made to a beneficial ownerthat is a foreign person if it complieswith the requirements under §1.1441–1(e)(1) (dealing with reliance by awithholding agent on a beneficialowner’s claim of foreign status). Forpurposes of this section, beneficialowner shall be as defined in §1.1441–1(c)(6)(ii)(A).

(2) Payments made outside theUnited States with respect to off-shoreaccounts—(i) In general. In the case ofa payment made outside the UnitedStates with respect to an offshoreaccount, as defined in paragraph (d)(3)of this section, a payor or middleman

may treat a payment as made to abeneficial owner (as described in§1.1441–1(b)(6)) that is a foreign per-son if it complies with the proceduresdescribed in paragraph (c)(1) of thissection or complies with the documen-tary evidence procedures described inparagraph (c)(2)(ii) of this section.

(ii) Documentary evidence. A payoror middleman complies with the docu-mentary evidence procedures if, priorto the payment, the payor or middle-man has established procedures toobtain, review, and maintain documen-tary evidence sufficient to establish theidentity of the beneficial owner and thestatus of that person as a foreignperson; and the payor or middlemanobtains, reviews, and maintains suchdocumentary evidence in accordancewith those procedures. A payor ormiddleman maintains the documentsreviewed by retaining the original,certified copy, or a photocopy of thedocuments reviewed and noting in itsrecords the date on which and bywhom the document was received andreviewed.

(3) Presumptions. The presumptionsof §1.1441–1(f) shall apply for deter-mining the payee’s status where therequired documentation is lacking, in-correct, or unreliable.

(4) Validity of certificates and docu-mentary evidence. For rules regardingthe period of validity of a withholdingcertificate, see §1.1441–1(e)(4)(ii).Documentary evidence or a certificatethat does not include a taxpayer identi-fying number shall be valid for aperiod of three years from the datereceived by the payor or middleman.The three-year validity period shallstart from the date that the certificate issigned (or the documentation is re-ceived) until the last day of the thirdsucceeding calendar year. For example,a withholding certificate signed onSeptember 10, 1998, remains validthrough December 31, 2001. A benefi-cial owner that becomes a U.S. personmust, however, inform a payor ormiddleman within 30 days of change ofstatus.

(5) Retention of withholding certifi-cate. A payor or middleman mustretain each withholding certificate, anyapplicable documentary evidence, andany information obtained in lieu of thewithholding certificate as long as itmay be relevant to the determination ofthe payor’s or middleman’s liabilityunder the reporting provisions of thischapter and related provisions.

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(6) Standard of knowledge. A payoror middleman may not rely on a certi-ficate or documentary evidence de-scribed in paragraph (c)(1) or (c)(2)(ii)of this section if it has actual knowl-edge that the representations madetherein or on the basis thereof are in-correct or if any of the required in-formation or certifications described in§1.1441–1(f)(1)(ii) are lacking from thecertificate or documentary evidence.

(7) Joint owners. In the case ofamounts paid to joint owners and forwhich a certificate or documentation isrequired as a condition for beingexempt from reporting under this para-graph (c), a payor or middleman mustreceive from each joint owner therequired certification or documentation.Where any one of the joint owners hasnot furnished the required certificationor documentation, the payment is notexempt from reporting under this para-graph (c).

(8) Payee. For determination ofpayee, see §1.1441–1(c)(3).

(d) Definitions—(1) Payor or mid-dleman and U.S. payor or U.S. middle-man. For purposes of this section, theterm payor means any person who isrequired to make an information returnwith respect to any reportable payment,as described in section 3406(b) (includ-ing any middleman). For purposes ofthis section, the term middleman meansany person whose legal relationship tothe payor or payee (including any othermiddleman) is of a kind described in§1.6049–4(f)(4) (as proposed in projectnumber INTL–52–86 published in1988–1 C.B. 892). Thus, a person who,from within the United States, forwardsan interest coupon or discount obliga-tion on behalf of a payee for presenta-tion, collection or payment outside theUnited States is also a middleman forpurposes of this section (but thetransfer, although subject to informa-tion reporting under this section, doesnot make the payment subject tobackup withholding under section3406). For purposes of this section, theterm U.S. payor or U.S. middlemanmeans a payor or middleman that is—

(i) A person described in section7701(a)(30);

(ii) The government of the UnitedStates, the government of any State orpolitical subdivision thereof (or anyagency or instrumentality of any of theforegoing);

(iii) A controlled foreign corporationwithin the meaning of section 957(a);or

(iv) A foreign person 50 percent ormore of the gross income of which,from all sources for the three-yearperiod ending with the close of itstaxable year preceding the collection orpayment (or such part of such period asthe person has been in existence), waseffectively connected with the conductof trade or business within the UnitedStates.

(2) Non-U.S. payor or non-U.S.middleman. A non-U.S. payor or a non-U.S. middleman is a payor or middle-man that is not a U.S. payor or a U.S.middleman.

(3) On-shore and off-shore accounts.An on-shore account means an accountmaintained at an office or branch of apayor or middleman in the UnitedStates. An offshore account means anaccount that is not an on-shore account.

* * * * * *

(g) Effective date—(1) General rule.The provisions of paragraphs (b)(6)through (b)(14), (c), (d), and (e) of thissection apply to payments made afterDecember 31, 1997.

(2) Transition rules. A payor thatholds a valid Form W–8 on a date thatis 60 days after these regulations arepublished as final regulations in theFederal Register may treat it as a validcertificate until its validity expiresunder applicable provisions as in effecton April 22, 1996.

Par. 38. Section 1.6050N–1 isamended by:

1. Revising the section heading.2. Redesignating paragraphs (c) and

(d) as paragraphs (d) and (e),respectively.

3. Adding a new paragraph (c).4. Revising newly designated para-

graph (e).The addition and revisions read as

follows:

§1.6050N–1 Statement to recipients ofroyalties paid after December 31,1986.

* * * * * *

(c) Exempted foreign-related items—(1) In general. No return shall berequired under paragraph (a) of thissection for payments of the itemsdescribed in paragraphs (c)(1)(i)through (iii) of this section.

(i) Returns of information are notrequired for payments of royalties that

a payor or middleman, as defined inparagraph (c)(2)(i) of this section, maytreat as made to a beneficial owner thatis a foreign person pursuant to§1.1441–1(e)(1) and from which thepayor or middleman is either requiredto withhold tax under section 1441 orthe regulations under that section orwould be so required but for exceptionsin the regulations under section 1441(such as, for example, under §1.1441–4(dealing with effectively connected in-come) or §1.1441–6 (dealing with areduction of rate of tax under an in-come tax treaty)). See §1.1441–1(e)-(4)(i) in the case of payments to jointowners.

(ii) Returns of information are notrequired for payments of royalties fromsources outside the United States madeoutside the United States by a non-U.S.payor or non-U.S. middleman (as de-fined in paragraph (c)(2)(ii) of thissection). See §1.6049–5(e) for circum-stances in which a payment is consid-ered to be made outside the UnitedStates.

(iii) Returns of information are notrequired for payments of royalties fromsources outside the United States that apayor or middleman may treat as paidto a beneficial owner that is a foreignperson (because such person has fur-nished a certificate described in§1.6049–5(c)(1)). For purposes of thisparagraph (c)(1)(iii), the presumptionsin §1.6049–5(c)(3) through (6) (regard-ing operating rules related to thecertificate of foreign status) shall apply.

(2) Definitions—(i) Payor and mid-dleman. For purposes of this section,the term payor means any person whois required to make an informationreturn with respect to any reportablepayment, as described in section3406(b), including any middleman. Forpurposes of this section, the termmiddleman means any person whoselegal relationship to the payor or payee(including any other middleman) is of akind described in §1.6049–4(f)(4) (asproposed in project number INTL–52–86 published in 1988–1 C.B. 892).

(ii) Non-U.S. payor and non-U.S.middleman. The term non-U.S. payoror non-U.S. middleman means a payoror middleman other than—

(A) A person described in section7701(a)(30);

(B) The government of the UnitedStates, the government of any State orpolitical subdivision thereof (or anyagency or instrumentality of any of theforegoing);

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(C) A controlled foreign corporationwithin the meaning of section 957(a);or

(D) A foreign person 50 percent ormore of the gross income of which,from all sources for the three-yearperiod ending with the close of itstaxable year preceding the collection orpayment (or such part of such period asthe person has been in existence), waseffectively connected with the conductof trade or business within the UnitedStates.

(iii) Applicable presumptions. Thepresumptions of §1.1441–1(f) shall ap-ply for determining the payee’s statuswhere the required documentation islacking, incorrect, or unreliable.

(iv) Joint owners. In the case ofamounts paid to joint owners and re-quiring a certificate or documentationas a condition for being exempt fromreporting under this paragraph (c), thepayor or middleman must receive fromeach joint owner the required certifica-tion. Where any one of the jointowners has not furnished the requiredcertification, the payment is not exemptfrom reporting under this section.

(v) Payee. For determination ofpayee, see §1.1441–1(c)(3).

* * * * * *

(e) Effective date—(1) General rule.The provisions of paragraph (c) of thissection apply to payments made afterDecember 31, 1997.

(2) Transition rules. A payor thatholds a valid Form W–8 on a date thatis 60 days after these regulations arepublished as final regulations in theFederal Register may treat it as a validcertificate until its validity expiresunder applicable provisions as in effecton April 22, 1996.

PART 31—EMPLOYMENT TAXESAND COLLECTION OF INCOMETAX AT SOURCE

Par. 39. The authority for part 31continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 40. Section 31.3401(a)(6)–1 is

amended by:1. Revising the section heading.2. Revising the heading and first

sentence of paragraph (e).3. Adding paragraph (f).4. Removing the authority citation at

the end of the section.

The addition and revisions read asfollows:

§31.3401(a)(6)–1 Remuneration forservices of nonresident alienindividuals.

* * * * * *

(e) Exemption from income tax forremuneration paid for services per-formed before January 1, 1998. Re-muneration paid for services performedwithin the United States by a nonresi-dent alien individual before January 1,1998 is excepted from wages and henceis not subject to withholding if suchremuneration is, or will be, exemptfrom income tax imposed by chapter 1of the Internal Revenue Code by reasonof a provision of the Internal RevenueCode or an income tax convention towhich the United States is a party.* * *

(f) Exemption from income tax forremuneration paid for services per-formed after December 31, 1997. Re-muneration paid for services performedwithin the United States by a nonresi-dent alien individual after December31, 1997 is excepted from wages andhence is not subject to withholding ifsuch remuneration is, or will be,exempt from the income tax imposedby chapter 1 of the Internal RevenueCode by reason of a provision of theInternal Revenue Code or an incometax convention to which the UnitedStates is a party. An employer may relyon a claim that the employee is entitledto an exemption from tax if it complieswith the requirements of §1.1441–1(e)(1) of this chapter (for a claimbased on a provision of the InternalRevenue Code) or §1.1441–4(b)(2) ofthis chapter (for a claim based on anincome tax convention).

Par. 41. In §31.3406(d)–3, paragraph(c) is revised to read as follows:

§31.3406(d)–3 Special 30-day rulesfor certain reportable payments.

* * * * * *

(c) Application to foreign payees.The rules of paragraphs (a) and (b) ofthis section also apply to a payee fromwhom the payor is required to obtain aForm W–8 (or an acceptable substitute)or is to obtain other evidence offoreign status (pursuant to relevantregulations under an applicable InternalRevenue Code section), provided the

payee represents orally or otherwise,before or at the time of the acquisitionor sale of the instrument or theestablishment of the account, that thepayee is not a United States citizen orresident. In the case of a payment madeafter December 31, 1997, to a personwith respect to whom indicia of foreignownership exists, as described in§1.1441–1(f)(2)(ii)(A) of this chapter,at any time before expiration of the 30-day grace period described in thisparagraph (c), the procedures describedin that section shall apply, includingthe special grace period. The 30-dayand 90-day grace periods shall runconcurrently. Therefore, for example, ifindicia of foreign ownership were pro-vided on the 28th day after a paymentis credited to an account, the 30-daygrace period would convert to a 90-daygrace pe r iod unde r §1 .1441–1(f)(2)(ii)(A) of this chapter, of which28 days would have already elapsed.

Par. 42. In §31.3406(g)–1, paragraph(e) is added to read as follows:

§31.3406(g)–1 Exception for paymentsto certain payees and certain otherpayments.

* * * * * *

(e) Certain reportable paymentsmade outside the United States byforeign persons, foreign offices ofUnited States banks and brokers, andothers. A payor of a reportable pay-ment or transfer is not required tobackup withhold under section 3406 ifsuch reportable payment or transfer isof a kind that is exempt from reportingif documentary evidence described in§1.6049–5(2)(ii) of this chapter isprovided to the payor, unless the payorhas actual knowledge that the payee isa United States person. In addition,amounts paid with respect to notionalprincipal contracts described in§1.6041–1(d)(5) of this chapter are notsubject to backup withholding if theyare paid outside the United States,unless the payor has actual knowledgethat the payee is a United Statesperson.

Par. 43. Section 31.3406(h)–2 isamended by:

1. Removing the heading of para-graph (e)(1).

2. Removing the paragraph designa-tion (e)(1).

3. Removing paragraph (e)(2).

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4. Revising paragraph (a)(3)(i) toread as follows:

§31.3406(h)–2 Special rules.

(a) * * *(3) Joint foreign payees—(i) In gen-

eral. If the relevant payee listed on anaccount or instrument provides thepenalties of perjury statement regardingits foreign status, withholding undersection 3406 applies unless—

(A) Every joint payee provides thestatement regarding foreign status (un-der the provisions of chapter 3 andchapter 61 of the Internal RevenueCode and the regulations under thoseprovisions); or

(B) Any one of the joint ownerswho has not established foreign statusprovides a taxpayer identifying numberto the payor in the manner required in§31.3406(d)–1.

* * * * * *

Par. 44. Section 31.6413(a)–3 isamended as follows:

1. In paragraph (a)(1)(iii), the lan-guage ‘‘(including the certification re-lating to foreign status described in§1.6049–5(b)(2)(iv) of this chapter or§1.6045–1(g)(1) of this chapter)’’ isremoved and ‘‘(including the documen-tation required under §§1.1441–1(e)(1),1.6045–1(g)(3), and 1.6049–5(c) of thischapter)’’ is added in its place.

2. Paragraph (a)(1)(ii) is amended byremoving ‘‘or’’ at the end of theparagraph and paragraph (a)(1)(iii) isamended by removing the period at theend of the paragraph and adding ‘‘;or’’ in its place.

3. Paragraph (a)(1)(iv) is added.4. Paragraphs (a)(2) and (b)(2) are

revised.The addition and revisions read as

follows:

§31.6413(a)–3 Repayment by payor oftax erroneously collected from payee.

(a) * * * (1) * * *(iv) The amount is withheld because

a payor imposed backup withholdingon a payment made to a person becausethe payee failed to furnish the requireddocumentation described in §§1.1441–1(e)(1), 1.6045–1(g)(3), and 1.6049–5(c) of this chapter and the payeesubsequently furnishes, completes, or

corrects the required documentation.The required documentation must befurnished, completed, or corrected priorto the end of the calendar year inwhich the payment is made and prior tothe time the payor furnishes a Form1099 to the payee with respect to thepayment for which the withholdingerroneously occurred.

(2) For purposes of paragraph (a)(1)of this section (other than erroneouswithholding occurring under the cir-cumstances described in paragraph(a)(1)(iv) of this section), if a payor orbroker withholds because the payor orbroker has not received a taxpayeridentifying number or required cer-tification and the payee subsequentlyprovides a taxpayer identifying numberor a required certification to the payor,the payor or broker may not refund theamount to the payee.

(b) * * *(2) Adjustment after the deposit of

the tax—(i) In general. Except asprovided in paragraph (b)(2)(ii) of thissection, if the amount erroneouslywithheld has been deposited prior tothe time that the refund is made to thepayee, the payor or broker may adjustany subsequent deposit of the taxcollected under chapter 24 of theInternal Revenue Code that the payoror broker is required to make in theamount of the tax that has beenrefunded to the payee.

(ii) Erroneous withholding from apayee that is a foreign person. Where apayor withholds in error from a payeethat is a nonresident alien or foreignperson, as described in paragraph (b)(1)of this section, the payor may refundsome or all of the amount subject tobackup withholding under section 3406.A refund may be paid in accordancewith the requirements of this paragraph(b)(2)(ii) where the required documen-tation is furnished, completed, or cor-rected prior to the end of the calendaryear in which the payment is made andprior to the time the payor furnishes aForm 1099 to the payee with respect tothe payment for which the withholdingerroneously occurred. The amount ofthe refund will be the amount er-roneously withheld less the amount oftax required to be withheld, if any,under chapter 3 of the Internal RevenueCode. With respect to the amount ofthe payment to the foreign person andthe amount of tax required to be with-held under chapter 3 of the InternalRevenue Code, returns must be made

in accordance with the requirements of§1.1461–1(b) and (c) of this chapter.

PART 35a—TEMPORARYEMPLOYMENT TAXREGULATIONS UNDER THEINTEREST AND DIVIDEND TAXCOMPLIANCE ACT OF 1983

Par. 45. The authority for part 35a isamended by removing the entries for§35a.9999–3, §35a.9999–3A and§35a.9999–4T to read in part asfollows:

Authority: 26 U.S.C. 7805 * * *

§§35a.9999–1 through 35a.9999–3A,and 35a.9999–4T [Removed]

Par. 46. Sections 35a.9999–1 through35a.9999–3A, and 35a.9999–4T areremoved.

PART 301—PROCEDURE ANDADMINISTRATION

Par. 47. The authority citation forpart 301 continues to read in part asfollows:

Authority: 26 U.S.C. 7805. * * *Par. 48. Section 301.6109–1 as pro-

posed to be amended in project numberINTL–0024–94, published on June 8,1995, at 60 FR 30214, is amended asfollows:

1. Paragraph (b)(2)(iii) is amendedby removing ‘‘and’’ at the end of theparagraph.

2. Paragraph (b)(2)(iv) is revised.3. Paragraph (b)(2)(v) is added.4. Paragraph (c) is revised.The revisions and additions read as

follows:

§301.6109–1 Identifying numbers.

* * * * * *

(b) * * *(2) * * *(iv) A foreign person that makes a

return of tax under this title (includingincome, estate, and gift tax returns) butexcluding information returns, state-ments, or documents;

(v) A foreign person that furnishes awithholding certificate described in§1.1441–1(e)(2) or (e)(3) of this chap-ter to the extent required under§1.1441–1(e)(4)(vii) of this chapter.

(c) Requirement to furnish another’snumber. Every person required under

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this title to make a return, statement, orother document must furnish such tax-payer identifying numbers of other U.S.persons and foreign persons that aredescribed in paragraph (b)(2)(i), (ii),(iii), or (v) of this section as requiredby the forms and the accompanyinginstructions. The taxpayer identifyingnumber of any person furnishing awithholding certificate referred to inparagraph (b)(2)(v) of this section shallalso be furnished if it is actually knownto the person making a return, state-ment, or other document described inthis paragraph (c). If the person makingthe return, statement, or other docu-ment does not know the taxpayeridentifying number of the other person,and such other person is one that isdescribed in paragraph (b)(2)(i), (ii),(iii), or (v) of this section, such personmust request the other person’s num-ber. The request should state that theidentifying number is required to befurnished under authority of law. Whenthe person making the return, state-ment, or other document does not knowthe number of the other person, and hascomplied with the request provision ofthis paragraph (c), such person mustsign an affidavit on the transmittaldocument forwarding such returns,statements, or other documents to theInternal Revenue Service, so stating. Aperson required to file a taxpayeridentifying number shall correct anyerrors in such filing when such per-son’s attention has been drawn to them.

* * * * * *

Par. 49. Section 301.6114–1 isamended by:

1. Revising paragraph (a)(1)(ii).2. Revising paragraph (b)(4)(ii) in-

troductory text, and adding paragraphs(b)(4)(ii)(C) and (b)(4)(ii)(D)

3. Revising paragraphs (c)(1) and(d)(4)(v):

The revisions read as follows:

§301.6114–1 Treaty-based returnpositions.

(a) * * * (1) * * *(ii) If a return of tax would not

otherwise be required to be filed, areturn must nevertheless be filed forpurposes of making the disclosurerequired by this section. For thispurpose, such return need include onlythe taxpayer’s name, address, taxpayeridentifying number, and be signed

under the penalties of perjury (as wellas the subject disclosure). Also, thetaxpayer’s taxable year shall be deemedto be the calendar year (unless thetaxpayer has previously established, ortimely chooses for this purpose toestablish, a different taxable year). Inthe case of a disclosable return positionrelating solely to income subject towithholding (as defined in §1.1441–2(a) of this chapter), however, thestatement required to be filed inparagraph (d) of this section mustinstead be filed at times and inaccordance with procedures to be pub-lished by the Internal Revenue Service.

* * * * * *

(b) * * *(4) * * *(ii) A treaty exempts from tax, or

reduces the rate of tax on, fixed ordeterminable annual or periodical in-come subject to withholding undersections 1441 or 1442 that a foreignperson receives from a U.S. person, butonly if described in paragraphs (b)(4)-(ii)(A) and (B) of this section, orparagraph (b)(4)(ii)(C) or (D) of thissection.

* * * * * *

(C) For payments made after De-cember 31, 1997, with respect to atreaty that contains a limitation onbenefits article, that—

(1) The treaty exempts from tax, orreduces the rate of tax on incomesubject to withholding (as defined in§1.1441–2(a) of this chapter) that ispaid to a foreign person (other than aState, including a political subdivisionor local authority) that is the beneficialowner of the income and the beneficialowner is related to the person obligatedto pay the income within the meaningof sections 267(b) and 707(b), and theincome exceeds $500,000; and

(2) A foreign person (other than anindividual or a State, including apolitical subdivision or local authority)meets the requirements of the limitationon benefits article of the treaty; or

(D) For payments made after De-cember 31, 1997, with respect to atreaty that imposes any other conditionsfor the entitlement of treaty benefits,for example as a part of the interest,dividends, or royalty article, that suchconditions are met;

* * * * * *

(c) Reporting requirement waived.* * *

(1) Notwithstanding paragraph (b)(4)or (5) of this section, that a treaty hasreduced the rate of withholding taxotherwise applicable to a particulartype of fixed or determinable annual orperiodical income subject to withhold-ing under section 1441 or 1442, suchas dividends, interest, rents, or royaltiesto the extent such income is bene-ficially owned by an individual or aState (including a political subdivisionor local authority);

* * * * * *

(d) * * * (4) * * * (v) The provision(s) of the limitation

on benefits article (if any) in the treatythat the taxpayer relies upon to meetthe requirements of that article and astatement of the relevant facts insupport of the taxpayer’s claim.

* * * * * *

Par. 50. Section 301.6402–3 isamended as follows:

1. Paragraph (e) is revised as setforth below.

2. Removing the OMB parentheticaland the authority citation at the end ofthe section.

§301.6402–3 Special rules applicableto income tax.

* * * * * *

(e) In the case of a nonresident alienindividual or foreign corporation, theappropriate income tax return on whichthe claim for refund or credit is mademust contain the tax identificationnumber of the taxpayer required pur-suant to section 6109 and the entireamount of income of the taxpayersubject to tax, even if the tax liabilityfor that income was fully satisfied atsource through withholding under chap-ter 3 of the Internal Revenue Code.Also, if the overpayment of tax resultedfrom the withholding of tax at sourceunder chapter 3 of the Internal RevenueCode, a copy of the Form 1042–Srequired to be provided to the benefi-cial owner pursuant to §1.1461–1(c)(1)-(i) of this chapter must be attached tothe return. For purposes of claiming arefund, the Form 1042–S must includethe taxpayer identifying number of thebeneficial owner even if not otherwise

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required. No claim of refund or creditunder chapter 65 may be made by thetaxpayer for any amount that thewithholding agent has repaid to thetaxpayer pursuant to §1.1461–2(a)(2) ofthis chapter or that was subject to aset-off pursuant to §1.1461–2(a)(3) ofthis chapter. Upon request, a taxpayermust also submit such documentationas the Commissioner (or delegate), theDistrict Director, or the Assistant Com-missioner (International), may requireestablishing that the taxpayer is thebeneficial owner of the income forwhich a claim of refund or credit isbeing made.

PART 502—[REMOVED]

Par. 51. Part 502 is removed.

PART 503—[REMOVED]

Par. 52. Part 503 is removed.

PART 509—[AMENDED]

Par. 53. The authority citation forpart 509 is revised and the authoritycitation for ‘‘Subpart—General IncomeTax’’ removed, to read as follows:

Authority: 26 U.S.C. 62, 3791 and7805.

Par. 54. Part 509 is amended asfollows:

1. Subpart—Withholding of Taxconsisting of §§509.1 through 509.10 isremoved.

2. In §509.103, paragraph (e) isremoved and reserved.

3. In §509.117, paragraph (a) isremoved and reserved.

4. Sections 509.119 and 509.122 areremoved.

PART 513—[AMENDED]

Par. 55. The authority citation forpart 513 is revised to read as follows:

Authority: 26 U.S.C. 62.Par. 56. Part 513 is amended as

follows:1. Section 513.1 is removed.2. Section 513.2 is amended as

follows:a. Paragraphs (a)(1) and (a)(2) are

removed and reserved.b. Paragraph (a)(4) is removed.c. Paragraph (b) is removed and

reserved.

d. Paragraphs (c) and (d) areremoved.

3. Section 513.3 is amended asfollows:

a. Paragraph (a)(1) is removed andreserved.

b. Paragraphs (b) and (c) areremoved.

4. Section 513.4 is amended asfollows:

a. Paragraph (a) is removed andreserved.

b. Paragraphs (c) and (d) areremoved.

5. Section 513.5 is amended asfollows:

a. Paragraph (a) is removed andreserved.

b. Paragraphs (c) and (d) areremoved.

PART 514—[AMENDED]

Par. 57. The authority citation forpart 514 is revised to read as follows:

Authority: 26 U.S.C. 7805.Par. 58. Part 514 is amended as

follows:1. The undesignated centerheading

preceding §514.1 and §§514.1 through514.10 are removed.

2. Sections 514.20 through 514.21are removed.

3. In §514.22, paragraph (c) isremoved.

4. Sections 514.23 through 514.32are removed.

5. Sections 514.101 through 514.117are removed.

PART 516—[REMOVED]

Par. 59. Part 516 is removed.

PART 517—[REMOVED]

Par. 60. Part 517 is removed.

PART 520—[REMOVED]

Par. 61. Part 520 is removed.

PART 521—[AMENDED]

Par. 62. The authority citation forpart 521 is revised to read as follows:

Authority: 26 U.S.C. 62, 143, 144,211, and 231.

Par. 63. Part 521 is amended asfollows:

1. Subpart—Withholding of Taxconsisting of §§521.1 through 521.8 isremoved.

2. In §521.103, paragraph (d) isremoved and reserved.

Margaret Milner Richardson,Commissioner of Internal Revenue.

(Filed by the Office of the Federal Register onApril 15, 1996, 8:45 a.m., and published in theissue of the Federal Register for April 22,1996, 61 F.R. 17614)

Correction of 1995 Instructions forSchedule SSA (Form 5500), AnnualRegistration Statement IdentiyfingSeparated Participants With DeferredVested Benefits

Announcement 96–38

The Schedule SSA (Form 5500)instructions for when to file for singleemployer plans, incorrectly states that aseparated plan participant with deferredvested benefits must be reported nolater than the due date (includingextensions) of the Schedule SSA filedfor the plan year during which theseparation occurred.

The instructions should state that aseparated plan participant with deferredvested benefits must be reported nolater than the due date (includingextensions) of the Schedule SSA filedfor the plan year following the planyear in which the separation occured.

Deletions from Cumulative List ofOrganizations Contributions to WhichAre Deductible Under Section 170 ofthe Code

Announcement 96–39

The name of an organization that nolonger qualifies as an organizationdescribed in section 170(c)(2) of theInternal Revenue Code of 1986 is listedbelow.

Generally, the Service will not dis-allow deductions for contributionsmade to a listed organization on orbefore the date of announcement in theInternal Revenue Bulletin that an orga-nization no longer qualifies. However,the Service is not precluded fromdisallowing a deduction for any contri-butions made after an organizationceases to qualify under section170(c)(2) if the organization has not

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timely filed a suit for declaratoryjudgment under section 7428 and if thecontributor (1) had knowledge of therevocation of the ruling or determina-tion letter, (2) was aware that suchrevocation was imminent, or (3) was inpart responsible for or was aware ofthe activities or omissions of theorganization that brought about thisrevocation.

If on the other hand a suit fordeclaratory judgment has been timelyfiled, contributions from individualsand organizations described in section170(c)(2) that are otherwise allowablewill continue to be deductible. Protec-tion under section 7428(c) would beginon (DATE) 1996, and would end onthe date the court first determines thatthe organization is not described insection 170(c)(2) as more particularly

set forth in section 7428(c)(1). Forindividual contributors, the maximumdeduction protected is $1,000, with ahusband and wife treated as onecontributor. This benefit is not ex-tended to any individual who wasresponsible, in whole or in part, for theacts or omissions of the organizationthat were the basis for revocation.

Families for ChildrenGolden Valley, MN

Correction of Errors in TD 8653,1996–12 I.R.B. 4

Announcement 96–40

TD 8653 was published in the

Federal Register on January 8, 1996(61 Fed. Reg. 517), and corrected onMarch 21, 1996 (61 Fed. Reg. 11547).When reprinted in I.R.B. 1996–12 onMarch 18, 1996, the document con-tained the following typographical er-rors unrelated to the March 21, 1996,correction: Section 1.1221–2(g)(6)(v)of the Income Tax Regulations, asreprinted, contains references to ‘‘May8, 1996’’. The correct date, whichappears in the Federal Register, is‘‘May 7, 1996’’. These corrections(and the correction reflected in theFederal Register on March 21, 1996)will appear in TD 8653 when it isrepublished in Cumulative Bulletin1996–1.

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Definition of TermsRevenue rulings and revenue proce-dures (hereinafter referred to as ‘‘rul-ings’’) that have an effect on previousrulings use the following defined termsto describe the effect:

Amplified describes a situation whereno change is being made in a priorpublished position, but the prior posi-tion is being extended to apply to avariation of the fact situation set forththerein. Thus, if an earlier ruling heldthat a principle applied to A, and thenew ruling holds that the same princi-ple also applies to B, the earlier rulingis amplified. (Compare with modified,below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position ina prior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previouslypublished ruling and points out anessential difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A butnot to B, and the new ruling holds thatit applies to both A and B, the prior

ruling is modified because it corrects apublished position. (Compare with am-plified and clarified, above).

Obsoleted describes a previouslypublished ruling that is not considereddeterminative with respect to futuretransactions. This term is most com-monly used in a ruling that listspreviously published rulings that areobsoleted because of changes in law orregulations. A ruling may also beobsoleted because the substance hasbeen included in regulations subse-quently adopted.

Revoked describes situations wherethe position in the previously publishedruling is not correct and the correctposition is being stated in the newruling.

Superseded describes a situationwhere the new ruling does nothingmore than restate the substance andsituation of a previously publishedruling (or rulings). Thus, the term isused to republish under the 1986 Codeand regulations the same position pub-lished under the 1939 Code and regula-tions. The term is also used when it isdesired to republish in a single ruling aseries of situations, names, etc., thatwere previously published over aperiod of time in separate rulings.

If the new ruling does more thanrestate the substance of a prior ruling, acombination of terms is used. Forexample, modified and superseded de-scribes a situation where the substanceof a previously published ruling isbeing changed in part and is continuedwithout change in part and it is desiredto restate the valid portion of thepreviously published ruling in a newruling that is self contained. In thiscase the previously published ruling isfirst modified and then, as modified, issuperseded.

Supplemented is used in situations inwhich a list, such as a list of the namesof countries, is published in a rulingand that list is expanded by addingfurther names in subsequent rulings.After the original ruling has beensupplemented several times, a newruling may be published that includesthe list in the original ruling and theadditions, and supersedes all priorrulings in the series.

Suspended is used in rare situationsto show that the previous publishedrulings will not be applied pendingsome future action such as the issuanceof new or amended regulations, theoutcome of cases in litigation, or theoutcome of a Service study.

AbbreviationsThe following abbreviations in current use andformerly used will appear in material publishedin the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C.—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.

E.O.—Executive Order.ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contribution Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign Corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—GrantorIC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.

PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statements of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.

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Numerical Finding List1

Bulletins 1996–1 through 1996–18

Announcements:

96–1, 1996–2 I.R.B. 5796–2, 1996–2 I.R.B. 5796–3, 1996–2 I.R.B. 5796–4, 1996–3 I.R.B. 5096–5, 1996–4 I.R.B. 9996–6, 1996–5 I.R.B. 4396–7, 1996–5 I.R.B. 4496–8, 1996–7 I.R.B. 5696–9, 1996–8 I.R.B. 3096–10, 1996–8 I.R.B. 3096–11, 1996–9 I.R.B. 1196–12, 1996–11 I.R.B. 3096–13, 1996–12 I.R.B. 3396–14, 1996–12 I.R.B. 3596–15, 1996–11 I.R.B. 996–16, 1996–13 I.R.B. 2296–17, 1996–13 I.R.B. 2296–18, 1996–15 I.R.B. 1596–19, 1996–15 I.R.B. 1596–20, 1996–15 I.R.B. 1596–21, 1996–15 I.R.B. 1596–22, 1996–15 I.R.B. 1696–23, 1996–18 I.R.B. 796–24, 1996–16 I.R.B. 3596–25, 1996–17 I.R.B. 1396–26, 1996–17 I.R.B. 1396–27, 1996–17 I.R.B. 1696–28, 1996–17 I.R.B. 1696–29, 1996–17 I.R.B. 1796–30, 1996–17 I.R.B. 1796–31, 1996–17 I.R.B. 1896–32, 1996–17 I.R.B. 1896–33, 1996–18 I.R.B. 1296–34, 1996–18 I.R.B. 1396–35, 1996–18 I.R.B. 1396–36, 1996–18 I.R.B. 1396–37, 1996–18 I.R.B. 14

Delegations Orders:

232 (Rev. 2), 1996–7 I.R.B. 49239 (Rev. 1), 1996–7 I.R.B. 49

Notices:

96–2, 1996–2 I.R.B. 1596–1, 1996–3 I.R.B. 3096–4, 1996–4 I.R.B. 6996–5, 1996–6 I.R.B. 2296–6, 1996–5 I.R.B. 2796–7, 1996–6 I.R.B. 2296–8, 1996–6 I.R.B. 2396–9, 1996–6 I.R.B. 2696–10, 1996–7 I.R.B. 4796–11, 1996–8 I.R.B. 1996–12, 1996–10 I.R.B. 2996–13, 1996–10 I.R.B. 29

See footnote at the end of list.

Notices—Continued

96–14, 1996–12 I.R.B. 1196–15, 1996–13 I.R.B. 1996–16, 1996–13 I.R.B. 2096–17, 1996–13 I.R.B. 2096–18, 1996–14 I.R.B. 2796–19, 1996–14 I.R.B. 2896–20, 1996–14 I.R.B. 3096–21, 1996–14 I.R.B. 3096–22, 1996–14 I.R.B. 3096–23, 1996–16 I.R.B. 2396–24, 1996–16 I.R.B. 2396–25, 1996–17 I.R.B. 1196–26, 1996–18 I.R.B. 496–27, 1996–18 I.R.B. 4

Proposed Regulations:

DL–1–95, 1996–6 I.R.B. 28EE–20–95, 1996–5 I.R.B. 15EE–34–95, 1996–3 I.R.B. 49EE–35–95, 1996–5 I.R.B. 19EE–53–95, 1996–5 I.R.B. 23EE–55–95, 1996–12 I.R.B. 12EE–106–82, 1996–10 I.R.B. 31EE–142–87, 1996–12 I.R.B. 13EE–148–81, 1996–11 I.R.B. 29IA–3–94, 1996–17 I.R.B. 12IA–33–95, 1996–4 I.R.B. 99IA–41–93, 1996–11 I.R.B. 29INTL–3–95, 1996–6 I.R.B. 29INTL–9–95, 1996–5 I.R.B. 25INTL–54–95, 1996–14 I.R.B. 39PS–2–95, 1996–7 I.R.B. 50PS–4–96, 1996–18 I.R.B. 5PS–6–95, 1996–16 I.R.B. 27

Revenue Procedures:

96–1, 1996–1 I.R.B. 896–2, 1996–1 I.R.B. 6096–3, 1996–1 I.R.B. 8296–4, 1996–1 I.R.B. 9496–5, 1996–1 I.R.B. 12996–6, 1996–1 I.R.B. 15196–7, 1996–1 I.R.B. 18596–8, 1996–1 I.R.B. 18796–8A, 1996–9 I.R.B. 1096–9, 1996–2 I.R.B. 1596–10, 1996–2 I.R.B. 1796–11, 1996–2 I.R.B. 1896–12, 1996–3 I.R.B. 3096–13, 1996–3 I.R.B. 3196–14, 1996–3 I.R.B. 4196–15, 1996–3 I.R.B. 4196–16, 1996–3 I.R.B. 4596–17, 1996–4 I.R.B. 6996–18, 1996–4 I.R.B. 7396–19, 1996–4 I.R.B. 8096–20, 1996–4 I.R.B. 8896–21, 1996–4 I.R.B. 9696–22, 1996–5 I.R.B. 27

Revenue Procedures—Continued

96–23, 1996–5 I.R.B. 2796–24, 1996–5 I.R.B. 2896–24A, 1996–15 I.R.B. 1296–25, 1996–8 I.R.B. 1996–26, 1996–8 I.R.B. 2296–27, 1996–11 I.R.B. 2796–28, 1996–14 I.R.B. 3196–29, 1996–16 I.R.B. 24

Revenue Rulings:

96–1, 1996–1 I.R.B. 796–2, 1996–2 I.R.B. 596–3, 1996–2 I.R.B. 1496–6, 1996–2 I.R.B. 896–4, 1996–3 I.R.B. 1696–5, 1996–3 I.R.B. 2996–7, 1996–3 I.R.B. 1296–8, 1996–4 I.R.B. 6296–9, 1996–4 I.R.B. 596–10, 1996–4 I.R.B. 2796–11, 1996–4 I.R.B. 2896–12, 1996–9 I.R.B. 496–13, 1996–10 I.R.B. 1996–14, 1996–6 I.R.B. 2096–15, 1996–11 I.R.B. 996–16, 1996–11 I.R.B. 496–17, 1996–13 I.R.B. 596–18, 1996–13 I.R.B. 496–19, 1996–14 I.R.B. 2496–20, 1996–15 I.R.B. 596–21, 1996–15 I.R.B. 796–22, 1996–15 I.R.B. 996–23, 1996–15 I.R.B. 11

Treasury Decisions:

8630, 1996–3 I.R.B. 198631, 1996–3 I.R.B. 78632, 1996–4 I.R.B. 68633, 1996–4 I.R.B. 208634, 1996–3 I.R.B. 178635, 1996–3 I.R.B. 58636, 1996–4 I.R.B. 648637, 1996–4 I.R.B. 298638, 1996–5 I.R.B. 58639, 1996–5 I.R.B. 128640, 1996–2 I.R.B. 108641, 1996–6 I.R.B. 48642, 1996–7 I.R.B. 48643, 1996–11 I.R.B. 48644, 1996–7 I.R.B. 168645, 1996–8 I.R.B. 48646, 1996–8 I.R.B. 108647, 1996–9 I.R.B. 78648, 1996–10 I.R.B. 238649, 1996–9 I.R.B. 58650, 1996–10 I.R.B. 58651, 1996–11 I.R.B. 248652, 1996–11 I.R.B. 118653, 1996–12 I.R.B. 4

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Numerical Finding List1—Continued

Bulletins 1996–1 through 1996–18

Treasury Decisions—Continued

8654, 1996–11 I.R.B. 148655, 1996–12 I.R.B. 98656, 1996–13 I.R.B. 98657, 1996–14 I.R.B. 48658, 1996–14 I.R.B. 138659, 1996–16 I.R.B. 48660, 1996–17 I.R.B. 48661, 1996–17 I.R.B. 7

1A cumulative list of all Revenue Rulings,Revenue Procedures, Treasury Decisions, etc.,published in Internal Revenue Bulletins 1995–27 through 1995–52 will be found in InternalRevenue Bulletin 1996–1, dated January 2,1996.

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Finding List of Current Action onPreviously Published Items1

Bulletins 1996–1 through 1996–18

*Denotes entry since last publication

Delegation Orders:

232 (Rev. 1)Superseded by232 (Rev. 2), 1996–7 I.R.B. 49

239Amended by239 (Rev. 1), 1996–7 I.R.B. 49

Revenue Procedures:

65–17Modified by96–14, 1996–3 I.R.B. 41

66–49Modified by96–15, 1996–3 I.R.B. 41

88–32Obsoleted by96–15, 1996–3 I.R.B. 41

88–33Obsoleted by96–15, 1996–3 I.R.B. 41

89–19Superseded by96–17, 1996–4 I.R.B. 69

89–48Superseded in part by96–17, 1996–4 I.R.B. 69

91–22Modified by96–1, 1996–1 I.R.B. 8

91–22Amplified by96–13, 1996–3 I.R.B. 31

91–23Superseded by96–13, 1996–3 I.R.B. 31

91–24Superseded by96–14, 1996–3 I.R.B. 41

91–26Superseded by96–13, 1996–3 I.R.B. 31

92–20Modified by96–1, 1996–1 I.R.B. 8

1A cumulative finding list for previouslypublished items mentioned in Internal RevenueBulletins 1995–27 through 1995–52 will befound in Internal Revenue Bulletin 1996–1, datedJanuary 2, 1996.

Revenue Procedures—Continued

92–85Modified by96–1, 1996–1 I.R.B. 8

93–16Superseded by96–11, 1996–2 I.R.B. 18

93–46Superseded in part by96–17, 1996–4 I.R.B. 69

Superseded by96–18, 1996–4 I.R.B. 73

94–16Modified by96–29, 1996–16 I.R.B. 24

94–18Superseded in part by96–17, 1996–4 I.R.B. 69

Superseded by96–18, 1996–4 I.R.B. 73

94–59Superseded in part by96–17, 1996–4 I.R.B. 69

Superseded by96–18, 1996–4 I.R.B. 73

94–62Modified by96–29, 1996–16 I.R.B. 24

94–77Superseded by96–28, 1996–14 I.R.B. 31

95–1Superseded by96–1, 1996–1 I.R.B. 8

95–2Superseded by96–2, 1996–1 I.R.B. 60

95–3Superseded by96–3, 1996–1 I.R.B. 82

95–4Superseded by96–4, 1996–1 I.R.B. 94

95–5Superseded by96–5, 1996–1 I.R.B. 129

95–6Superseded by96–6, 1996–1 I.R.B. 151

Revenue Procedures—Continued

95–7Superseded by96–7, 1996–1 I.R.B. 185

95–8Superseded by96–8, 1996–1 I.R.B. 187

95–13Superseded by96–20, 1996–4 I.R.B. 88

95–20Superseded by96–24, 1996–5 I.R.B. 28

95–50Superseded by96–3, 1996–1 I.R.B. 82

96–3Amplified by96–12, 1996–3 I.R.B. 30

Revenue Rulings:

66–307Obsoleted by96–3, 1996–2 I.R.B. 14

72–437Modified by96–13, 1996–3 I.R.B. 31

80–80Obsoleted by96–3, 1996–2 I.R.B. 14

82–80Modified by96–14, 1996–3 I.R.B. 41

92–19Supplemented in part96–2, 1996–2 I.R.B. 5

92–75Clarified by96–13, 1996–3 I.R.B. 31

95–10Supplemented and superseded by96–4, 1996–3 I.R.B. 16

95–11Supplemented and superseded by96–5, 1996–3 I.R.B. 29

96–24Modified and amplified by96–24A, 1996–15 I.R.B. 12

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INDEXInternal Revenue Bulletins 1996–1Through 1996–18

For index of items published duringthe last six months of 1995, seeI.R.B. 1996–1, dated January 2,1996.

The abbreviation and number in pa-rentheses following the index entryrefer to the specific item; numbersin roman and italic type following theparentheses refer to the InternalRevenue Bulletin in which the itemmay be found and the page numberon which it appears.

Key to Abbreviations:

RR Revenue RulingRP Revenue ProcedureTD Treasury DecisionCD Court DecisionPL Public LawEO Executive OrderDO Delegation OrderTDO Treasury Department OrderTC Tax ConventionSPR Statement of Procedural

RulesPTE Prohibited Transaction

Exemption

EMPLOYMENT TAXESBackup withholding:

Substitute Form W–9 (RP 26) 8, 22Forms, electronic filing, magnetic

media, Form 1042–S (RP 11) 2,18; correction (Notice 20) 14, 30

Proposed regulations:26 CFR 31.3306(r)(2)–1, added;

FUTA taxation of amounts underemployee benefit plans (EE–55–95) 12, 12

26 CFR 31.6302–1(h)(1)(ii)(A)(2),added; 31.6302–1(h)(2), –(3), –(7)and –(8), revised; federal taxdeposits by electronic funds trans-fer (IA–03–94) 17, 12

26 CFR 31.9999–0, added; effectivedate of temporary backup with-holding regs (IA–33–95) 4, 99

Partial withdrawal of proposed regula-tions INTL–52–86 (Notice 4) 4, 69

Regulations:26 CFR 31.3402(r)–1 added;

31.3402(r)–IT, removed; withhold-ing on distributions of Indiangaming profits to tribal members(TD 8634) 3, 17

EMPLOYMENT TAXES—Continued

Regulations—Continued26 CFR 31 .3406–0 rev ised ;

31 .3406(a)–1—31.3406( i )–1 ,31.6051–4, 31.6413(a)–3, added;35a.9999.OT, 35a.3406–2, re-moved; 301.6109–1, amended;backup withholding statementmailing requirements, and due dili-gence (TD 8637) 4, 29

26 CFR 31.6051–1(d), 31.6071(a)–1(a)(3), amended; 31.6051–2(c),31.6081(a)–1(a)(3), 301.6011–2(c)(4)(i), revised; time for fur-nishing wage statements on termi-nation of employer’s operations(TD 8636) 4, 64; correction(Notice 21) 14, 30

26 CFR 31.6302–IT(h)(1)(ii)(A)(2),added; 31.6302–IT(h)(2), –(3),–(7), –(8), revised; federal taxdeposits by electronic funds trans-fer (TD 8661) 17, 7

26 CFR 33 and 38, removed; partsdeclared obsolete (TD 8655) 12, 9

26 CFR 301.6109–1, amended gran-tor trust reporting requirements(TD 8633) 4, 20

26 CFR 301.7507–1, 301.7507–0,amended; treatment of acquisitionof certain financial institutions(TD 8641) 6, 4

26 CFR 301.7701–3, amended; costsharing arrangements (TD 8632) 4,6

26 CFR 301.9100–7T, amended;generation-skipping transfer tax(TD 8644) 7, 16

Returns:Information, electronic filing; Form

941 (RP 19) 4, 80Magnetic tape reporting: Forms 940,

941, and 945 (RP 18) 4, 73Reporting agents, Form 8655 (RP

17) 4, 69

ESTATE & GIFT TAXESADMINISTRATIVE

Proposed regulations:26 CFR 301.6103(n)–1, amended;

disclosure of returns and returninformation to procure property orservices for tax administration pur-poses (DL–1–95) 6, 28

ESTATE & GIFT TAXESADMINISTRATIVE—Continued

Regulations:26 CFR 20.2035–1; 26 CFR 23 and

24, 25.2517–1, removed; regula-tions declared obsolete (TD 8655)12, 9

26 CFR 301.6109–1, amended; gran-tor trust reporting requirements(TD 8633) 4, 20

26 CFR 301.6011–2(c)(4)(i), revised;time for furnishing wage state-ments on termination of em-ployer’s operations (TD 8636) 4,64

26 CFR 301.7507–1, 301.7507–0,amended; treatment of acquisitionof certain financial institutions(TD 8641) 6, 4

26 CFR 301.7701–3, amended; costsharing arrangements (TD 8632) 4,6

26 CFR 301.9100–7T, amended;generation-skipping transfer tax(TD 8644) 7, 16

ESTATE TAXES

Annuities, valuation, terminally illmeasured life (RR 3) 1, 14

Regulations:26 CFR 20.2035–1, removed; regula-

tions declared obsolete (TD 8655)12, 9

26 CFR 20.7520–3, amended; ac-turial tables exceptions (TD 8630)3, 19

26 CFR Part 26, revised; 301.9100–7T, amended; generation-skippingtransfer tax (TD 8644) 7, 16

Special use value; farms; interest rates(RR 23) 15, 11

Tax conventions, competent authorityprocedures (RP 13) 3, 31

GIFT TAXES

Annuities, valuation, terminally illmeasured life (RR 3) 1, 14

Regulations:26 CFR 25.2517–1, removed; regula-

tions declared obsolete (TD 8655)12, 9

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GIFT TAXES—Continued

Regulations—Continued26 CFR 25.2522(c)–3, 25.7520–3

amended; actuarial tables excep-tions (TD 8630) 3, 19; correction(Notice 22) 14, 30

26 CFR 25.2702–3, amended; gran-tor trust reporting requirements(TD 8633) 4, 20

26 CFR 25.2702–5, 25.2702–7,amended; sale of residence fromqualified personal residence trust(PS–4–96) 18, 5

Tax conventions, competent authorityprocedures (RP 13) 3, 31

EXCISE TAXES

Proposed regulations:26 CFR 48.4081–8; 48.4082–1, re-

vised; 41.4101–1, amended; gas-oline and diesel fuel dye injectionsystems (PS–6–95) 16, 27

26 CFR 48.4101–1(c), 48.4101–2T;gasoline sale or removal and taxbond requirements, withdrawn(Notice 26) 18, 4

26 CFR 301.6103(n)–1, amended;disclosure of returns and returninformation to procure property orservices for tax administration pur-poses (DL–1–95) 6, 28

Regulations:26 CFR 48.4081–4, 48.4082–1, –2T,

48.4101–3T, –4T, 48.6427–8T,–9T, removed; 48.4082–1, –2,48.4101–1, –2, 48.6427–8, –9,added; 48.4041–0T, removed;48.4041–1, –2, –2T, removed;48.4041–21, amended; 48.4041–15—48.4041–21, transferred;48.4042–1, amended; 48.4064–1(e)(2), amended; 48.4081–1, –2,–3, revised; 48.4081–4, –5, –7,amended; 48.4081–6, –8, revised;48.4081–10T, –11T, –12T, re-moved; 48.4082–1, revised;48.4082–2T, –3T, –4T, 48.4083,removed; 48.4082–2, –3, –4,48.4083–1, added; 48.4101–2T,–3, –3T, –4T, removed; 48.4102–1, amended; 48.4221, removed;48.4221–1, –2, –5, amended;48.4221–8, –9, –10, –12, removed;4 8 . 4 2 2 1 – 1 1 , r e d e s i g -nated; 48.4222(a)–1, (b)–1, re-vised; 48.4222(d)–1, amended;4 0 . 6 0 1 1 ( a ) – 1 ( b ) , a m e n d e d ;40.6011(a)–3T, removed; Part 42,

EXCISE TAXES—Continued

Regulations—Continuedremoved; 48.6206–1, removed;4 8 . 6 4 1 6 ( b ) ( 2 ) – 2 , a m e n d e d ;48.6416(g)–1, removed; 48.6421–3, amended; 48.6424–0—48.6424–6, removed; 48.6427–3, –7,amended; 48.6427–8, –9, added;48.6427–8T, –9T, removed;48.6675–1, removed; 48.6714–1,added; gasoline and diesel fuelregistration requirements (TD8659) 16, 4

26 CFR 301.7507–1, 301.7507–0,amended; treatment of acquisitionof certain financial institutions(TD 8641) 6, 4

26 CFR 301.9100–7T, amended;generation-skipping transfer tax(TD 8644) 7, 16

26 CFR 53.4941(d)–2, amended;self-dealing for private foundations(TD 8639) 5, 12

26 CFR 301.6011–2(c)(4)(i), revised;time for furnishing wage state-ments on termination of em-ployer’s operations (TD 8636) 4,64

26 CFR 301.6109–1, amended; gran-tor trust reporting requirements(TD 8633) 4, 20

26 CFR 301.7701–3, amended; costsharing arrangements (TD 8632) 4,6

INCOME TAX

Administration:Advance valuation of art (RP 15) 3,

41Delegation of authority:

Authority of Taxpayer Ombuds-man (DO 239 [Rev. 1]) 7, 49

Authority to modify or rescindTAO (DO 232 [Rev. 2]) 7, 49

Unagreed issues, referral to Appeals(RP 9) 2, 15

Annuities and pensions, valuation, ter-minally ill measured life (RR 3) 2,14

Automobiles:Owners and lessees, limitations on

depreciation (RP 25) 8, 19Books and records:

Imaging systems (Notice 10) 7, 47

INCOME TAX—Continued

Books and records—ContinuedCapital expenditures (Notice 7) 6, 22Consolidated returns, single-entity elec-

tion (RP 21) 4, 96Credit against tax:

Enpowerment zone employment, in-tent to issue regulations (Notice 1)3, 30

Differential earnings rate (Notice 15)13, 19

Employee plans:Administrative, COBRA premium is-

sues (RR 8) 4, 62Closing agreements (RP 29) 16, 24Determination letters (RP 6) 1, 51Funding:

Full funding limitations, weightedaverage interest rate, Dec. 1995(Notice 2) 2, 15; Jan. 1996(Notice 9) 6, 26; Feb. 1996(Notice 11) 8, 19; March 1996(Notice 16) 13, 20; April 1996(Notice 24) 16, 23

Mortality tables (RR 7) 3, 12Retirement Protection Act of 1994

(RR 20) 15, 5; (RR 21) 15, 7Single sum distributions amounts,

cash balance plans (Notice 8) 6,23

Estimate tax payments for individuals(Notice 5) 6, 22

Estate and trusts:Valuations, transfers to pooled in-

come funds (RR 1) 1, 7Foreign insurance companies, domes-

tic asset/liability and investmentyield (RP 23) 5, 27

Forms:Substitute Forms W–2 and W–3,

specifications (RP 24) 5, 28; (RP24A) 15, 12

Insurance companies:Life, interest rate tables (RR 2) 2, 5

Interest:Investment:

Federal short-term, mid-term andlong-term rates, Jan. 1996 (RR6) 2, 8; Feb. 1996 (RR 14) 6,20; March 1996 (RR 15) 11, 9;April 1996 (RR 19) 14, 24

Rates, underpayments and over-payments (RR 17) 13, 5

Interest netting study (Notice 18) 14,27

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INCOME TAX—ContinuedInventories:

LIFO:Price indexes, department stores,

Nov. 1995 (RR 9) 4, 5; Dec.1995 (RR 12) 9, 4; Jan. 1996(RR 18) 13, 4; Feb. 1996 (RR22) 15, 9

Investment:Inflation adjustment for 1996 (RR 4)

3, 16Joint return study (Notice 19) 14, 28Loans:

CPI adjustment for below marketloans—1996 (RR 5) 3, 29

Subject to principal-reductionmethod of accounting and mark-tomarket rules (Notice 23) 16, 23

Low-income housing credit:Bond factor amounts Jan.–Mar. 1996

(RR 16) 11, 4Tax credit (RR 27) 11, 27

Major disaster areas (RR 13) 10, 19Mark to market, securities dealers

(Notice 12) 10, 29Partnerships:

Charitable contribution of property(RR 11) 4, 28

Sales between partners, basis (RR10) 4, 27

Payments from Presidential ElectionCampaign Fund (Notice 13) 10, 29

Per diem allowances (RP 28) 14, 31Property (contributed or other) distribu-

tion; recognition of gain or loss bycontributing partner; correction(Notice 17) 13, 20

Proposed regulations:26 CFR 1.72–17A, amended: 1.72–

17A(d)(1), added; 1.72(p)–1,added; loans to plan participants(EE–106–82) 10, 31

26 CFR 1.125–3, added; effect ofFamily and Medical Leave Act of1993 on the operation of cafeteriaplans (EE–20–95) 5, 15

26 CFR 1.367–9, added (INTL–9–95) 5, 24

26 CFR 1.409–1(b)(2)(i), retirementbonds withdrawn (EE–118–81) 11,29

26 CFR 1.411(c)–1, amended; alloca-tion of accrued benefits betweenemployer and employee contribu-tions (EE–20–95) 5, 15

26 CFR 1.411(d)(6), added; futurebenefit accrual (EE–34–95) 3, 49

26 CFR 1.501(c)(5)–1, amended;requirements for tax-exempt orga-nizations (EE–53–95) 5, 23

INCOME TAX—ContinuedProposed regulations—Continued

26 CFR 1.731–2, added; distributionof marketable securities by a part-nership (PS–2–95) 7, 50

26 CFR 1.863–0, added; 1.863–1, –2,–3, revised; 1.863–4, amended;1.863–5, removed; source of in-come from sales of inventory andnatural resources produced in onejurisdiction and sold in another(INTL–3–95) 6, 29

26 CFR 1.882–5, 1.884–1, amended;effectively connected income andbranch profits tax (INTL–54–95)14, 39

26 CFR 1.1254–0, 1.1254–4,amended; treatment of gain fromdisposition of interest in certainnatural resource recapture propertyby S corporations (PS–7–89) 8, 24

26 CFR 1.6081–4(a), revised:1.6081–4(d), added; automatic ex-tension of time for filing individ-ual tax returns (IA–41–93) 11, 29

26 CFR 1.6302–4, added; federal taxdeposits by electronic funds trans-fer (IA–03–94) 17, 12

26 CFR 31.3121(v)(2)–1, –2, added;FICA taxation amounts underemployee benefit plans (EE–142–87) 12, 13

26 CFR 31.3306(r)(2)–1, added;FUTA taxation amounts underemployee benefit plans (EE–55–95) 12, 12

26 CFR 301.6651–1(c)(3), revised;failure to file return or pay tax(IA–41–93) 11, 29

26 CFR 301.6103(n)–1, amended;disclosure of returns and returninformation to procure property orservices for tax administration pur-poses (DL–1–95) 6, 28

Property (contributed or other) distribu-tion; recognition of gain or loss bycontributing partner; correction(Notice 17) 13, 20

Regulations:26 CFR 1.162–27, added; dis-

allowance of deductions foremployee remuneration in excessof $1,000,000 (TD 8650) 10, 5;TD 8650 corrected (Notice 14) 12,11

26 CFR 1.305–3, –5, –7, amended;distribution of stock and stockrights (TD 8643) 11, 4

INCOME TAX—ContinuedRegulations—Continued

26 CFR 1.367(a)–3T, amended; cer-tain transfers of domestic stock orsecurities by U.S. persons to for-eign corporations (TD 8638) 5, 5

26 CFR 1.385–2(d), removed; 1.358–6, 1.1032–2, 1.1502–30, added;controlling corporation’s basis ad-justment (TD 8648) 10, 23

26 CFR 1.401–12(n) redesignated1.408–2(e); 1.401–12T, removed;1.401(f)–1, 1.408–2, amended;nonbank trustee net worth require-ments (TD 8635) 3, 5

26 CFR 1.411(d)–6T, added; noticeof significant reduction in the rateof future benefit accrual (TD8631) 3, 7

26 CFR 1.469–0, 1.469–4, 1.469–11,amended; 1.469–9, revised; rulesfor certain rental real estate ac-tivities (TD 8645) 8, 4

26 CFR 1.482–0, 301.7701–3,amended; 1.482–7, added; 1.482–7T, removed; section 482 costsharing arrangements (TD 8632) 4,6

26 CFR 1.508–1, 1.6033–2 amended;exempt organization not requiredto file annual returns, integratedauxiliaries of churches (TD 8640)2, 10

26 CFR 1.597–1—1.597–7, added;301.7507–1, 301.7507–9, amended;treatment of acquisition of certainfinancial institutions (TD 8641) 6, 4

26 CFR 1.671–4, revised; 1.6012–3,301.6109–1, amended; grantortrust reporting requirements (TD8633) 4, 20

26 CFR 1.704–4, 1.737–1 through1.737–5, added; recognition of gainor loss by contributing partner ondistribution of contributed propertyor other property (TD 8642) 7, 4

26 CFR 1.861–8, amended; 1.861–17,added; allocation and apportion-ment of research and experimentalexpenditures (TD 8646) 8, 10

26 CFR 1.861–9T, amended; 1.822–0, added; 1.882–5, revised; interestexpense deduction of foreign cor-porations (TD 8658) 14, 13

26 CFR 1.864–4, 1.871–12, 1.884–0(b), amended; 1.884–1(d)(4),1.884–2T(a)(5), 1.884–4(b)(1) and(2), revised; 1.884–1(i)(4), 1.884–2T(a)(6), 1.884–4(e)(1) and (2),added; effectively connected in-come and branch profits tax (TD8657) 14, 4

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INCOME TAX—Continued

Regulations—Continued26 CFR 1.1258–1, added; conversion

transactions (TD 8649) 9, 526 CFR 1.1301–1, 1.32–1, 1.103–12,

1.110–1, 1.114–1, 1.115–1, 1.116–1, –2, 1.367(a)–7T, 1.383–1A,–2A, –3A, 1.804–1, 1.805–1through –8 and intermediate sec-tions, 1.820–1, –2, –3, 1.824–1,–2, –3, removed; 1.907–0,amended; 1.907(e)(1), 1.907(a)–0A, –1A, 1.907(b)–1A, –2A,1.907(c)–1A, –2A, –3A, 1.907(d)–1A, 1.907(e)–1A, 1.907(f)–1A,1.995–7, 1301–0 through –3 andintermediate sections, 1.1303–1,1.1304–1 through –6 and inter-mediate sections, removed; regula-tions declared obsolete (TD 8655)12, 9

26 CFR 1.1445–1, 1.1445–8(c)(2)(i),revised; 1.1445–5, amended; with-holding of tax on dispositions ofU.S. real property interests byforeign persons (TD 8647) 9, 7

26 CFR 1.1502–13, revised;1.267(f)–1(k), amended; 1.1502–1 3 ( f ) ( 6 ) , a d d e d ; 1 . 1 5 0 2 –13(g)(2)(i)(B), amended; consoli-dated groups intercompany trans-actions and related rules (TD8660) 17, 4

26 CFR 1.6042–4, 1.6044–5, revised;1.6049–6, 301.6109–1, amended;1.6050N–1, added Backup with-holding, statement mailing require-ments and due diligence (TD8637) 4, 29

26 CFR 1.6050I–0T, –2T, removed;1.6050I–0, –2, added; cash report-ing by court clerks (TD 8652) 11,11

26 CFR 1.6050P–0, –1, added,1.6050P–0T, –1T, removed; infor-mation reporting for discharges ofindebtedness (TD 8654) 11, 14

INCOME TAX—Continued

Regulations—Continued26 CFR 1.6081–4, amended; 1.6081–

4T, added; automatic extension oftime for filing income tax returns(TD 8651) 11, 24

26 CFR 1.6302–4T, added; federaltax deposits by electronic fundstransfer (TD 8661) 17, 7

26 CFR 1.6662–0, –6T, removed;1.6662.5T, revised; 1.6662–6,added; imposition of accuracy-related penalty (TD 8656) 13, 9

26 CFR 301.6011–2(c)(4)(i), revised;time for furnishing wage state-ments upon termination of em-ployer’s operations (TD 8636) 4,64

26 CFR 301.6311–1, corrected; pay-ment of tax by check or moneyorder (Notice 27) 18, 4

26 CFR 1.7520–3, amended; actu-arial tables exceptions (TD 8630)3, 19

26 CFR 301.6676–1, 301.7424–1,removed; regulations declared ob-solete (TD 8655) 12, 9

26 CFR 301.9100–7T, amended;generation-skipping transfer tax(TD 8644) 7, 16

Returns:Form 990, church affiliated organiza-

tions exempt from filing (RP 10)2, 17

On-line service electronic filing pro-gram; Form 1040 (RP 20) 4, 88

Renewable electricity production credit:1996 inflation adjustment factor andreference prices (Notice 25) 17, 11

Rulings:Areas in which advance rulings

willing to be issued:Associate Chief Counsel (Domes-

tic), Associate Chief Counsel

INCOME TAX—Continued

Rulings—Continued(Employee Benefits and ExemptOrganizations) (RP 3) 1, 86

Associate Chief Counsel (Interna-tional) (RP 7) 1, 185

Areas in which rulings will not beissued (RP 12) 3, 30

Employee plans and exempt organi-zations user fees correction (RP8A) 9, 10

Letter rulings, determination letters,and information letters, AssociateChief Counsel (Domestic), Associ-ate Chief Counsel (Employee Ben-efits and Exempt Organizations),Associate Chief Counsel (Enforce-ment Litigation) and AssociateChief Counsel (International) (RP1) 1, 8

No-rule provision, combining trans-actions (RP 22) 5, 27 (Notice 6) 5,27

Tax-exempt bonds, issuance pro-cedrues (RP 16) 3, 45

Technical advice, employee plansand exempt organizations (RP 5)1, 129

Technical advice to the District Direc-tors and Chiefs, Appeals Offices,from the Associate Chief Counsel(Domestic), Associate Chief Counsel(Employee Benefits and ExemptOrganizations), Associate ChiefCounsel (Enforcement Litigation),and Associate Chief Counsel (Inter-national) (RP 2) 1, 60

Rulings and determination letters, issu-ance procedures (RP 4) 1, 94

Tax conventions:Competent authority procedure (RP

13) 3, 31Relief in treaty cases (RP 14) 3, 41

User fees for employee plans and exemptorganizations (RP 8) 1, 187