internal revenue bulletin no. 2000–23 bulletin · 2000–23 i.r.b. june 5, 2000 it is the policy...

INCOME TAX

Rev. Rul. 2000–28, page 1157.Federal rates; adjusted federal rates; adjusted federallong-term rate, and the long-term exempt rate. Forpurposes of sections 1274, 1288, 382, and other sectionsof the Code, tables set forth the rates for June 2000.

T.D. 8881, page 1158.Amendments to final regulations (T.D. 8734, 1997–2 C.B.109) relate to the withholding of income tax under section1441 of the Code on certain U.S. source income paid to for-eign persons.

T.D. 8882, page 1150.Final regulations under section 356 of the Code relate tononqualified preferred stock and rights to acquire nonquali-fied preferred stock, as defined in section 351(g)(2).

T.D. 8883, page 1151.Final regulations under section 1032 of the Code relate tothe treatment of a disposition by a corporation or partner-ship of the stock of a corporation in a taxable transaction.Rev. Rul. 80–76 obsoleted.

REG–106186–98, page 1226.Proposed regulations under section 368 of the Code providethat mergers involving Disregarded Entities do no qualify for

tax-free treatment because the mergers do not result in thecombination of the assets and liabilities of two corporationspursuant to the state or federal merger law. A public hearingis scheduled for August 8, 2000.

REG–107644–98, page 1229.Proposed regulations under section 472 of the Code relateto the dollar-value last-in, first-out (LIFO) and inventory priceindex computation (IPIC) methods of accounting for invento-ries. A public hearing is scheduled for September 15, 2000.

Notice 2000–29, page 1241.Partnership options and convertible instruments. Thisnotice invites public comment on the federal income taxtreatment of the exercise of an option to acquire a partner-ship interest, the exchange of convertible debt for a partner-ship interest, and the exchange of a preferred interest in apartnership for a common interest in that partnership.

ADMINISTRATIVE

Announcement 2000–48, page 1243.This announcment provides additional information relating toRev. Proc. 2000–12 for financial institutions that are consid-ering entering into a qualified intermediary agreement withthe Internal Revenue Service.

Internal Revenue

bbuulllleettiinnBulletin No. 2000–23

June 5, 2000

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

Department of the TreasuryInternal Revenue Service

Actions Relating to Court Decisions is on the page following the Introduction.Finding Lists begin on page ii.Announcements of Disbarments and Suspensions begin on page 1244.Index for January through May begins on page vi.

June 5, 2000 2000–23 I.R.B.

The Internal Revenue Bulletin is the authoritative instrumentof the Commissioner of Internal Revenue for announcing offi-cial rulings and procedures of the Internal Revenue Serviceand for publishing Treasury Decisions, Executive Orders, TaxConventions, legislation, court decisions, and other items ofgeneral interest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscriptionbasis. Bulletin contents are consolidated semiannually intoCumulative Bulletins, which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of in-ternal management are not published; however, statementsof internal practices and procedures that affect the rightsand duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulingsto taxpayers or technical advice to Service field offices,identifying details and information of a confidential natureare deleted to prevent unwarranted invasions of privacy andto comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not havethe force and effect of Treasury Department Regulations,but they may be used as precedents. Unpublished rulingswill not be relied on, used, or cited as precedents by Servicepersonnel in the disposition of other cases. In applying pub-lished rulings and procedures, the effect of subsequent leg-islation, regulations, court decisions, rulings, and proce-

dures must be considered, and Service personnel and oth-ers concerned are cautioned against reaching the same con-clusions in other cases unless the facts and circumstancesare substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisionsof 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, Legislation and RelatedCommittee Reports.

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

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The first Bulletin for each month includes a cumulative indexfor the matters published during the preceding months.These monthly indexes are cumulated on a semiannual basis,and are published in the first Bulletin of the succeeding semi-annual period, respectively.

The IRS Mission

Provide America’s taxpayers top quality service by help-ing them understand and meet their tax responsibilities

and by applying the tax law with integrity and fairness toall.

Introduction

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, DC 20402.

2000–23 I.R.B. June 5, 2000

It is the policy of the Internal RevenueService to announce at an early datewhether it will follow the holdings in cer-tain cases. An Action on Decision is thedocument making such an announcement.An Action on Decision will be issued atthe discretion of the Service only on un-appealed issues decided adverse to thegovernment. Generally, an Action on De-cision is issued where its guidance wouldbe helpful to Service personnel workingwith the same or similar issues. Unlike aTreasury Regulation or a Revenue Ruling,an Action on Decision is not an affirma-tive statement of Service position. It is notintended to serve as public guidance andmay not be cited as precedent.

Actions on Decisions shall be reliedupon within the Service only as conclu-sions applying the law to the facts in theparticular case at the time the Action onDecision was issued. Caution should beexercised in extending the recommenda-tion of the Action on Decision to similarcases where the facts are different. More-over, the recommendation in the Actionon Decision may be superseded by newlegislation, regulations, rulings, cases, orActions on Decisions.

Prior to 1991, the Service published ac-quiescence or nonacquiescence only in

certain regular Tax Court opinions. TheService has expanded its acquiescenceprogram to include other civil tax caseswhere guidance is determined to be help-ful. Accordingly, the Service now may ac-quiesce or nonacquiesce in the holdingsof memorandum Tax Court opinions, aswell as those of the United States DistrictCourts, Claims Court, and Circuit Courtsof Appeal. Regardless of the court decid-ing the case, the recommendation of anyAction on Decision will be published inthe Internal Revenue Bulletin.

The recommendation in every Actionon Decision will be summarized as ac-quiescence, acquiescence in result only,or nonacquiescence. Both “acquies-cence” and “acquiescence in result only”mean that the Service accepts the holdingof the court in a case and that the Servicewill follow it in disposing of cases withthe same controlling facts. However, “ac-quiescence” indicates neither approvalnor disapproval of the reasons assignedby the court for its conclusions; whereas,“acquiescence in result only” indicatesdisagreement or concern with some or allof those reasons. “Nonacquiescence” sig-nifies that, although no further reviewwas sought, the Service does not agreewith the holding of the court and, gener-

ally, will not follow the decision in dis-posing of cases involving other taxpay-ers. In reference to an opinion of a circuitcourt of appeals, a “nonacquiescence” in-dicates that the Service will not followthe holding on a nationwide basis. How-ever, the Service will recognize theprecedential impact of the opinion oncases arising within the venue of the de-ciding circuit.

The Actions on Decisions published inthe weekly Internal Revenue Bulletin areconsolidated semiannually and appear inthe first Bulletin for July and the Cumu-lative Bulletin for the first half of theyear. A semiannual consolidation also ap-pears in the first Bulletin for the follow-ing January and in the Cumulative Bul-letin for the last half of the year.

The Commissioner ACQUIESCES inthe following decision:

Diane Fernandez v. Commissioner,1

114 T.C. No. 21

The Commissioner ACQUIESCES inresult only in the following decision:

Osteophathic Medical Oncology andHematology, P.C. v. Commissioner,2

113 T.C. No. 26

Actions Relating to Decisions of the Tax Court

1 Acquiescence relating to whether the Tax Court has jurisdiction to review the Service’s determination that a spouse is not entitled to relief under I.R.C. section6015.

2 Acquiescence in result only relating to whether the administration of chemotherapy drugs arising from the provision of medical services constitutes the sale of mer-chandise within the meaning of Treas. Reg. section 1.471–1.

Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof June 2000. See Rev. Rul. 2000–28, page 1157.

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-termrates are set forth for the month of June 2000. SeeRev. Rul. 2000–28, page 1157.

Section 356.—Receipt forAdditional Consideration

26 CFR 1.356–6: Rules for treatment ofnonqualified preferred stock as other property.

T.D. 8882

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Part 1

Reorganizations; NonqualifiedPreferred Stock

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document containsfinal regulations relating to nonqualifiedpreferred stock and rights to acquirenonqualified preferred stock. The regu-lations are necessary to reflect changesto the law concerning these instrumentsthat were made by the Taxpayer ReliefAct of 1997. The regulations affectshareholders who receive nonqualifiedpreferred stock, or rights to acquire suchstock, in certain corporate reorganiza-tions and divisions.

EFFECTIVE DATE: These regulationsare effective May 16, 2000.

FOR FURTHER INFORMATION CON-TACT: Michael J. Danbury, (202) 622-7750 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation ofProvisions

On January 6, 1998, temporary regula-tion TD 8753 (1998–9 I.R.B. 6 [63 F.R.411]) was published in the Federal Reg-ister. A notice of proposed rulemaking(REG–121755–97, 1998–9 I.R.B. 13)cross–referencing the temporary regula-tion was published in the Federal Regis-ter (63 F.R. 453) on the same day.

The temporary regulation providedthat, notwithstanding contemporaneouslyissued final regulations treating certainrights to acquire stock as securities thatcan be received tax-free in corporate reor-ganizations and divisions, nonqualifiedpreferred stock (as defined in section351(g)(2) of the Internal Revenue Code)(NQPS), or a right to acquire NQPS, willin some circumstances not be treated asstock or securities for purposes of sec-tions 354, 355, and 356. The temporaryregulation added §1.356–6T, and appliedto NQPS received in connection with atransaction occurring on or after March 9,1998 (other than certain recapitalizationsof family-owned corporations and trans-actions described in section 1014(f)(2) ofthe Taxpayer Relief Act of 1997, PublicLaw 105–34, 111 Stat. 788, 921). Nowritten comments responding to the no-tice of proposed rulemaking were re-ceived, and no public hearing was re-quested or held.

The regulation proposed byREG–121755–97 is adopted by this Trea-sury decision, and the corresponding tem-porary regulation is removed. Cross-ref-erences to the temporary regulation in§§1.354–1(e), 1.355–1(c), and 1.356–3(b)have been removed and replaced withcross-references to the final regulation at§1.356–6.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It has also been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions. Because the regulations do not im-pose a collection of information on small

entities, the Regulatory Flexibility Act (5U.S.C. chapter 6) does not apply. Pur-suant to section 7805(f) of the InternalRevenue Code, the notice of proposedrulemaking preceding these regulationswas submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comment on its impact onsmall business.

Drafting Information

The principal author of these regula-tions is Michael J. Danbury of the Officeof Assistant Chief Counsel (Corporate).However, other personnel from the IRSand Treasury participated in their devel-opment.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXESParagraph . The authority citation for

part 1 is amended by adding an entry innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.356–6 also issued under 26U.S.C. 351(g)(4). * * *

§1.354–1 [Amended]

Par. 2. In §1.354–1, paragraph (e), firstsentence, the language “§1.356–6T” is re-moved and “§1.356–6” is added in itsplace.

§1.355–1 [Amended]

Par. 3. In §1.355–1, paragraph (c), firstsentence, the language “§1.356–6T” is re-moved and “§1.356–6” is added in itsplace.

§1.356–3 [Amended]

Par. 4. In §1.356–3, paragraph (b), firstsentence, the language “§1.356–6T” is re-moved and “§1.356–6” is added in itsplace.

Par. 5. Section 1.356–6T is redesig-nated as §1.356–6 and the section headingis revised to read as follows:§1.356–6 Rules for treatment of nonqual-ified preferred stock as other property.* * * * *

June 5, 2000 1150 2000–23 I.R.B.

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

Robert E. Wenzel,Deputy Commissioner

of Internal Revenue.

Approved May 5, 2000.

Jonathan Talisman,Deputy Assistant Secretary

of the Treasury.

Section 382.—Limitation on NetOperating Loss Carryforwardsand Certain Built-In LossesFollowing Ownership Change

The adjusted applicable federal long-term rate isset forth for the month of June 2000. See Rev. Rul.2000–28, page 1157.

Section 412.—Minimum FundingStandards


Section 467.—Certain Paymentsfor the Use of Property orServices


Section 468.—Special Rules forMining and Solid WasteReclamation and Closing Costs


Section 482.—Allocation ofIncome and Deductions AmongTaxpayers


Section 483.—Interest onCertain Deferred Payments


Section 642.—Special Rules forCredits and Deductions


Section 807.—Rules for CertainReserves


Section 846.—DiscountedUnpaid Losses Defined


Section 1032.—Exchange ofStock for Property

26 CFR 1.1032–2: Disposition by a corporation ofstock of a controlling corporation in certaintriangular reorganizations.

T.D. 8883

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Part 1

Guidance Under Section 1032Relating to the Treatment of aDisposition by an AcquiringEntity of the Stock of aCorporation in a TaxableTransaction



SUMMARY: This document containsfinal regulations relating to the treatmentof a disposition by a corporation or part-nership (the acquiring entity) of the stockof a corporation (the issuing corporation)in a taxable transaction. The final regula-tions interpret section 1032 of the InternalRevenue Code. They affect persons en-gaging in certain taxable transactions, asdescribed in the final regulations, occur-ring after May 16, 2000.

EFFECTIVE DATE: These regulationsare effective May 16, 2000.

FOR FURTHER INFORMATION CON-TACT: Filiz Serbes, (202) 622-7550 (nota toll-free number).


Background

On September 23, 1998, the Treasuryand the IRS issued a notice of proposedrulemaking in the Federal Register (63 FR50816), setting forth rules relating to thetreatment of a disposition by a corpora-tion (the acquiring corporation) of thestock of another corporation (the issuingcorporation) in a taxable transaction. Apublic hearing regarding these proposedregulations was held on January 7, 1999.Written comments responding to the no-tice were received. After consideration ofall of the comments, the proposed regula-tions are adopted as revised by this Trea-sury decision.

Explanation of Revisions and Summaryof Comments

The Immediacy Requirement

The proposed regulations adopted acash purchase model in which certaintransactions involving a contribution of is-suing corporation stock by an issuing cor-poration to an acquiring corporation arerecast as a contribution of cash by the issu-ing corporation to the acquiring corpora-tion, which is used by the acquiring corpo-ration to purchase issuing corporationstock from the issuing corporation. As acondition for application of the cash pur-chase model of the proposed regulations,the proposed regulations adopted the re-quirement of §1.1502–13(f)(6)(ii)(B) thatthe issuing corporation stock received bythe acquiring corporation be immediatelytransferred to acquire money or otherproperty.

A number of commentators requestedthat the term “immediately” be explicitlydefined. Some suggested replacing thetemporal requirement with a transactionalapproach, requiring only that the stock bedisposed of “pursuant to a plan of acquisi-tion.” Others suggested that the immedi-acy requirement be waived in certain cir-cumstances, such as with respect to anonqualified deferred compensationarrangement involving a grantor trust(commonly referred to as a “RabbiTrust”) that is established to provide fu-

2000–23 I.R.B. 1151 June 5, 2000

ture benefits to the employees of an ac-quiring corporation and that is fundedwith issuing corporation stock.

After considering the purposes of section1032 and issues of administrative burdenand technical complexity, the Treasury andthe IRS believe that the immediacy require-ment should neither be waived nor con-strued to permit the acquiring corporationto hold issuing corporation stock for a pe-riod of time during which the value of thestock could fluctuate.

The Treasury and the IRS believe that,in a case where the issuing corporationcontributes its stock to the acquiring cor-poration and the acquiring corporationdoes not immediately dispose of thatstock, it is not appropriate to increase thebasis of either the issuing corporationstock transferred to the acquiring corpora-tion or the stock of the acquiring corpora-tion held by the issuing corporation. Inthe cases addressed by the proposed regu-lations, in which the acquiring corpora-tion exchanges the stock immediately forproperty owned by a third party, the trans-action is indistinguishable from one inwhich the issuing corporation directly ex-changes its stock for the property of thethird party (an exchange to which section1032 would apply) and contributes thatproperty to the acquiring corporation, atransaction whose tax result would be thesame as the cash purchase model set forthin the proposed regulations. However, incases where the acquiring corporation’sownership of the issuing corporationstock is more than transitory, there ap-pears to be no comparable transactionwhich would generate the same tax conse-quences as the cash purchase model.

Implementation of an approach thatwaives the immediacy requirement wouldraise administrative and policy concerns.If the acquiring corporation were to bepermitted to hold the issuing corporationstock for a period of time, the regulationswould have to adopt one of two alterna-tive approaches. Under the first alterna-tive, the regulations would provide thatthe cash purchase model would bedeemed to apply at the time that the stockis contributed to the acquiring corpora-tion, giving the acquiring corporation afair market value basis in the stock. How-ever, such an approach would raise atleast two concerns. First, in the case thatthe issuing corporation stock is not pub-

licly traded, such an approach would im-pose administrative burdens requiring avaluation of the stock at a time when thereis no related transaction to assist in suchvaluation. Thus, there is a potential forthe stock to be overvalued, with a resultof inflating the basis in both the con-tributed issuing corporation stock and theacquiring corporation stock held by the is-suing corporation.

Second, even if the valuation were ac-curate, providing for the cash purchasemodel on the date of the contributionwould facilitate selective loss recognition.If the acquiring corporation could receivethe stock at a fair market value basis andhold on to it, then if the value of the stockdecreased, the subsidiary could sell thestock and recognize a loss. The Treasuryand the IRS believe that it is inappropriateto issue regulations facilitating selectiveloss recognition.

Under the second alternative, the regu-lations would suspend the operation of thecash purchase model until such time asthe acquiring corporation actually dis-poses of the issuing corporation stock.However, such an approach also wouldgive rise to inappropriate tax results. Inaddition to precluding gain recognition at-tributable to the zero basis result, this al-ternative would allow a subsidiary toavoid recognition of gain attributable toreal appreciation in this asset.

Assume, for example, a case where theissuing corporation contributes issuingcorporation stock worth $100 to the ac-quiring corporation, the acquiring corpo-ration retains that stock while it appreci-ates to $300, and then sells the stock for$300 in cash. Absent an immediacy re-quirement, under the second alternative,the acquiring corporation would bedeemed to have purchased the stock for$300 in cash contributed by the issuingcorporation immediately before the saleof the stock to the third party. As a result,the acquiring corporation would not rec-ognize any gain or loss, and the issuingcorporation would increase its basis in thestock of the acquiring corporation by$300. More than merely avoiding a zerobasis result (i.e., taxation on the $100value in the stock when contributed to theacquiring corporation), neither the acquir-ing corporation nor the issuing corpora-tion would ever be taxed on the further$200 in appreciation of the issuing corpo-

ration stock which occurred while suchstock was held by the acquiring corpora-tion. Such a result, which effectivelywould provide full section 1032 protec-tion for a subsidiary’s gain in certain par-ent stock, would go well beyond address-ing the zero basis result, the scope ofthese regulations.

Because each of those alternativeswould be unsatisfactory for the reasonsdiscussed above, the final regulations re-tain the immediacy requirement withoutfurther exception.

Consistent with that determination, andas in the case of any other transaction, thecash purchase model of these regulationsapplies to arrangements involving RabbiTrusts only if the immediacy requirementis satisfied. Thus, these regulations donot apply to Rabbi Trust arrangements inwhich the stock of an issuing corporationis treated for federal tax purposes asowned for a period of time by its sub-sidiary. However, the Treasury and theIRS have reconsidered certain aspects ofRabbi Trust arrangements and have deter-mined that the fact that trust assets aresubject to the claims of creditors of thesubsidiary corporation does not necessar-ily establish that the subsidiary should betreated as a grantor of the trust at the timethe trust is funded. Guidance regardingthe effects of this reconsideration on ex-isting Rabbi Trusts will be forthcoming.In addition, the final regulations contain anew example describing an arrangementin which the issuing corporation (and notthe subsidiary) is treated as the grantorand owner of the Rabbi Trust, with the re-sult that the immediacy requirement issatisfied upon the transfer of issuing cor-poration stock by the trust to the sub-sidiary’s employees.

Taxpayers could have reasonably antic-ipated that Rabbi Trust arrangementscould not be structured without causingsubsidiaries to be treated as grantors andowners of the trust. For that reason andbecause of the potential ambiguities in in-terpreting Rev. Rul. 80–76 (1980–1 C.B.15), the IRS will not challenge a tax-payer’s position that no gain is recognizedby an acquiring corporation upon the dis-position by a Rabbi Trust, established onor before June 15, 2000, of issuing corpo-ration stock if that stock was contributedby the issuing corporation to the RabbiTrust on or before May 16, 2001.

June 5, 2000 1152 2000–23 I.R.B.

Exchanges by the Acquiring Corporationof Stock of the Issuing Corporation forOther Issuing Corporation Stock

Commentators noted that, unlike§1.1502–13(f)(6)(ii), the recast of the pro-posed regulations applies even where theacquiring corporation exchanges stock ofthe issuing corporation for other issuingcorporation stock. Allowing a subsidiaryto receive parent stock it immediatelyswaps for other parent stock, which itcould hold long term with a cost basis,would facilitate selective loss recognitionwith respect to parent stock by a sub-sidiary. Accordingly, the final regulationsadopt, as a precondition for the recast, arequirement that the issuing corporationstock not be exchanged for other issuingcorporation stock.

Exchanges by the Acquiring Corporationof Stock of the Issuing Corporation forAcquiring Corporation Debt

Commentators contended that it is un-clear whether the proposed regulationsare applicable when the acquiring corpo-ration uses issuing corporation stock tosatisfy acquiring corporation debt. TheTreasury and the IRS believe that the reg-ulations do apply to an exchange of issu-ing corporation stock for acquiring corpo-ration debt. Although section 1032 refersto an exchange for money or other prop-erty and does not expressly refer to ex-changes of stock for debt, it is generallyacknowledged that section 1032 appliesto an exchange of a corporation’s stockfor its debt, subject to sections 61(a)(12)and 108, which provide that a corporationmay have income from a cancellation ofindebtedness on an exchange of its stockfor its own debt (that is, cancellation ofindebtedness income can be realized andrecognized when debt is satisfied withstock of the debtor corporation, eventhough no gain is recognized on the is-suance of the stock). Similarly, therefore,the requirement set forth in these regula-tions that the acquiring corporation trans-fer issuing corporation stock to acquiremoney or other property is satisfied wherethe stock is used to satisfy acquiring cor-poration debt (although the acquiring cor-poration may be subject to sections61(a)(12) and 108). No modifications tothe language of the final regulations areneeded to achieve this result.

Similarly, a commentator expressedconcern that the proposed regulations donot expressly apply to an acquiring corpo-ration’s exchange of issuing corporationstock for the acquiring corporation’s ownoutstanding acquiring corporation stockheld by a shareholder other than the issu-ing corporation. The Treasury and the IRSbelieve that the regulations do apply tosuch an exchange.

Acquiring Corporation’s Use of IssuingCorporation’s Debt

Commentators also requested that theregulations be extended to issuing corpo-ration debt instruments used by the ac-quiring corporation to acquire money orother property from unrelated third par-ties. Because section 1032 only refers tocorporate stock, debt instruments are be-yond the scope of these final regulations.

Reorganizations Coupled with TaxableTransactions

The proposed regulations do not applyif any party to the exchange receives asubstituted basis in the issuing corpora-tion stock. Commentators suggested thatthe final regulations provide that theabove rule does not preclude applicationof the final regulations if a taxable ex-change of issuing corporation stock forproperty accompanies a reorganization.

The Treasury and the IRS believe that ataxable transaction to which the regula-tions apply can accompany a reorganiza-tion, provided that the exchanges are sep-arate and that the assets acquired in thetaxable transaction and the assets ac-quired as part of the reorganization can beidentified. If these elements can be estab-lished, the substituted basis prohibitionshould not preclude application of thefinal regulations to the taxable portion ofthe exchange. Accordingly, clarifyinglanguage has been added to§1.1032–3(c)(3).

Options Without a Readily AscertainableFair Market Value

Several commentators asked how theproposed regulations apply to a compen-satory stock option without a readily as-certainable fair market value. Pursuant tosection 83(e)(3) and §1.83–7(a), the grantof such options is effectively treated as anopen transaction. Section §1.83–7(a) pro-

vides that section 83(a) and (b) applies atthe time the option is exercised or is oth-erwise disposed of. An example has beenadded to confirm that the final regulationsdo not apply to such options.

When the option is exercised, section83(a) and (b) applies to the transfer ofstock pursuant to the exercise. If all ofthe requirements of §1.1032–3 are met,those regulations apply to determine thetreatment accorded the issuing corpora-tion and the acquiring corporation upontransfer of the issuing corporation stock tothe employee.

Reversionary Interest in IssuingCorporation Stock

Examples 4 and 5 of the proposed regu-lations set forth situations in which eitherthe issuing corporation (X) or the acquir-ing corporation (Y) retains a reversionaryinterest in the issuing corporation stock.One commentator pointed out that thepreamble of the proposed regulationsdoes not articulate reasons for concernwith reversionary interests.

These facts were included in the exam-ples in the proposed regulations to indi-cate ownership of the stock for tax pur-poses. Example 6 of the final regulationshas been modified to state that X retainsthe only reversionary interest in the Xstock in the event that A forfeits the rightto the stock.

Actual Payment for Issuing CorporationStock

Under the cash purchase model of theproposed regulations, the acquiring cor-poration is deemed to have purchased theissuing corporation stock from the issuingcorporation for fair market value withcash contributed to the acquiring corpora-tion by the issuing corporation. Commen-tators requested clarification of the taxconsequences in cases where the acquir-ing corporation or another party makes anactual payment to the issuing corporationfor issuing corporation stock. Specifi-cally, concern was expressed as towhether any or all of the amounts actuallypaid to the issuing corporation are treatedas a distribution by the acquiring corpora-tion to the issuing corporation. Assume,for example, that the issuing corporation,which owns all the stock of the acquiringcorporation, transfers an option for issu-ing corporation stock to an employee of

2000–23 I.R.B. 1153 June 5, 2000

the acquiring corporation. At a time whenone share of issuing corporation stock hasa fair market value of $100, that em-ployee exercises the option to acquire oneshare of issuing corporation stock andpays a strike price of $80 to the issuingcorporation. The acquiring corporationpays some or all of the “spread” of $20 tothe issuing corporation.

The Treasury and the IRS do not believethat an actual payment to the issuing corpo-ration for issuing corporation stock shouldbe taxed as a distribution with respect to ac-quiring corporation stock. Accordingly, thefinal regulations have been modified toprovide that the amount of cash deemedcontributed by the issuing corporation tothe acquiring corporation in the cash pur-chase model is equal to the difference be-tween the fair market value of the issuingcorporation stock and the fair market valueof the money or other property received bythe issuing corporation as payment fromthe employee or the acquiring corporation.An example to such effect has been addedto the final regulations.

Although in other contexts partial pay-ments received by a shareholder of an ac-quiring corporation should be characterizedas boot under section 351(b), these finalregulations integrate such payments intothe cash purchase model described above.Because the property transferred by the is-suing corporation to the acquiring corpora-tion in this context is the issuing corpora-tion’s stock (or is deemed to be cash underthe recast of these regulations), characteri-zation of the payment as boot in this con-text would have no effect. No inferenceshould be drawn from the recast in the finalregulations to transactions in which a share-holder receives money or other property inexchange for property other than its ownstock.

Section 1.83–6 is currently under study.A cross-reference in §1.83–6(d) to thesefinal regulations has been added to indicatethat the mechanics of §1.1032–3, ratherthan the mechanics of §1.83–6(d), apply toa corporate shareholder’s transfer of itsown stock to any person in consideration ofservices performed for another entity wherethe conditions of the final regulations aresatisfied.

Applicability of the Final Regulations inthe Partnership Context

Consistent with a suggestion by com-

mentators that the regulations be ex-panded to apply to transactions involvingpartnerships, the final regulations treat anacquiring partnership’s disposition of thestock of the issuing corporation in thesame manner as an acquiring corpora-tion’s disposition of such stock. The reg-ulations also have been expanded to applyto transactions in which the stock of theissuing corporation is obtained indirectlyby the acquiring entity in any combina-tion of exchanges under sections 721 and351.

In certain situations where the recast ofthe final regulations does not apply to thedisposition by a partnership of a corporatepartner’s stock (for example, because theimmediacy requirement is not satisfied),realized gain or loss that is allocated tothat corporate partner may nonethelessnot be recognized pursuant to section1032. See Rev. Rul. 99–57 (1999–51I.R.B. 678).

Status of §1.1502–13(f)(6)(ii)The Treasury and the IRS believe that

the finalization of these §1.1032–3 regu-lations renders §1.1502–13(f)(6)(ii) su-perfluous because there should be nocases which would be subject to recastunder §1.1502–13(f)(6)(ii), but in which amember would “otherwise recognizegain” as required for §1.1502–13(f)(6)(ii)to apply. Accordingly, the effective dateparagraph in the §1.1502–13(f)(6) regula-tions has been modified to limit the ap-plicability of §1.1502–13(f)(6)(ii) and thelast sentence of §1.1502–13(f)(6)(iv)(A)to periods before the effective date ofthese regulations.

Status of Rev. Rul. 80–76

The preamble to the proposed regula-tions states that Rev. Rul. 80–76 (1980–1C.B. 15) addresses the same issues as theproposed regulations and that, when final-ized, the regulations will render Rev. Rul.80–76 obsolete. In Rev. Rul. 80–76, amajority shareholder of parent transfersparent stock to an employee of its sub-sidiary corporation as compensation. Theholding of the revenue ruling that the sub-sidiary does not recognize gain or loss onthe transfer of the parent stock is nowgoverned by these regulations. An exam-ple has been added to the final regulationsto clarify how general tax principles (seeCommissioner v. Fink , 483 U.S. 89(1987)) and these final regulations inter-

act when a shareholder of the parent/issu-ing corporation compensates an employeeof the subsidiary/acquiring corporation.With the finalization of these regulations,Rev. Rul. 80–76 is obsolete.

Additional Issues and Future Guidance

Since issuance of the proposed regula-tions, commentators have raised questionsregarding the tax treatment of restrictedstock and options granted to employees be-fore or in connection with a transaction inwhich an issuing corporation distributes thestock of the acquiring corporation undersection 355 (commonly referred to as a“spin off”). For example, assume that em-ployees of both X corporation and its sub-sidiary Y corporation have outstanding op-tions to acquire stock in X corporation. Inconnection with a spin off of the Y stock byX, the employees of both corporations havetheir outstanding options converted into op-tions to acquire stock of both X and Y, withoption terms preserving the overall valuesof the original options. Commentatorshave requested guidance on the tax conse-quences to X when, after the spin off, em-ployees of X exercise options to acquire Ystock and, likewise, the tax consequencesto Y when, after the spin off, employees ofY exercise options to acquire X stock.Guidance addressing these issues will beforthcoming.

Effective Date

Commentators suggested that taxpayerswho engaged in transactions described inthese final regulations prior to the effectivedate should be eligible for the tax treatmentprescribed by the regulations. While thefinal regulations are applicable onlyprospectively, the IRS will not challenge ataxpayer’s position taken in a prior periodthat is consistent with the requirements setforth in the final regulations.

For a discussion of transitional reliefconcerning certain Rabbi Trust arrange-ments, see the discussion of the immedi-acy requirement above.

Effect on Other Documents

Rev. Rul. 80–76 (1980–1 C.B. 15) isobsolete.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-

June 5, 2000 1154 2000–23 I.R.B.

tory action as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions, and, because these regulations donot impose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the InternalRevenue Code, the notices of proposedrulemaking preceding these regulationswere submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comment on their impact onsmall business.


The principal author of these final reg-ulations is Filiz A. Serbes of the Office ofthe Assistant Chief Counsel (Corporate),IRS. However, other personnel from theIRS and the Treasury Department partici-pated in its development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to

read in part as follows:Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.83–6 is amended by

adding two sentences to the end of para-graph (d)(1) to read as follows:§1.83–6 Deduction by employer.* * * * *

(d) * * * (1) * * * For special rules thatmay apply to a corporation’s transfer ofits own stock to any person in considera-tion of services performed for anothercorporation or partnership, see§1.1032–3. The preceding sentence ap-plies to transfers of stock and amountspaid for such stock occurring on or afterMay 16, 2000.* * * * *

Par. 3. Section 1.1032–2 is amendedby:

1. Revising paragraph (e).2. Adding paragraph (f).The addition and revision read as follows:

§1.1032–2 Disposition by a corporationof stock of a controlling corporation incertain triangular reorganizations. * * * * *

(e) Stock options. The rules of this sec-tion shall apply to an option to buy or sellP stock issued by P in the same manner asthe rules of this section apply to P stock.

(f) Effective dates. This section appliesto triangular reorganizations occurring onor after December 23, 1994, except forparagraph (e) of this section, which ap-plies to transfers of stock options occur-ring on or after May 16, 2000.

Par. 4. Section 1.1032–3 is added toread as follows:§1.1032–3 Disposition of stock or stockoptions in certain transactions not quali-fying under any other nonrecognition pro-vision.

(a) Scope. This section provides rulesfor certain transactions in which a corpo-ration or a partnership (the acquiring en-tity) acquires money or other property (asdefined in §1.1032–1) in exchange, inwhole or in part, for stock of a corpora-tion (the issuing corporation).

(b) Nonrecognition of gain or loss—(1)General rule. In a transaction to which thissection applies, no gain or loss is recog-nized on the disposition of the issuing cor-poration’s stock by the acquiring entity.The transaction is treated as if, immediatelybefore the acquiring entity disposes of thestock of the issuing corporation, the acquir-ing entity purchased the issuing corpora-tion’s stock from the issuing corporation forfair market value with cash contributed tothe acquiring entity by the issuing corpora-tion (or, if necessary, through intermediatecorporations or partnerships). For rulesthat may apply in determining the issuingcorporation’s adjustment to basis in the ac-quiring entity (or, if necessary, in determin-ing the adjustment to basis in intermediateentities), see sections 358, 722, and the reg-ulations thereunder.

(2) Special rule for actual payment forstock of the issuing corporation. If the is-suing corporation receives money or otherproperty in payment for its stock, theamount of cash deemed contributed underparagraph (b)(1) of this section is the dif-ference between the fair market value ofthe issuing corporation stock and theamount of money or the fair market valueof other property that the issuing corpora-tion receives as payment.

(c) Applicability. The rules of this sec-tion apply only if, pursuant to a plan toacquire money or other property—

(1) The acquiring entity acquires stockof the issuing corporation directly or indi-rectly from the issuing corporation in atransaction in which, but for this section,the basis of the stock of the issuing corpo-ration in the hands of the acquiring entitywould be determined, in whole or in part,with respect to the issuing corporation’sbasis in the issuing corporation’s stockunder section 362(a) or 723;

(2) The acquiring entity immediatelytransfers the stock of the issuing corpora-tion to acquire money or other property(from a person other than an entity fromwhich the stock was directly or indirectlyacquired);

(3) The party receiving stock of the is-suing corporation in the exchange speci-fied in paragraph (c)(2) of this sectionfrom the acquiring entity does not receivea substituted basis in the stock of the issu-ing corporation within the meaning ofsection 7701(a)(42); and

(4) The issuing corporation stock is notexchanged for stock of the issuing corpo-ration.

(d) Stock options. The rules of this sec-tion shall apply to an option issued by acorporation to buy or sell its own stock inthe same manner as the rules of this sec-tion apply to the stock of an issuing cor-poration.

(e) Examples. The following examplesillustrate the application of this section:

Example 1. (i) X, a corporation, owns all of thestock of Y corporation. Y reaches an agreement withC, an individual, to acquire a truck from C in ex-change for 10 shares of X stock with a fair marketvalue of $100. To effectuate Y’s agreement with C,X transfers to Y the X stock in a transaction in which,but for this section, the basis of the X stock in thehands of Y would be determined with respect to X’sbasis in the X stock under section 362(a). Y immedi-ately transfers the X stock to C to acquire the truck.

(ii) In this Example 1, no gain or loss is recog-nized on the disposition of the X stock by Y. Imme-diately before Y’s disposition of the X stock, Y istreated as purchasing the X stock from X for $100 ofcash contributed to Y by X. Under section 358, X’sbasis in its Y stock is increased by $100.

Example 2. (i) Assume the same facts as Example1, except that, rather than X stock, X transfers an optionwith a fair market value of $100 to purchase X stock.

(ii) In this Example 2, no gain or loss is recog-nized on the disposition of the X stock option by Y.Immediately before Y’s disposition of the X stockoption, Y is treated as purchasing the X stock optionfrom X for $100 of cash contributed to Y by X.Under section 358, X’s basis in its Y stock is in-creased by $100.

2000–23 I.R.B. 1155 June 5, 2000

Example 3. (i) X, a corporation, owns all of theoutstanding stock of Y corporation. Y is a partnerin partnership Z. Z reaches an agreement with C,an individual, to acquire a truck from C in ex-change for 10 shares of X stock with a fair marketvalue of $100. To effectuate Z’s agreement withC, X transfers to Y the X stock in a transaction inwhich, but for this section, the basis of the X stockin the hands of Y would be determined with re-spect to X’s basis in the X stock under section362(a). Y immediately transfers the X stock to Z ina transaction in which, but for this section, thebasis of the X stock in the hands of Z would be de-termined under section 723. Z immediately trans-fers the X stock to C to acquire the truck.

(ii) In this Example 3, no gain or loss is recog-nized on the disposition of the X stock by Z. Im-mediately before Z’s disposition of the X stock, Zis treated as purchasing the X stock from X for$100 of cash indirectly contributed to Z by Xthrough an intermediate corporation, Y. Undersection 722, Y’s basis in its Z partnership interestis increased by $100, and, under section 358, X’sbasis in its Y stock is increased by $100.

Example 4. (i) X, a corporation, owns all of theoutstanding stock of Y corporation. B, an individ-ual, is an employee of Y. Pursuant to an agreementbetween X and Y to compensate B for services pro-vided to Y, X transfers to B 10 shares of X stockwith a fair market value of $100. Under §1.83–6(d), but for this section, the transfer of X stock byX to B would be treated as a contribution of the xstock by X to the capital of Y, and immediatelythereafter, a transfer of the X stock by Y to B. Butfor this section, the basis of the X stock in thehands of Y would be determined with respect toX’s basis in the X stock under section 362(a).

(ii) In this Example 4, no gain or loss is recog-nized on the deemed disposition of the X stock byY. Immediately before Y’s deemed disposition ofthe X stock, Y is treated as purchasing the X stockfrom X for $100 of cash contributed to Y by X.Under section 358, X’s basis in its Y stock is in-creased by $100.

Example 5. (i) X, a corporation, owns all of theoutstanding stock of Y corporation. B, an individ-ual, is an employee of Y. To compensate B for ser-vices provided to Y, B is offered the opportunity topurchase 10 shares of X stock with a fair marketvalue of $100 at a reduced price of $80. B trans-fers $80 and Y transfers $10 to X as partial pay-ment for the X stock.

(ii) In this Example 5, no gain or loss is recog-nized on the deemed disposition of the X stock byY. Immediately before Y’s deemed disposition ofthe X stock, Y is treated as purchasing the X stockfrom X for $100, $80 of which Y is deemed tohave received from B, $10 of which originatedwith Y, and $10 of which is deemed to have beencontributed to Y by X. Under section 358, X’s basisin its Y stock is increased by $10.

Example 6. (i) X, a corporation, owns stock ofY. To compensate Y’s employee, B, for servicesprovided to Y, X issues 10 shares of X stock to B,subject to a substantial risk of forfeiture. B doesnot have an election under section 83(b) in effectwith respect to the X stock. X retains the only re-versionary interest in the X stock in the event thatB forfeits the right to the stock. Several years afterX’s transfer of the X shares, the stock vests. At the

time the stock vests, the 10 shares of X stock havea fair market value of $100. Under §1.83– 6(d),but for this section, the transfer of the X stock by Xto B would be treated, at the time the stock vests,as a contribution of the X stock by X to the capitalof Y, and immediately thereafter, a disposition ofthe X stock by Y to B. The basis of the X stock inthe hands of Y, but for this section, would be deter-mined with respect to X’s basis in the X stockunder section 362(a).

(ii) In this Example 6, no gain or loss is recog-nized on the deemed disposition of X stock by Ywhen the stock vests. Immediately before Y’sdeemed disposition of the X stock, Y is treated aspurchasing X’s stock from X for $100 of cash con-tributed to Y by X. Under section 358, X’s basis inits Y stock is increased by $100.

Example 7. (i) Assume the same facts as in Ex-ample 6, except that Y (rather than X) retains a re-versionary interest in the X stock in the event thatB forfeits the right to the stock. Several years afterX’s transfer of the X shares, the stock vests.

(ii) In this Example 7, this section does notapply to Y’s deemed disposition of the X shares be-cause Y is not deemed to have transferred the Xstock to B immediately after receiving the stockfrom X. For the tax consequences to Y on thedeemed disposition of the X stock, see §1.83–6(b).

Example 8. (i) X, a corporation, owns all of theoutstanding stock of Y corporation. In Year 1, Xissues to Y’s employee, B, a nonstatutory stock op-tion to purchase 10 shares of X stock as compensa-tion for services provided to Y. The option is exer-cisable against X and does not have a readilyascertainable fair market value (determined under§1.83–7(b)) at the time the option is granted. InYear 2, B exercises the option by paying X thestrike price of $80 for the X stock, which then hasa fair market value of $100.

(ii) In this Example 8, because, under section83(e)(3), section 83(a) does not apply to the grantof the option, paragraph (d) of this section alsodoes not apply to the grant of the option. Section83 and §1.1032–3 apply in Year 2 when the optionis exercised; thus, no gain or loss is recognized onthe deemed disposition of X stock by Y in Year 2.Immediately before Y’s deemed disposition of theX stock in Year 2, Y is treated as purchasing the Xstock from X for $100, $80 of which Y is deemedto have received from B and the remaining $20 ofwhich is deemed to have been contributed to Y byX. Under section 358, X’s basis in its Y stock is in-creased by $20.

Example 9. (i) A, an individual, owns a major-ity of the stock of X. X owns stock of Y constitut-ing control of Y within the meaning of section368(c). A transfers 10 shares of its X stock to B, akey employee of Y. The fair market value of the10 shares on the date of transfer was $100.

(ii) In this Example 9, A is treated as making anondeductible contribution of the 10 shares of X tothe capital of X, and no gain or loss is recognizedby A as a result of this transfer. See Commissionerv. Fink, 483 U.S. 89 (1987). A must allocate hisbasis in the transferred shares to his remainingshares of X stock. No gain or loss is recognized onthe deemed disposition of the X stock by Y. Imme-diately before Y’s disposition of the X stock, Y istreated as purchasing the X stock from X for $100of cash contributed to Y by X. Under section 358,

X’s basis in its Y stock is increased by $100.Example 10. (i) In Year 1, X, a corporation,

forms a trust which will be used to satisfy deferredcompensation obligations owed by Y, X’s whollyowned subsidiary, to Y’s employees. X funds thetrust with X stock, which would revert to X upontermination of the trust, subject to the employees’rights to be paid the deferred compensation due tothem. The creditors of X can reach all the trust as-sets upon the insolvency of X. Similarly, Y’s cred-itors can reach all the trust assets upon the insol-vency of Y. In Year 5, the trust transfers X stock tothe employees of Y in satisfaction of the deferredcompensation obligation.

(ii) In this Example 10, X is considered to bethe grantor of the trust, and, under section 677, Xis also the owner of the trust. Any income earnedby the trust would be reflected on X’s income taxreturn. Y is not considered a grantor or owner ofthe trust corpus at the time X transfers X stock tothe trust. In Year 5, when employees of Y receive Xstock in satisfaction of the deferred compensationobligation, no gain or loss is recognized on thedeemed disposition of the X stock by Y. Immedi-ately before Y’s deemed disposition of the X stock,Y is treated as purchasing the X stock from X forfair market value using cash contributed to Y by X.Under section 358, X’s basis in its Y stock in-creases by the amount of cash deemed contributed.

(f) Effective date. This section appliesto transfers of stock or stock options ofthe issuing corporation occurring on orafter May 16, 2000.

Par. 5. In §1.1502–13, paragraph(f)(6)(v) is amended by adding a sentenceafter the first sentence to read as follows:§1.1502–13 Intercompany transactions.* * * * *

(f) ***(6) *** (v) Effective date. *** However, para-

graph (f)(6)(ii) of this section and the lastsentence of paragraph (f)(6)(iv)(A) of thissection do not apply to dispositions of Pstock or options occurring on or after May16, 2000. **** * * * *





of the Treasury.

(Filed by the Office of the Federal Register on May11, 2000, 2:30 p.m., and published in the issue of theFederal Register for May 16, 2000, 65 F.R. 31073)

June 5, 2000 1156 2000–23 I.R.B.

Section 1274.—Determinationof Issue Price in the Case ofCertain Debt Instruments Issuedfor Property

(Also sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate, andthe long-term exempt rate. For purposesof sections 1274, 1288, 382, and othersections of the Code, tables set forth therates for June 2000.

Rev. Rul. 2000–28

This revenue ruling provides variousprescribed rates for federal income taxpurposes for June 2000 (the currentmonth.) Table 1 contains the short-term,mid-term, and long-term applicable fed-eral rates (AFR) for the current month forpurposes of section 1274(d) of the Inter-nal Revenue Code. Table 2 contains theshort-term, mid-term, and long-term ad-justed applicable federal rates (adjustedAFR) for the current month for purposes

of section 1288(b). Table 3 sets forth theadjusted federal long-term rate and thelong-term tax-exempt rate described insection 382(f). Table 4 contains the ap-propriate percentages for determining thelow-income housing credit described insection 42(b)(2) for buildings placed inservice during the current month. Finally,Table 5 contains the federal rate for deter-mining the present value of an annuity, aninterest for life or for a term of years, or aremainder or a reversionary interest forpurposes of section 7520.

2000–23 I.R.B. 1157 June 5, 2000

REV. RUL. 2000–28 TABLE 1

Applicable Federal Rates (AFR) for June 2000

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-Term

AFR 6.53% 6.43% 6.38% 6.35% 110% AFR 7.19% 7.07% 7.01% 6.97%120% AFR 7.87% 7.72% 7.65% 7.60%130% AFR 8.53% 8.36% 8.27% 8.22%

Mid-Term

AFR 6.62% 6.51% 6.46% 6.42%110% AFR 7.29% 7.16% 7.10% 7.06%120% AFR 7.96% 7.81% 7.74% 7.69%130% AFR 8.64% 8.46% 8.37% 8.31%150% AFR 10.01% 9.77% 9.65% 9.58%175% AFR 11.71% 11.39% 11.23% 11.13%

Long-Term

AFR 6.39% 6.29% 6.24% 6.21%110% AFR 7.04% 6.92% 6.86% 6.82%120% AFR 7.69% 7.55% 7.48% 7.43%130% AFR 8.35% 8.18% 8.10% 8.04%


Adjusted AFR for June 2000

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-termadjusted AFR 4.62% 4.57% 4.54% 4.53%

Mid-termadjusted AFR 5.01% 4.95% 4.92% 4.90%

Long-termadjusted AFR 5.65% 5.57% 5.53% 5.51%


Rates Under Section 382 for June 2000

Adjusted federal long-term rate for the current month 5.65%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjustedfederal long-term rates for the current month and the prior two months.) 5.75%

June 5, 2000 1158 2000–23 I.R.B.


Appropriate Percentages Under Section 42(b)(2)for June 2000

Appropriate percentage for the 70% present value low-income housing credit 8.53%

Appropriate percentage for the 30% present value low-income housing credit 3.65%


Rate Under Section 7520 for June 2000

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 8.0%

Section 1288.—Treatment ofOriginal Issue Discounts on Tax-Exempt Obligations


Section 1441.—Withholding ofTax On Nonresident Aliens

26 CFR 1.1441–1: Requirements for the deductionand withholding of tax on payments to foreignpersons.

T.D. 8881

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Parts 1 and 31

Revisions to RegulationsRelating to Withholding of Taxon Certain U.S. Source IncomePaid to Foreign Persons andRevisions of InformationReporting Regulations



SUMMARY: This document containsamendments to final regulations relatingto the withholding of income tax undersections 1441, 1442, and 1443 on certainU.S. source income paid to foreign per-sons and related requirements governingcollection, deposit, refunds, and credits ofwithheld amounts under sections 1461through 1463. Additionally, this docu-ment contains amendments under sections6041, 6041A, 6042, 6045, 6049, and3406. This regulation affects personsmaking payments of U.S. source incometo foreign persons.

DATES: These regulations are effectiveJanuary 1, 2001.

FOR FURTHER INFORMATION CON-TACT: Carl Cooper, Laurie Hatten-Boyd,or Kate Hwa (202) 622-3840 (not a tollfree number).


Paperwork Reduction Act

The collections of information in thesefinal regulations have been reviewed andapproved by the Office of Managementand Budget in accordance with the Paper-work Reduction Act of 1995 (44 U.S.C.3507) under control number 1545 -1484.

Responses to these collections of infor-mation are required to obtain a benefit (toclaim an exemption to, or a reduction in,withholding), and to facilitate tax compli-ance (to verify entitlement to an exemp-tion or a reduced rate). The likely respon-dents are individuals, businesses, andother for-profit organizations.

Comments on the collections of infor-mation should be sent to the Office ofManagement and Budget, Attn: DeskOfficer for the Department of the Trea-sury, Office of Information and Regula-tory Affairs, Washington, DC 20503, withcopies to the Internal Revenue Service,Attn: IRS Reports Clearance Officer,OP:FS:FP, Washington, DC 20224.

The estimated average annual burdenper respondent and/or recordkeeper arereflected in the burdens of Forms W-8,1042, 1042-S, 1099, and the income taxreturn of a foreign person filed for pur-poses of claiming a refund.

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless the col-lection of information displays a validcontrol number assigned by the Office ofManagement and Budget.

Books or records relating to a collec-tion of information must be retained as

long as their contents may become mater-ial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

In Treasury Decision 8734 (1997–2C.B. 109 [62 F.R. 53387]), the TreasuryDepartment and the IRS issued compre-hensive regulations (final regulations)under chapter 3 (sections 1441- 1464) andsubpart G of Subchapter A of chapter 61(sections 6041-6050S) of the InternalRevenue Code. Those final regulationswere amended by TD 8804 (1999–12I.R.B. 5 [63 F.R. 72183]) which delayedthe effective date of the final regulationsto payments made after December 31,1999. The effective date of the regulationswas again extended by TD 8856 (2000–3I.R.B. 298 [64 F.R. 73408]) to paymentsmade after December 31, 2000.

Need for Changes

Since the publication of TD 8734, theIRS and Treasury of have received nu-merous comments relating to technical er-rors in the regulations and ways to easecompliance while keeping the objectivesof the regulations in place. In Notice 99–8(1999–5 I.R.B. 26), the IRS and Treasuryannounced amendments that would bemade to the regulations. This TD imple-ments Notice 99–8 and contains addi-tional changes made in response to com-ments as well as the IRS and Treasury’sfurther analysis of the regulations.

Explanation of Revisions

A. Changes to §1.1441–1

1. Payments to a U.S. Branch of CertainForeign Banks or Foreign InsuranceCompanies.

Generally, a payment to a U.S. branchof a foreign person is a payment to a for-eign person. Under §1.1441–1(b)(2)(iv),however, a U.S. branch of certain foreignbanks or insurance companies and a with-holding agent may agree to treat the U.S.branch as a U.S. person for purposes ofchapter 3 of the Internal Revenue Code.The regulation as initially drafted re-quired a withholding agent to treat such aU.S. branch as a U.S. person for all pur-poses under chapter 3 of the Internal Rev-

enue Code. The regulation itself, how-ever, does not treat a U.S. branch as aU.S. person for all purposes under chapter3 of the Internal Revenue Code. For ex-ample, a U.S. branch of a foreign bank orinsurance company provides a withhold-ing certificate on a Form W-8, which isused only by foreign persons. Further,under §1.1461–1(c), payments to such abranch are reportable as payments to aforeign person on Form 1042-S. There-fore, §1.1441–1(b)(2)(iv) has beenamended to state that, notwithstanding theagreement between the withholding agentand a U.S. branch to the treat the U.S.branch as a U.S. person, the branch is nottreated as a U.S. person for purposes ofproviding documentation or for reportingpayments to the branch.

2. Rules for Reliably Associating a Pay-ment With a Withholding Certificate orOther Appropriate Documentation

Section 1.1441–1(b)(2)(vii) containsrules to determine whether a payment canbe reliably associated with valid docu-mentation. A payment that cannot be reli-ably associated with valid documentationis subject to the presumption rules in§§1.1441–1(b)(3), 1.1441–4(a)(2)(ii) and(3)(i), 1.1441–5(d) and (e)(6),1.1441–9(b)(3), and 1.6049–5(d). Para-graph (b)(2)(vii) did not adequately ad-dress when a payment made to a nonqual-ified intermediary, a flow-through entity,or a U.S. branch of certain foreign banksand insurance companies (other than abranch that acts as a U.S. person) wouldbe treated as reliably associated with doc-umentation. These entities provide awithholding certificate for themselves andwithholding certificates, documentary ev-idence, or other information for the per-sons on whose behalf they act. Therefore,the payment must be reliably associatednot only with a withholding certificatefrom the intermediary, flow-through en-tity, or U.S. branch, but also with docu-mentation from, or information relatingto, the payee on whose behalf the entityacts.

Paragraph (b)(2)(vii) has beenamended to provide more detailed reliableassociation rules. For a payment made toa nonqualified intermediary, a flow-through entity, or a U.S. branch, newparagraph (b)(2)(vii)(B) provides that awithholding agent can reliably associate

the payment with valid documentation if,prior to the payment, it has received avalid nonqualified intermediary withhold-ing certificate on Form W-8IMY; it candetermine the portion of the payment thatrelates to valid documentation associatedwith the Form W-8IMY from a payee(i.e., a person other than a nonqualifiedintermediary, flow-through entity, or U.S.branch); and the nonqualified intermedi-ary, flow-through entity, or U.S. branchhas provided sufficient information forthe withholding agent to report the pay-ment on Form 1042-S or Form 1099, ifreporting is required.

Paragraph (b)(2)(vii)(C) provides rulesfor a withholding agent that makes a pay-ment to a qualified intermediary that doesnot assume primary withholding responsi-bility under chapter 3 of the Internal Rev-enue Code or primary Form 1099 report-ing and backup withholding responsibilityunder chapter 61 and section 3406 of theInternal Revenue Code. The payment canbe reliably associated with valid docu-mentation if, prior to the payment, thewithholding agent receives a valid quali-fied intermediary withholding certificateon Form W-8IMY and a withholdingstatement that allocates the paymentamong withholding rate pools, includingwithholding rate pools for each U.S. non-exempt recipient for which the qualifiedintermediary has provided a valid FormW-9 (or other information if a Form W-9has not been provided).

For a payment made to a qualified in-termediary that assumes primary with-holding responsibility under chapter 3 ofthe Internal Revenue Code with respect tothe payment, but does not assume primaryForm 1099 reporting and backup with-holding responsibility under chapter 61and section 3406 of the Internal RevenueCode, paragraph (b)(2)(vii)(D) providesthat a withholding agent can reliably asso-ciate the payment with valid documenta-tion if, prior to the payment, it receives avalid Form W-8IMY and the withholdingstatement associated with the Form W-8IMY allocates the payment between asingle withholding rate pool for which thequalified intermediary assumes primarywithholding responsibility and separatewithholding rate pools for each U.S. non-exempt recipient.

Paragraph (b)(2)(vii)(E) provides rulesfor a withholding agent that makes a pay-

2000–23 I.R.B. 1159 June 5, 2000

ment to a qualified intermediary that as-sumes primary Form 1099 reporting andbackup withholding responsibility underchapter 61 and section 3406 of the InternalRevenue Code, but does not assume pri-mary withholding responsibility underchapter 3 of the Internal Revenue Code.The payment can be reliably associatedwith valid documentation if, prior to thepayment, the withholding agent can asso-ciate the payment with a valid Form W-8IMY and the withholding statement asso-ciated with the Form W-8IMY allocatesthe payment among the withholding ratepool or pools for which withholding re-sponsibility is not assumed and the portionof payment for which the qualified inter-mediary assumes Form 1099 reportingand backup withholding responsibility.

Finally, for a payment made to a quali-fied intermediary that assumes both pri-mary withholding responsibility underchapter 3 of the Internal Revenue Codeand primary Form 1099 reporting andbackup withholding responsibility underchapter 61 and section 3406 of the Inter-nal Revenue Code, paragraph(b)(2)(vii)(F) provides that a withholdingagent can reliably associate the paymentwith valid documentation if, prior to thepayment, it can associate the paymentwith a valid Form W-8IMY. In this case,no withholding rate pool allocation infor-mation is required. This same rule ap-plies for payments made to a withholdingforeign partnership.

3. Presumptions of Classification as Indi-vidual, Corporation, Partnership, etc.

As initially drafted, §1.1441–1(b)(3)(ii)provided a withholding agent with pre-sumption rules to determine a payee’sclassification (e.g., individual, corpora-tion, partnership) if it could not reliablyassociate a payment with valid documen-tation. Paragraph (b)(3)(ii) did not, how-ever, provide a presumption rule if a with-holding agent could reliably associate apayment with documentary evidence (i.e.,documentation other than a withholdingcertificate) from which it could not deter-mine the payee’s classification. For ex-ample, documentary evidence may indi-cate that a payee (other than an entity thatis treated as a per se corporation under§301.7701–2(b)(8)(i)) is a type of entitythat can be organized so that all of itsmembers have limited liability, in which

case it would be treated as an association,or so that one or more of its membershave unlimited liability, in which case itwould be treated as a partnership. Thedetermination of classification can be crit-ical because if the entity is a flow-throughentity, it is not the beneficial owner of thepayment and its documentary evidencecannot be relied upon to grant a reducedrate of withholding.

Section 1.1441–1(b)(3)(ii)(C) has beenadded to permit a withholding agent totreat an entity that has provided documen-tary evidence as a corporation if the clas-sification of the entity cannot be deter-mined from documentary evidence or byreference to the exempt recipient rulesunder §1.6049–4(c)(1)(ii). This presump-tion rule will reduce burdens on withhold-ing agents that are permitted to use docu-mentary evidence, such as foreignintermediaries and flow-through entities,which would otherwise have to requestfrom payees additional information re-garding U.S. tax classification. The pre-sumption rule is not, however, intended toallow foreign entities to avoid making thecorrect determination of their classifica-tion and to provide the correct documen-tation. Thus, a foreign entity must make adetermination about its classification andif it determines that it is an intermediary,partnership, foreign simple trust, or for-eign grantor trust under U.S. tax law prin-ciples, it must provide an intermediary orflow-through withholding certificate onForm W-8IMY together with the appro-priate information relating to its cus-tomers, partners, beneficiaries, owners, orother payees. Further, a withholdingagent cannot treat an entity as a corpora-tion if it knows, or should know, that theentity is a flow-through entity or interme-diary. For example, if a particular type ofcollective investment vehicle providesdocumentary evidence that does not es-tablish that it is a corporation, partnership,or trust, but the withholding agent knows,or has reason to know, that the investmentvehicle is classified as a partnership forU.S. tax purposes, it must request a part-nership withholding certificate from theentity.

An entity that is presumed to be a for-eign corporation under new paragraph(b)(2)(ii)(C) cannot be treated as the ben-eficial owner entitled to a reduced rate ofwithholding to the extent the documen-

tary evidence indicates that it is a bank,broker, custodian, intermediary, or otheragent unless the entity provides a state-ment that it is the beneficial owner of theincome. For example, documentary evi-dence that indicates that the payee is abank does not permit a withholding agentto apply the portfolio interest exception topayments of interest made to the bank. Inaddition, even though a foreign entity istreated as a beneficial owner for purposesof the exceptions to withholding under theInternal Revenue Code and regulations, itis not necessarily entitled to claim treatybenefits. Whether treaty benefits may beclaimed by an entity depend on whether itmeets the requirements under the incometax treaty and section 894.

4. Changes to presumption rules

Several simplifying and clarifyingchanges have been made to the presump-tion rules in §1.1441–1(b)(3). First, thepresumption rule applicable to pensionsand annuities contained in§1.1441–1(b)(3)(iii)(C) has been expandedto apply to individual retirement accountsand individual retirement annuities. Sec-ond, §1.1441–1(b)(3)(iii)(D), which con-tains presumption rules applicable to off-shore accounts, was revised to state theapplicable rule more clearly. In addition,the restriction on applying the presumptionrule of paragraph (b)(3)(iii)(D) to amountsthat are not subject to withholding hasbeen moved from that paragraph to§1.6049–5(d)(2). This change eliminates aconflict with §1.6049–5(d)(2), as previ-ously drafted, which applied the paragraph(b)(3)(iii)(D) rule to amounts not subject towithholding.

Section 1.1441–1(b)(3)(iv) contains agrace period presumption rule that per-mits a withholding agent to treat a payeeas a foreign person in certain situationswhere the withholding agent would pre-sume the payee to be a U.S. person. Al-though the grace period rule generallydoes not permit a withholding agent toapply any exceptions to withholding, itdoes permit a withholding agent to applya reduced rate of withholding for 90 daysto a payee that provides a withholdingcertificate that would have been valid ex-cept that it was transmitted by facsimile.One commentator noted that because thefacsimile rule applied only to payees thata withholding agent could, “in its discre-

June 5, 2000 1160 2000–23 I.R.B.

tion” treat as a foreign person, the rulewas limited to those situations where thepresumption rules would have treated thepayee as a U.S. person and the withhold-ing agent was exercising its discretion totreat the payee as foreign. Therefore, thecommentator argued, the rule arguablycould not be applied to payees that wererequired to be treated as foreign personsunder the presumption rules, e.g., an ex-empt recipient with indicia of foreign sta-tus. The regulation has been modified byremoving the phrase “in its discretion”thereby permitting the facsimile rule toapply to payees that are treated as foreignpayees under the presumption rules.

Paragraph (b)(3)(v), as promulgated inTD 8734, provided several presumptionrules that applied if a withholding agentdid not receive from a nonqualified inter-mediary the withholding certificates ordocumentary evidence of the persons onwhose behalf the nonqualified intermedi-ary acted or did not receive informationallocating the payment to each person.Under paragraph (b)(3)(v)(C), if the with-holding agent could associate a paymentwith a group of beneficial owners or pay-ees, it could treat the payment as beingmade in its entirety to the person in thegroup that was subject to the highest with-holding rate or, if the rates were equal, tothe payee in the group with the highestU.S. tax liability. If a nonqualified inter-mediary grouped persons subject to simi-lar withholding and tax rates together andallocated the payment to the group, thenonqualified intermediary could achieve areduced rate of withholding for its cus-tomers without reliably associating thepayment to each of the customers thatwould be entitled to the payment. Trea-sury and the IRS stated in Notice 99-8that affording a reduced rate of withhold-ing under these circumstances was inap-propriate. Further, it was inappropriate toreport the entire payment as if it weremade to a single documented payee whowas not entitled to receive the entireamount of income.

Paragraph (b)(3)(v) has been revised sothat whenever a payment to a nonquali-fied intermediary cannot be reliably asso-ciated with valid documentation from aspecific payee, the payment is treated asmade to an undocumented foreign payeeand is subject to 30 percent withholding.Under §1.1461–1(c), such payments are

reported to an unknown owner on Form1042-S. Thus, a payment can no longerbe subject to a reduced rate of withhold-ing because it can be allocated to a groupof documented payees all of whom aresubject to the same reduced rate of with-holding. Similar changes have been madeto the presumption rules that applied toforeign partnerships under former§1.1441–5(d)(3)(ii).

Paragraph (b)(3)(vi), as originallydrafted, was in error. It stated that thepresumption rules that applied to foreignintermediaries also applied to U.S.branches of foreign banks and insurancecompanies that assumed withholding re-sponsibility. The rule should have pro-vided that the intermediary presumptionrules also apply to U.S. branches of for-eign banks and insurance companies thatdo not agree to be treated as U.S. persons.Those branches are generally treated inthe same manner as nonqualified interme-diaries under chapter 3 of the InternalRevenue Code. Therefore, paragraph(b)(3)(vi) has been revised to apply onlyto those branches that are not treated asU.S. persons. Finally, paragraph(b)(3)(vii), which applies to payments tojoint payees, has been amended to clarifythe treatment of payments made to jointaccounts.

5. Rules for Withholding and Reportingof Payments by a Foreign Intermediaryand Certain U.S. Branches

Section 1.1441–1(b)(6) sets forth thewithholding obligations of a foreign inter-mediary and certain U.S. branches. Theregulation, as originally drafted, statedthat a qualified intermediary, a nonquali-fied intermediary, or a U.S. branch of aforeign bank or insurance company wasdeemed to have satisfied any obligation ithad to withhold and report an amount itpaid if it did not know that the correctamount had not been withheld. The ruledid not, however, require a foreign inter-mediary or U.S. branch to report a pay-ment if it knew that the withholding agentfrom whom it received the payment hadnot reported the payment to the persons onwhose behalf the foreign intermediary orU.S. branch acted as long as the correctamount was withheld. For example, if aU.S. withholding agent withheld 30 per-cent from a payment of an amount subjectto withholding made to a nonqualified in-

termediary because the nonqualified inter-mediary failed to provide documentationor allocation information relating to thepersons for whom it acted, the rule re-lieved the nonqualified intermediary fromany obligation to report the payment tothose persons. Foreign intermediaries andU.S. branches, however, are withholdingagents under §1.1441–7(a) and, as statedin Notice 99–8, it is inappropriate to re-lieve them of any reporting responsibilityunless they have provided another with-holding agent with all of the informationthat the withholding agent needs to reportamounts paid to the appropriate recipientsof the income. In addition, paragraph(b)(6) should not have included qualifiedintermediaries, because a qualified inter-mediary has reporting responsibilitieswhether or not another withholding agentproperly reported the payment made to thequalified intermediary.

The regulation has been revised to pro-vide that a nonqualified intermediary orU.S. branch (other than a U.S. branchtreated as a U.S. person) is not required towithhold and report if the nonqualified in-termediary or U.S. branch (i) has pro-vided a valid nonqualified intermediary orU.S. branch withholding certificate, (ii)has provided all of the information re-quired to be included in a withholdingstatement associated with its withholdingcertificate so that another withholdingagent can do the required reporting onForm 1042-S or Form 1099, and (iii) doesnot know, and has no reason to know, thatthe other withholding agent did not with-hold the correct amount or did not reportthe payment correctly. A qualified inter-mediary’s obligations to withhold and re-port are determined in accordance with itsqualified intermediary agreement.

6. Definitions

Section 1.1441–1(c) contains the defin-itions of terms used in the regulationsunder chapter 3 of the Internal RevenueCode. The section has been significantlyexpanded and certain definitions havebeen consolidated in this section. Newdefinitions, or cross-references to defini-tions, have been provided for the termsbeneficial owner, payee, intermediary,nonqualified intermediary, qualified inter-mediary, withholding certificate, docu-mentary evidence, documentation, payor,exempt recipient, non-exempt recipient,

2000–23 I.R.B. 1161 June 5, 2000

reportable amounts, flow-through entity,foreign simple trust, foreign complextrust, foreign grantor trust, partnership,nonwithholding foreign partnership, andwithholding foreign partnership.

Paragraph (c)(6)(i) has been changed tostate specifically that the definition ofbeneficial owner does not apply in caseswhere a reduced rate of withholding isbeing claimed under an income tax treaty.This change has been made to clarify thata person who is a beneficial owner of anitem of income for purposes of these reg-ulations would not necessarily benefi-cially own the item of income for pur-poses of an income tax treaty.

Paragraph (c)(6), as originally drafted,did not include rules to determine the ben-eficial owner of a payment made to a for-eign trust or estate. In general, the regula-tions retained the rules for foreign trustsand estates that existed prior to the publi-cation of TD 8734. The paragraph hasbeen revised to provide specific rules forpayments to foreign trusts and estates.Generally, the beneficial owners of a pay-ment to a foreign simple trust are the ben-eficiaries of the trust. The beneficialowners of a payment made to a foreigngrantor trust are the owners of the trust.Foreign complex trusts and foreign es-tates are considered to be the beneficialowners of income paid to such entities.

Paragraph (c)(12) has been added toclarify the term payee. It provides cross-references to those sections under whichthe payee of income is determined, andemphasizes that foreign intermediariesand flow-through entities are generallynot considered the payees of income. Aqualified intermediary is, however, apayee to the extent it assumes primarywithholding responsibility with respect toa payment, and a flow-through entity is apayee if it is receiving income that is, or istreated as, effectively connected with theconduct of a U.S. trade or business.

The definition of a flow-through entityhas been moved from §1.1441–1(e)(3)(i)to paragraph (c)(23). The definition hasalso been expanded and clarified. Theterm flow- through entity refers to any en-tity which has an obligation to transmitdocumentation to another withholdingagent. Therefore, an entity may be aflow-through entity whether or not the in-come paid to the entity is includible in thegross income of the entity’s owners. A

flow-through entity includes a nonwith-holding foreign partnership, a foreignsimple trust, a foreign grantor trust, or anentity that is fiscally transparent undersection 894 to the extent it provides docu-mentation on behalf of its interest holders.A withholding foreign partnership and awithholding foreign trust are not flow-through entities. The term flow-throughentity has replaced the term partnership innumerous places throughout the regula-tion.

7. Withholding Certificates

a. Forms W-9

Section 1.1441–1(d) contains rules fora payee to establish its status as a U.S.payee. Under paragraph (d), a payee thatprovides a Form W-9 may be treated as aU.S. payee that is not subject to withhold-ing under section 1441. Commentatorshave noted that under current law, there isno prohibition against a foreign personproviding a Form W-9 to establish statusas an exempt recipient. They thereforesuggest that the regulations should beclarified to specifically state that provid-ing a Form W-9 serves as a representationof U.S. status and should only be fur-nished by a U.S. person. In response tothese comments, paragraph (d)(2) hasbeen amended to state that furnishing aForm W-9 serves as a statement that theperson providing the form is a U.S. per-son. Therefore, a foreign person, includ-ing a U.S. branch of a foreign person,should not provide a Form W-9 to a with-holding agent. The instructions to FormW-9 will also be modified to make clearthat providing a Form W-9 is a declara-tion of U.S. status.

Paragraph (d)(3) is revised to eliminatethe requirement for a permanent residenceaddress. Permanent residence address is aterm defined in §1.1441–1(e)(2)(ii) and isgenerally the address of a foreign personin the country in which the person is a res-ident for tax purposes. The term is inap-plicable, and potentially misleading, asapplied to the address a U.S. personshould provide on Form W-9.

Paragraph (d)(4), as originally drafted,provided rules to determine whether apayment was made to a U.S. beneficialowner. Generally, the regulation providedthat if a customer of a foreign intermedi-ary provided a Form W-9, the withhold-

ing agent could treat such person as a U.S.beneficial owner. A customer of a foreignintermediary could also be treated as aU.S. beneficial owner if it provided a U.S.branch withholding certificate that evi-denced its agreement to be treated as aU.S. person. A Form W-9 and a U.S.branch withholding certificate, however,do not establish beneficial ownership.Further, it is not necessary under the regu-lations to determine whether a U.S. payeeis a beneficial owner because a paymentto a U.S. payee is not subject to withhold-ing under chapter 3 of the Internal Rev-enue Code whether or not the payee is thebeneficial owner of the income. Thus, theparagraph has been modified to providethat the withholding agent may treat thepayee of a payment made to a foreign in-termediary or a flow-through entity as aU.S. payee if the payee provides a FormW-9 or a U.S. branch withholding certifi-cate that evidences the branch’s agree-ment to be treated as a U.S. person.

b. Intermediary and flow-through with-holding certificates

Section 1.1441–1(e)(3)(i) provides def-initions for the terms intermediary with-holding certificate, flow-through with-holding certificate, and U.S. branchwithholding certificate. That section orig-inally defined a flow-through withholdingcertificate as a Form W-8 furnished by apartnership (other than a withholding for-eign partnership) or a trust or estate. Theparagraph has been revised to conform tothe definition of flow-through entity con-tained in §1.1441–1(c)(23) and the newrules contained in §1.1441–5(e) regardingforeign trusts and foreign estates, dis-cussed in section E of this Explanation ofProvisions. Under paragraph (e)(3)(i), asrevised, a flow-through withholding cer-tificate is defined as a withholding certifi-cate on Form W-8 furnished by a non-withholding foreign partnership, a foreignsimple trust, a foreign grantor trust, or aforeign entity presenting claims on behalfof its interest holders for a reduced rate ofwithholding under an income tax treaty.Foreign complex trusts and foreign es-tates generally provide beneficial ownerwithholding certificates.

Section 1.1441–1(e)(3)(ii) provides therequirements for a valid withholding cer-tificate provided by a qualified intermedi-ary. The paragraph has been modified to

June 5, 2000 1162 2000–23 I.R.B.

reflect the procedures applicable to quali-fied intermediaries as set forth in Rev.Proc. 2000–12 (2004–4 I.R.B. 1).

Section §1.1441–1(e)(3)(iii) providesrules relating to a nonqualified intermedi-ary withholding certificate. Paragraph(e)(3)(iii) generally provided that payeedocumentation provided with a nonquali-fied intermediary withholding certificateneeded to be attached to the certificate.Similar requirements existed for flow-through withholding certificates and U.S.branch withholding certificates. The reg-ulations have been revised to require thatpayee documentation be associated with,rather than attached to, a nonqualified in-termediary, flow-through, or U.S. branchcertificate to obviate the need for a newwithholding certificate each time payeedocumentation is provided to a withhold-ing agent. The regulations do not set forthspecific requirements for associating doc-umentation. Any reasonable method maybe used to associate documentation withits intermediary withholding certificate.

Paragraph (e)(3)(iii), as originallydrafted, required a certification that thewithholding certificates or other appropri-ate documentation attached to a nonquali-fied intermediary withholding certificaterepresented all of the persons to whom theintermediary withholding certificate re-lated or that the amounts of income allo-cable to persons for whom no documenta-tion was provided was separately stated.A similar requirement applied to nonwith-holding foreign partnership withholdingcertificates in §1.1441–5(c)(3)(iii)(D).The requirement for this certification hasbeen eliminated. The persons on whosebehalf a nonqualified intermediary actswill frequently change as persons openand close accounts with the intermediary.Thus, any such certification may be trueat the time made, but false at a later point,necessitating a new withholding certifi-cate. The elimination of the certificationis not an elimination, however, of the re-quirement to provide payee withholdingcertificates to a withholding agent prior toa payment. The certification requirementhas also been eliminated for nonwithhold-ing foreign partnerships.

Section 1.1441–1(e)(3)(iii) permits anonqualified intermediary to providepayee documentation either in the form ofwithholding certificates or in the form ofdocumentary evidence. The withholding

agent is required to derive informationfrom the withholding certificates or otherdocumentary evidence and report pay-ments to each specific payee on whosebehalf the nonqualified intermediary acts.However, the regulations were silent onhow a withholding agent was to deter-mine the status (U.S. or foreign) or classi-fication (e.g., corporate, partnership, trust,or estate) and other information requiredto report payments on Form 1042-S fromdocumentary evidence, particularly whenthat documentary evidence was in a for-eign language. Further, although the reg-ulations require a nonqualified intermedi-ary to allocate payments to each payee onwhose behalf it acts so that a withholdingagent can report payments to each payeeon Form 1042-S or Form 1099, the regu-lations provided no detail on how the allo-cation information was to be provided.

The regulations have been revised totake these considerations into account.Under §1.1441–1(e)(3)(iv) as revised, anonqualified intermediary must associatewith its nonqualified intermediary with-holding certificate a withholding state-ment which sets forth the information awithholding agent needs to allocate a pay-ment to each payee on whose behalf thenonqualified intermediary acts and to re-port the payment. Specifically, the with-holding statement must contain for eachpayee the payee’s name, address, countryof residence, TIN (if any), the payee’s re-cipient type for Form 1042-S reporting,the applicable rate of withholding, thetype of withholding exception applied (ifany), and the name of any other interme-diary or flow-through entity from whomthe payee directly receives the income.Additional information is required if a re-duced rate of withholding under an in-come tax treaty is claimed. The withhold-ing statement may be provided in anymanner that the withholding agent andnonqualified intermediary agree, includ-ing electronically. It must be updated asfrequently as necessary to remain accu-rate prior to each payment. The regula-tion does not require a nonqualified inter-mediary to provide information for apayee unless the payee is a U.S. non-ex-empt recipient. Information regardingU.S. non-exempt recipients must be pro-vided irrespective of any local laws thatprohibit disclosure of an account holderor account information. Therefore, a non-

qualified intermediary should obtainwaivers from non-disclosure provisionsfrom U.S. non-exempt recipients. To theextent payee information is not provided,whether for a U.S. non-exempt recipientor any other payee, the regulation hasbeen clarified to state explicitly that awithholding agent must withhold underthe presumption rules. Further, the non-qualified intermediary remains liable forany tax not withheld by a withholdingagent and, unless the nonqualified inter-mediary itself files information returns,will also be held liable for penalties im-posed for failure to file information re-turns under sections 6721 and 6722.

Many commentators have argued that itis not practical to provide information al-locating a payment to each payee prior toeach payment because the customers ofnonqualified intermediaries are constantlyacquiring and disposing of investments.Several commentators made suggestionson how the regulations might ease com-pliance burdens. One commentator sug-gested that no allocation informationshould be required except in the case ofincome subject to reduced rates of with-holding under an income tax treaty andpayments made to U.S. non-exempt recip-ients. This suggestion was rejected. TheIRS has provided a mechanism for aggre-gate reporting of payments in the modelqualified intermediary agreement in Rev.Proc. 2000–12 (2000–4 I.R.B. 387). It isinappropriate to extend such treatment tononqualified intermediaries without thesafeguards contained in a qualified inter-mediary agreement. Other commentatorssuggested that a withholding agent shouldwithhold the difference between 30 per-cent of a payment and the claimed re-duced rate of withholding in escrow andrelease the amounts when allocation in-formation is provided. This suggestionwas also not accepted. Such a systemwould leave the escrow funds out of thecontrol of both the IRS and the beneficialowners of the payments. Further, becausethe nonqualified intermediary would haveto provide frequent allocations as soon aspossible after the time of payment to havethe escrow funds released, it appeared toprovide little relief from the pressures in-herent in providing allocation informationprior to a payment. Other commentatorsargued that a reduced rate of withholdingshould be provided at the time of payment

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with allocation information to follow afterthe close of the year with various disin-centives provided for failure to furnish theallocation information. The regulationsgenerally adopt this approach.

Paragraph (e)(3)(iv)(D) provides alter-native procedures that permit a nonquali-fied intermediary to provide informationallocating reportable amounts to payees(including U.S. exempt recipients) byJanuary 31 of the year following the cal-endar year of payment. The alternativeprocedures do not apply to paymentsmade to U.S. non-exempt recipients.Therefore, allocation information forthose persons must be provided prior to apayment. Under the alternative proce-dures, only allocation information may beprovided after a payment is made: allother information that is required to be in-cluded in a withholding statement and ap-propriate payee documentation must beprovided prior to a payment. The non-qualified intermediary may have reducedrates of withholding apply by identifyingpools of income subject to a particularwithholding rate (withholding rate pools)and identifying the payees with the appro-priate withholding rate pools.

Various penalties apply if a nonquali-fied intermediary fails to provide infor-mation to allocate payments in a with-holding rate pool to a withholding agentby January 31. First, the withholdingagent must commence withholding on allpayments in accordance with the pre-sumption rules. Therefore, 30 percentwithholding applies to amounts subject towithholding and 31 percent backup with-holding applies to payments of deposit in-terest and original issue discount on origi-nal issue discount obligations of 183 daysor less. Under a cure provision, the with-held amounts may be returned, and the al-ternative procedures may continue to beused, if the nonqualified intermediaryprovides allocation information by Febru-ary 14. If the nonqualified intermediaryfails to provide allocation information bythat date, withholding continues for thetaxable year, and all subsequent taxableyears, unless the withholding agent pro-vides allocation information prior to apayment. Further, because no allocationinformation has been provided, the pay-ments are considered never to have beenreliably associated with valid documenta-tion and the foreign beneficial owners and

other payees on whose behalf the non-qualified intermediary is acting are notentitled to a reduced rate of withholding.Therefore, the nonqualified intermediaryshall remain liable under section 1461 forthe difference between the amount, if any,withheld by the withholding agent and theamount that should have been withheldunder the presumption rules. Any tax duebecause of an allocation failure will be as-sessed against the nonqualified intermedi-ary and, if necessary, collected from theassets that the nonqualified intermediaryhas with the withholding agent. Interestand penalties may also be assessedagainst the nonqualified intermediary. Inparticular, paragraph (e)(3)(iv)(7) statesthat a failure to provide allocation infor-mation will be presumed to be an inten-tional failure to file information returnsand payee statements under sections 6721and 6722. The IRS will not, however,hold the withholding agent liable for anytax, interest, or penalties, that are duesolely to the failure of the nonqualified in-termediary to provide allocation informa-tion.

The withholding statement rules and al-ternative allocation procedures have alsobeen made applicable to U.S. branches ofcertain foreign banks and insurance com-panies and flow-through entities. Thischange, together with certain otherchanges discussed in this Explanation ofProvisions, generally results in nonquali-fied intermediaries, U.S. branches, andflow-through entities being treated simi-larly.

Paragraph (e)(3)(iv)(E) has been addedto permit the IRS to provide a withhold-ing agent with a notice prohibiting thewithholding agent from applying the al-ternative procedures of paragraph(e)(3)(iv)(D) to an identified nonqualifiedintermediary (or to a flow-through entityor a U.S. branch of a foreign bank or for-eign insurance company) thereby requir-ing allocation information prior to a pay-ment to have a reduced rate ofwithholding apply. In addition, the IRSmay, in appropriate circumstances issue anotice to a withholding agent prohibitingthe withholding agent from applying a re-duced rate of withholding under any cir-cumstances, even if allocation informa-tion is provided prior to a payment. TheIRS contemplates issuing these notices insituations where a nonqualified interme-

diary, flow-through entity, or U.S. branchfails to pay a tax due or is not applyingthe rules of the regulations in good faith.

c. Reportable amounts

Foreign intermediaries, flow-throughentities, and U.S. branches of foreign banksand insurance companies (other than U.S.branches treated as U.S. persons) are re-quired to provide information with respectto reportable amounts, as defined in§1.1441–1(e)(3)(vi). Prior to its revision,paragraph (e)(3)(vi) included in the defini-tion of reportable amounts original issuediscount or interest (OID) paid on short-term instruments. This definition appearedto include interest and OID regardless ofwhether those amounts were paid on the re-demption of an obligation or from the saleor exchange of an obligation in a transac-tion other than a redemption. Under thepresumption rules, if a withholding agentmakes a payment to a foreign intermediaryof interest and OID on a short-term obliga-tion and it lacks documentation for suchamounts, it must presume that the payee isa U.S. non-exempt recipient and report theincome on Form 1099 and backup with-hold on the payment. See§1.6049–5(d)(3)(iii). These rules proved tobe impractical for sales of short-term oblig-ations outside the United States. Foreignintermediaries have contended that they donot have the appropriate systems to reportgains from sales transactions on Forms1099 or to provide the proper allocation in-formation to U.S. payors. Moreover, treat-ing the sale or exchange of short-term OIDinstruments as reportable interest on Form1099 was inconsistent with rules that treatamounts paid on the sale or exchange,other than redemptions, of such obligationsas gross proceeds. See §§1.6045–1(d)(3)and 31.3406(b)(2)–2. Because it is moreappropriate to treat sales, other than re-demptions, of short-term OID instrumentsas gross proceeds rather than payments ofinterest or original issue discount, the regu-lation has been amended to provide that re-portable amounts do not include amountsrepresenting interest or OID on the sale orexchange, other than a redemption, of ashort-term OID instrument. Therefore, aforeign intermediary, flow-through entity,or U.S. branch is not required to provide in-formation regarding these transactions to awithholding agent as part of its withhold-ing statement.

June 5, 2000 1164 2000–23 I.R.B.

d. Period of validity

Section 1.1441–1(e)(4)(ii)(A) statesthat documentary evidence (i.e., docu-mentation other than a withholding cer-tificate) remains valid until “the earlier ofthe last day of the third calendar year fol-lowing the year in which the documentaryevidence is created . . . .“ Commentatorshave stated that it is not clear if a docu-ment is “created” when it comes intobeing or when it is provided to a with-holding agent. They also stated that bas-ing the validity period on the date a docu-ment came into being would be moredifficult to administer because they wouldhave to calculate the expiration date inevery case rather than assuming that itwas valid for three years after it had beenreceived by the withholding agent. In re-sponse to these comments, the rule hasbeen amended to permit the validity pe-riod to be measured from the date docu-mentation is provided to the withholdingagent.

Section 1.1441–1(e)(4)(ii)(B) setsforth the circumstances in which a FormW-8 has an indefinite validity period.Paragraph (e)(4)(ii)(B)(1), as originallydrafted, provided that a Form W-8 thatcontained a TIN was valid indefinitely“if the income for which such certificateis furnished is required to be reported”on Form 1042-S. Commentators notedthat a strict reading of this languagecould preclude the indefinite validity ofa Form W-8 with respect to income thatwas not subject to reporting, even thoughother income paid to the same beneficialowner by the withholding agent was sub-ject to reporting. The regulation hasbeen amended to provide that if there isannual reporting of at least one item ofincome paid by a withholding agent to abeneficial owner, the Form W-8 remainsvalid even for payments that are not sub-ject to reporting. However, if a with-holding agent has a Form W-8 with aTIN but does not make any payments ofan amount subject to withholding, forexample the withholding agent pays onlydeposit interest, the form remains validonly for 3 calendar years after the year ofreceipt. In addition, paragraph(e)(4)(ii)(B)(8) has been added to pro-vide an indefinite validity period for awithholding certificate provided by aforeign simple trust or foreign grantortrust for the purposes of transmitting

withholding certificates or documentaryevidence.

e. Electronic transmission of information

These regulations finalize the regula-tions proposed in REG–107872–97(1997–2 C.B. 658 [62 F.R. 53504]) relat-ing to the electronic submission of FormsW-8 and make them applicable beginningJanuary 1, 2000. Like the proposed regu-lations, the final regulations apply only tosituations where there is a direct relation-ship between the withholding agent orpayor and the beneficial owner or payee.The final regulations reserve on applica-ble standards for transmitting formsthrough tiers of intermediaries. Com-ments were solicited on this matter in thepreamble to the proposed regulations butnone were received. The IRS and Trea-sury recognize the benefits of allowingthe electronic transmission of Forms W-8through one or more intermediaries andcontinue to solicit comments regardingrequirements to ensure the integrity, accu-racy, and reliability of electronicallytransmitted forms through tiers of inter-mediaries.

f. Requirement of taxpayer identifyingnumber

Section 1.1441–1(e)(4)(vii) providesguidance for when a TIN is required on aForm W-8. Paragraph (e)(4)(vii), as orig-inally drafted, required TINs on withhold-ing certificates from all trusts or estates orthe fiduciaries thereof. A number of com-mentators stated that the TIN requirementwas burdensome and unreasonable whenapplied to pension trusts and large invest-ment trusts. In addition, commentatorsnoted that nonwithholding foreign part-nerships, which are treated similarly toforeign simple trusts and foreign grantortrusts, are not required to have a TIN. Inresponse to these comments, the regula-tions have been amended by eliminatingthe TIN requirement for foreign trustsother than foreign grantor trusts with 5 orfewer owners.

Paragraph (e)(4)(vii) has also been modi-fied to state that a TIN is required on a with-holding certificate from a beneficial ownerthat is claiming an exemption based on itsclaim of tax exempt status under section501(c) or private foundation status. Thisdoes not represent a change in the require-ments for a withholding certificate from

such a beneficial owner. The regulation, asoriginally drafted, however, contained therequirement only in §1.1441–9. The re-quirement of a TIN has been repeated in thisparagraph for convenience. Finally, com-mentators noted that there was a conflict be-tween paragraph (e)(4)(vii), which did notrequire a TIN on a withholding certificatefrom a nonwithholding foreign partnership,and §1.1441–5(c)(3)(iii)(A), which statedthat a TIN was required. It was never in-tended that a nonwithholding foreign part-nership withholding certificate used totransmit documentation and information re-lating to its partners have a TIN. Section1.1441–5(c)(3)(iii)(A) has been modifiedaccordingly. TINs are required, however, ifthe withholding foreign partnership is pro-viding a withholding certificate on which itclaims an exemption from withholding be-cause the income is effectively connectedwith the conduct of a trade or business orwhen it is entitled to claim treaty benefitsunder section 894 on income for which aTIN is required under §1.1441–6(b)(1).

g. Requirement to furnish certificates foreach account

Generally, each withholding agent thatmakes a payment to a beneficial ownermust obtain a separate withholding cer-tificate. In addition, a withholding agentthat is a financial institution must obtainwithholding certificates or other appropri-ate documentation on an account-by-ac-count basis from its customers. Underparagraph (e)(4)(ix)(A)(3) of the regula-tions, a withholding agent may rely on awithholding certificate held at anotherbranch of the same withholding agent orof a person related to the withholdingagent if there is a system in place that per-mits a withholding agent to access dataregarding the withholding certificate andto transmit data that affects the validity ofthe documentation into the system. Acommentator noted that the regulations donot contain provisions, however, to let un-related withholding agents utilize such asystem that they maintain in common orthat is maintained by another person.New paragraph (e)(4)(ix)(A)(4) has beenadded to permit unrelated withholdingagents to rely on such a system.

h. Special rules for brokers

Section 1.1441–1(e)(4)(ix)(C) pro-vided that a withholding agent may rely

2000–23 I.R.B. 1165 June 5, 2000

on the certification of a broker acting asthe agent of a beneficial owner if the bro-ker held a valid beneficial owner with-holding certificate or other documentationfor that beneficial owner. As originallydrafted, the intention of this provisionwas unclear. It also appeared to be overlybroad because it would have permitted aforeign broker to retain beneficial ownerdocumentation and not transmit the docu-mentation to a U.S. withholding agent.

Paragraph (e)(4)(ix)(C) has been re-drafted to clarify, and appropriately limit,its application. As redrafted, it appliesonly to a U.S. broker. It permits such abroker that is acting as an introducing orcorresponding broker to provide a clear-ing broker with a certification that it holdsa valid withholding certificate or other ap-propriate documentation. Without thisrule, an introducing or corresponding bro-ker would have to obtain multiple FormsW-8 and provide them to each clearingbroker with whom the introducing or cor-responding broker executes transactions.In addition, paragraph (e)(4)(ix)(C) hasbeen amended to apply only to readilytradeable instruments, as provided in§31.3406(h)–3(d), on which it is mod-eled. An example has been added to illus-trate the paragraph.

8. Qualified Intermediary WithholdingCertificates

Section 1.1441–1(e)(5) provides rulesregarding qualified intermediaries. Therules have been redrafted to more closelyconform with the model qualified inter-mediary agreement published as part ofRev. Proc. 2000–12. The regulation, asoriginally drafted, contained a require-ment that a qualified intermediary dis-close U.S. non-exempt recipients “irre-spective of local secrecy laws.” Themodel qualified intermediary agreementhas specific provisions contained in sec-tion 6.04 of the agreement, as well asother sections, that govern the treatmentof U.S. persons whenever foreign law,whether or not a “secrecy” provision, maypreclude disclosure of a U.S. non-exemptrecipient. Very generally, those provi-sions require a qualified intermediary todisinvest a U.S. non-exempt recipientwho does not waive its local law non-dis-closure privileges and to collect backupwithholding on income and sales pro-ceeds paid to such person. Therefore, the

language stating that disclosure is re-quired “irrespective of local secrecylaws” has been deleted to avoid creatingan inconsistency between the model qual-ified intermediary agreement and the reg-ulation.

The provisions in paragraph (e)(5) re-garding the terms of the withholdingagreement a qualified intermediary mustenter with the IRS have also beenchanged to more generally conform withthe qualified intermediary agreement asset forth in Rev. Proc. 2000–12. The reg-ulation clarifies the consequences of aqualified intermediary’s assumption ofprimary withholding responsibility. Sec-tion 1.1441–1(e)(5)(iv), as originallydrafted, stated that a withholding agentmaking a payment to a qualified interme-diary was required to presume full with-holding responsibility for that paymentunless the qualified intermediary assumedprimary withholding responsibility. Theregulation was potentially misleading be-cause it could have been interpreted tomean that if a qualified intermediary didnot assume primary withholding responsi-bility, only the U.S. withholding agentwas responsible for withholding. Rev.Proc. 2000–12 makes clear, however, thatqualified intermediaries are required towithhold in certain circumstances eventhough they have not assumed primarywithholding responsibility. The rule thatwas initially in paragraph (e)(5)(iv) wasintended to relieve a withholding agentmaking a payment to a qualified interme-diary that assumed primary withholdingresponsibility from the obligation to with-hold, not to relieve the qualified interme-diary of any withholding requirement.The paragraph has been amended to re-flect this intent.

Paragraph (e)(5)(iv) also stated that aqualified intermediary generally wouldnot be permitted to assume withholdingand reporting responsibility under section3406 and chapter 61 of the Internal Rev-enue Code on a payment made to a U.S.person unless the qualified intermediarywas a foreign branch of a U.S. person or aforeign person that had a branch in theUnited States capable of performing suchreporting and withholding. In developingthe model qualified intermediary agree-ment, it became apparent that it was desir-able to permit certain qualified intermedi-aries that did not meet those criteria to

assume reporting and withholding respon-sibility under chapter 61 of the InternalRevenue Code and section 3406. For ex-ample, where payments are made throughclearing organizations, it may be imprac-tical to require a qualified intermediary toprovide information regarding U.S. non-exempt recipients to a U.S. withholdingagent. The language that generally lim-ited the ability to assume reporting andwithholding responsibility under chapter61 of the Internal Revenue Code and sec-tion 3406 has been eliminated. Whether aqualified intermediary may assume suchresponsibility is left to the terms of thequalified intermediary agreement. Seesection 3 of the model qualified interme-diary agreement in Rev. Proc. 2000–12.

Section 1.1441–1(e)(5)(v), as origi-nally drafted, required a qualified inter-mediary to associate a payment with oneof three categories of assets: (i) assets as-sociated with documented foreign per-sons, (ii) assets associated with docu-mented U.S. payees, and (iii) assetsassociated with undocumented payees.These three asset categories were subdi-vided into classes of assets based on with-holding rates and reporting requirements.The asset categories did not provide theneeded flexibility sought by qualified in-termediaries. For example, informationregarding U.S. exempt recipient payees,who are not subject to withholding undersection 1441, could not be combined withinformation regarding foreign beneficialowner payees subject to a zero rate ofwithholding. The model qualified inter-mediary agreement, as published in Rev.Proc. 2000–12, substituted the withhold-ing rate pool concept for asset classes andthis concept has been reflected in the re-vised regulation. A withholding rate poolis a payment of a single type of income,determined in accordance with the cate-gories of income reported on Form 1042-S or Form 1099, as applicable, that is sub-ject to a single rate of withholding.

Finally, the regulations permit, in ac-cordance with Rev. Proc. 2000–12, aqualified intermediary and a U.S. with-holding agent to use a single withholdingrate pool for U.S. non-exempt recipientsfor whom no backup withholding is re-quired and a single withholding rate poolfor U.S. non-exempt recipients that aresubject to backup withholding providedthat the qualified intermediary agreement

June 5, 2000 1166 2000–23 I.R.B.

permits such an arrangement and suffi-cient information is provided to the with-holding agent no later than January 15following the year of payment that allo-cates the reportable payments to eachU.S. non-exempt recipient accountholder. Failure to provide the allocationinformation timely may result in penaltiesimposed on the qualified intermediaryand the termination of its qualified inter-mediary agreement. Unlike qualified in-termediaries, nonqualified intermediariesand flow-through entities are not permit-ted to pool payments to U.S. non-exemptrecipients. Therefore, information suffi-cient to allocate the payment to each U.S.non-exempt recipient must be providedbefore a payment is made or the withhold-ing agent must treat the payment as madeto a U.S. payee that has failed to provide aTIN and impose backup withholding.

B. Changes to §1.1441–2

1. Amounts Subject to Withholding

Section 1.1441–2(a) has been amendedto exclude from the definition of amountsubject to withholding interest paid aspart of the purchase price of an obligationsold between interest payment dates (ac-crued interest) and an amount represent-ing original issue discount (OID) paid aspart of the purchase price of an obligationsold in a transaction other than the re-demption of such obligation. The exclu-sions do not apply, however, if the sale ofan obligation is part of a plan the principalpurpose of which is to avoid tax and thewithholding agent has actual knowledgeor reason to know of such plan.

The exclusion of accrued interest andamounts representing OID paid as part ofthe purchase price of an obligation sold ina transaction other than a redemption weremade in response to comments received on§1.1441–2(b)(3) of the final regulationsand proposed regulation §1.1441–3(b)(REG–114000, [1997–2 C.B. 661, 62 F.R.53503]). Section 1.1441–2(b)(3), as origi-nally drafted, required withholding onOID to the extent the withholding agenthad actual knowledge of the amount of thepayment that was taxable to the beneficialowner. A withholding agent was treated ashaving actual knowledge if it had a directaccount relationship with the holder of theobligation. Proposed regulation§1.1441–3(b) would have eliminated the

rule that no withholding was required onaccrued interest and replaced it with a rulethat conformed with the rule applicable toOID on the theory that, from a withholdingperspective, the two payments were equiv-alent. The withholding rules applicable toOID and accrued interest would have re-quired withholding whenever a paymentof interest or OID was not subject to an ex-ception, such as the portfolio interest ex-ception, or a payment of OID or accruedinterest was presumed made to a foreignperson and the withholding agent couldnot reliably associate the payment withbeneficial owner documentation. Suchpayments were subject to reporting onForm 1042-S whether or not withholdingwas imposed.

In Notice 99–8, Treasury and the IRS an-nounced that they would make modifica-tions to the OID and accrued interest rules.The modifications were intended to addresscriticisms by commentators that the OIDand accrued interest rules were unworkable.Commentators argued that debt obligationsare often sold in delivery-versus-paymenttransactions which settle quickly and ofteninvolve multiple intermediaries. The re-quirement to withhold in absence of a bene-ficial owner withholding certificate wouldnecessarily inhibit the speed with whichsales transactions are normally conducted.In addition, they argued that a withholdingagent does not necessarily know the amountof OID or accrued interest merely because ithas a direct account relationship with the ac-count holder. In addition, custodians statedthat sales were often accounted for in sys-tems different from those used to report in-terest and OID and therefore the reportingrequirement of the regulations would re-quire significant systems modifications.They argued that these modifications werenot justified because nearly all accrued in-terest and OID would be from instrumentsthat could qualify for the portfolio interestexception.

Notice 99–8 proposed rules that wereintended to require only the withholdingagent that had a direct account relation-ship with a beneficial owner to obtain aForm W-8. Thus, the notice proposed arule that would require a withholdingagent to obtain a withholding certificateonly if it received the proceeds from asale against delivery of the debt obliga-tion or, in the case of a retirement, thewithholding agent was the person respon-

sible for paying the owner or crediting itsaccount. The notice would have pre-vented intermediaries other than the inter-mediary with the direct account relation-ship with the beneficial owner fromhaving to obtain a Form W-8 by statingthat any withholding agent that effected atransaction for a broker was generally notrequired to obtain a Form W-8. A brokerwas defined by reference to §1.6045–1(a)and generally included a person thatmakes sales of securities for customers inthe ordinary course of that person’s tradeor business. In addition, the notice pro-posed to eliminate the rule that presumedknowledge of the amount of OID or inter-est accrued between interest paymentdates merely because there was a directaccount relationship with the beneficialowner of an obligation.

Commentators criticized the Notice99–8 proposal. They argued that the mul-tiple broker exception did not always ac-complish its intended purpose becausecertain participants in a transaction forwhom a Form W-8 should not be requiredcould not meet the definition of a broker,particularly since that definition does notinclude non-U.S. payors that effect salesof obligations at an office outside theUnited States and certain other persons,such as investment advisors, who mightparticipate in the transaction but did notstand ready to effect sales of securities forothers. In addition, the Notice did notsolve the problem faced by custodians.

In light of these criticisms, Treasuryand the IRS have decided to eliminate therequirement for withholding, and report-ing, on accrued interest and an amountrepresenting OID paid on the sale of anOID obligation, other than in a redemp-tion. This change has been effected byeliminating those items from the defini-tion of amounts subject to withholding.Withholding is required, however, if thewithholding agent knows or has reason toknow that a sale is part of a plan to avoidtax. For example, if a holder of a debtobligation that pays interest that does notqualify for the portfolio interest exceptionsells the instrument immediately prior toan interest payment date and reacquiresthe same type of security after the interestpayment date and the withholding agentknows, or has reason to know, of this pat-tern of sales, withholding and reporting ofaccrued interest is required.

2000–23 I.R.B. 1167 June 5, 2000

Paragraph (a) has also been amended tostate that insurance premiums paid on acontract subject to the section 4371 excisetax are not amounts subject to withholding.As previously drafted, these amounts wereexcluded from the definition of fixed ordeterminable annual or periodical (FDAP)income under §1.1441–1(b)(2)(ii) andtherefore were not included in amountssubject to withholding. Excluding insur-ance premiums from FDAP is inappropri-ate, however. Insurance premiums fallwithin the definition of FDAP provided inparagraph (b)(1). Therefore, the bettermeans for exempting premiums subject tothe section 4371 excise tax from withhold-ing is to exclude them from the definitionof amounts subject to withholding.

2. Fixed or Determinable Annual or Peri-odical Income

Section 1.1441–2(b)(1)(i) provides thedefinition of fixed or determinable an-nual or periodical (FDAP) income. Suchincome, if from sources within the UnitedStates, is generally an amount subject towithholding and therefore also subject toreporting on Form 1042-S if paid to a for-eign payee. Paragraph (b)(1)(i) statesthat amounts that are excluded fromgross income under any provision of law“without regard to the identity of theholder” are not FDAP income. This pro-vision was, in part, intended to excludefrom FDAP qualified scholarship incomeunder section 117. The language, how-ever, failed to accomplish its intendedpurpose because the section 117 exclu-sion is dependent on the identity of theperson receiving the income—the recipi-ent must be a candidate for a degree at acertain type of educational organization.The paragraph has been revised to statethat amounts that are excluded fromgross income without regard to the U.S.or foreign status of the owner of the in-come is not FDAP. In addition, the para-graph has been changed to clarify thatamounts excluded from gross incomeunder sections 892 (income of foreigngovernments) and 115 (income of a U.S.possession) are not excluded from the de-finition of FDAP since the foreign statusof the owner of the income is determina-tive of whether the exclusions providedby those sections apply. Amounts subjectto the section 892 and section 115 exclu-sions are, therefore, included in the scope

of amounts subject to withholding andtherefore are reportable on Form 1042-Sunder section 1461 even though not tax-able under section 871 or 881.

3. Original Issue Discount

Section 1.1441–2(b)(3) provides rulesgoverning the treatment of original issuediscount. Paragraph (b)(3)(i) describesthe amount of OID subject to taxation inthe hands of the owner of an OID obliga-tion. Minor changes have been made tothis paragraph to clarify the amount ofOID that is taxable to the beneficialowner of the obligation.

Paragraph (b)(3)(ii) describes theamount of OID subject to withholding.To conform paragraph (b)(3)(ii) to thechanges discussed in section B. 1 of thisExplanation of Provisions, the paragraphhas been revised to require a withholdingagent to withhold on OID only upon theredemption of the original issue discountobligation or in any case where the with-holding agent knows that a sale, otherthan a redemption, is being made with theprincipal purpose of avoiding tax on theobligation. A withholding agent is re-quired to withhold on the actual amountof OID includible in the gross income ofthe owner of an obligation if it has actualknowledge of such amount, or, if actualknowledge is lacking, on the entireamount of OID determined under Publi-cation 1212, “List of Original Issue Dis-count Instruments” as if the obligationhad been held since issuance.

Paragraph (b)(3)(iii) contained a rulethat required a withholding agent to with-hold on interest and OID paid on an OIDobligation even though it did not know theamount of OID subject to taxation if thewithholding agent could not reliably asso-ciate the payment with valid documenta-tion. The rule was designed to eliminatean exception to withholding that applied ifa withholding agent did not have actualknowledge of the amount of OID that ac-crued to the holder of the obligation up tothe date of sale. If the exception were noteliminated, it was feared that the docu-mentation requirement for portfolio inter-est could be avoided by selling OID oblig-ations through intermediaries that had noknowledge of the accrued amount of OID.The rule is no longer necessary. Undernew §1.1441–2(a)(6), withholding is re-quired if a withholding agent knows, or

has reason to know, that an OID obliga-tion is sold with the principal purpose ofavoiding tax. Therefore, the rule as origi-nally contained in paragraph (b)(3)(iii) hasbeen removed. New paragraph (b)(3)(iii)contains the transition rule formerly foundin paragraph (b)(3)(iv). The rule has beenmodified, however. As previously drafted,the rule appeared to eliminate any with-holding responsibility by the issuer of anOID obligation or its agent, as formerlycontained in Rev. Rul. 68–333 (1968–1C.B. 390). As revised, issuers and theiragents are subject to any applicable with-holding requirements on obligations is-sued before or after December 31, 2000.The rule now states, however, that with-holding on OID obligations is only re-quired by persons other than issuers ortheir agents with respect to obligations is-sued after December 31, 2000.

C. Changes to §1.1441–3

1. Accrued Interest

Section 1.1441–3 provides rules to de-termine the amount subject to withhold-ing. In accordance with the change madein §1.1441–2(a)(5), which eliminates in-terest accrued between sales dates fromamounts subject to withholding,§1.1441–3(b)(2) has been modified toeliminate the requirement that a withhold-ing agent that pays accrued interest mustreport that interest on Form 1042-S.

2. Coordination With REIT Withholding

As originally drafted, §1.1441–3(c)-(4)(i)(C) required withholding under sec-tion 1441 on the portion of a Real EstateInvestment Trust (REIT) distribution thatis not designated as a capital gain divi-dend or return of basis. Therefore,§1.1441–3(c)(4)(i)(C) inadvertently re-quired withholding under section 1441 ona distribution in excess of basis, whichunder section 301(c)(3) is capital gainfrom the sale or exchange of stock and,therefore, not subject to withholdingunder section 1441. To correct this error,paragraph (c)(4)(i)(C) has been amendedto provide that withholding under section1441 is not required on a distribution inexcess of basis. A distribution in excessof basis is, however, subject to withhold-ing under section 1445 unless the interestin the REIT is not a U.S. real property in-terest (e.g., an interest in a domesticallycontrolled REIT under section 897(h)(2)).

June 5, 2000 1168 2000–23 I.R.B.

D. Changes to §1441–4

1. Notional Principal Contracts

Section 1.1441–4(a)(3)(i) treats a pay-ment of income on a notional principalcontract made to a foreign person as in-come effectively connected with a tradeor business within the United States un-less the withholding agent can reliably as-sociate a payment with a withholding cer-tificate that certifies that the payment isnot effectively connected. This rule isoverly broad because it presumes that anynotional principal contract payment madeto a foreign person is effectively con-nected even if the foreign person has nonexus to the United States. As a result,§1.1441–4(a)(3)(i) has been amended tolimit the presumption that notional princi-pal contract income is effectively con-nected to a U.S. trade or business to thosesituations in which the income is eitherpaid to a U.S. qualified business unit of aforeign person or the withholding agentotherwise knows, or has reason to know,that the income is effectively connectedwith the conduct of a U.S. trade or busi-ness. It is not expected that a withholdingagent would be considered to have reasonto know that a notional principal contractpayment is effectively connected with theconduct of a trade or business within theUnited States solely because the foreignperson receiving the payment has a quali-fied business unit in the United States towhich a portion of the payment may be al-located pursuant to proposed regulation§1.863–3(h) (the global dealing regula-tions).

Section 1.1441–4(a)(3)(ii), as origi-nally drafted, stated that a payment to a fi-nancial institution was not treated as ef-fectively connected with the conduct of atrade or business within the United Statesif the financial institution provided a rep-resentation in a master agreement thatgoverns transactions in notional principalcontracts between the parties (for exam-ple, an International Swaps and Deriva-tives Association (ISDA) Agreement) orin the confirmation on the particular no-tional principal contract transaction thatthe counter party was a U.S. person or anon-U.S. branch of a foreign person.

Commentators requested that the mas-ter agreement and confirmation excep-tions be expanded to apply to personsother than financial institutions. Section

1.1441–4(a)(3)(ii) has been amended (inthe table or corrections at the end of theregulation) to allow any payee, not just afinancial institution, to provide in a mas-ter agreement or confirmation statement arepresentation that the payee is a U.S. per-son or a non-U.S. branch of a foreign per-son.2. Withholding on Payments From Indi-vidual Retirement Accounts

Section 1.1441–4(b)(1)(ii), as origi-nally drafted, provided that section 1441applied to distributions from any trust de-scribed in section 401(a) made to a non-resident alien individual and to certainother retirement distributions. The resultof this rule is that section 1441, ratherthan section 3405, applies to retirementdistributions. This rule considerablyeases the burdens that would otherwiseapply to retirement distributions.

Commentators noted that the regula-tions did not provide the same rule fordistributions from individual retirementaccounts and annuities described in sec-tion 408. The regulation has beenamended so that those distributions willbe subject to section 1441 as well.

E. Changes to §1441–5

Section 1.1441–5 of the regulationsconcerns payments made to partnerships,trusts, and estates. As originally drafted,the regulations contained extensive rulesfor payments made to U.S. and foreignpartnerships, but applied the rules of theregulations prior to the publication of TD8734 to trusts and estates. The trust andestate rules, however, were inconsistentwith the rules contained in TD 8734 andwere also incomplete. For example,§1.1441–1(c)(6)(ii)(B) required a with-holding agent to determine the beneficialowner of income paid to a trust or estateunder §1.1441–3(f) and (g) of the regula-tions in effect prior to January 1, 2001.That section, however, did not determinethe beneficial owner of income paid to atrust. In addition, §1.1441–1(e)(3)(i)stated that a trust or estate was to use aflow–through withholding certificate fur-nished under §1.1441–5(e), but that sec-tion was reserved in the regulation. Theregulation has been revised to providecomplete trust and estate rules. Except asnoted below, the partnership rules remaingenerally unchanged; however, severalchanges were made to clarify those rules.

1. Rules Applicable to U.S. Partnerships,Trusts, and Estates

Section 1.1441–5(b), as originallydrafted, provided rules regarding pay-ments to U.S. partnerships. The rules ofparagraph (b) have been expanded tocover payments to U.S. trusts and U.S. es-tates as well. Under revised paragraph(b)(1), a payment to a U.S. partnership,U.S. trust, or U.S. estate is treated as apayment to a U.S. person and, therefore,not subject to withholding under chapter 3of the Internal Revenue Code. UnitedStates partnerships, U.S. trusts, and U.S.estates are required, however, to withholdon payments they make to foreign part-ners, foreign beneficiaries, or, in the caseof grantor trusts, foreign owners. Fidu-ciaries of U.S. trusts and U.S. estatesshould take particular note that it is thetrust or the estate that is the withholdingagent, and Forms 1042 and Forms 1042-Smust be filed using the name and TIN ofthe U.S. trust or U.S. estate, not the nameand TIN of the fiduciary.

Under paragraph (b)(2), a U.S. partner-ship is a withholding agent for a foreignpartner’s distributable share of partner-ship income that consists of amounts sub-ject to withholding. A U.S. simple trust isa withholding agent for the distributablenet income (DNI) includible in the grossincome of a foreign beneficiary to the ex-tent the DNI consists of an amount sub-ject to withholding. Similarly, a U.S.complex trust is a withholding agent onDNI includible in the gross income of aforeign beneficiary to the extent the DNIconsists of an amount subject to withhold-ing that is, or is required to be, distributedcurrently. U.S. simple trusts and complextrusts are permitted to make reasonableestimates of the portion of a distributionthat constitute DNI consisting of amountssubject to withholding. A U.S. grantortrust must withhold on any income in-cludible in the taxable income of a foreignperson that is treated as an owner to theextent the amount includible consists ofan amount subject to withholding.

In the case of a partnership, if amountssubject to withholding are not actuallydistributed, the U.S. partnership mustwithhold at the earlier of the time thestatement required under section 6031(b)(Form K-1) is mailed or otherwise pro-vided to the partner or the due date forfurnishing the statement. In addition, if

2000–23 I.R.B. 1169 June 5, 2000

an amount of income is required to be, butis not actually distributed to the foreignbeneficiary of a U.S. simple or complextrust, the U.S. trust must withhold at thetime the income is required to be reportedon Form 1042-S. A U.S. grantor trust isrequired to withhold at the time the trustreceives the payment or the payment iscredited to the trust’s account.

2. Payments Made to Foreign Partner-ships

Section 1.1441–5(c) provides rules forpayments made to foreign partnerships.Generally, the payees of a payment madeto a nonwithholding foreign partnershipare the partners of the partnership. Para-graph (c)(1)(ii), however, contains ruleson when the partnership itself will be re-garded as the payee of a payment. Thatparagraph, as originally drafted, permitteda partnership to be treated as the payee ofincome if the partnership provided a with-holding certificate stating that the pay-ment was effectively connected with theconduct of the partnership’s U.S. trade orbusiness. A commentator noted that theparagraph did not treat the partnership asthe payee, however, to the extent the in-come was treated as being effectivelyconnected under the presumption rules inthe absence of a withholding certificate.

The paragraph has been revised to treatthe partnership as the payee if the incomeis presumed to be effectively connected inthe absence of documentation. For exam-ple, if a nonwithholding foreign partner-ship is receiving income on a notionalprincipal contract and the income istreated as effectively connected incomeunder the presumption rule of§1.1441–4(b)(3)(i), the nonwithholdingforeign partnership, and not the partners,is treated as the payee. In addition, theexample in paragraph (c)(1)(iv) has beenreplaced with several less complex exam-ples that better illustrate the operation ofthe rules of paragraph (c)(1).

Section 1.1441–5(c)(2) contains rulesrelating to withholding foreign partner-ships. Section 1.1441–5(c)(2)(ii)(A), to-gether with §1.1461–1(c)(2)(ii)(A), re-quired a withholding foreign partnershipto file a Form 1065 and Forms K-1 andexempted the partnership from having tofile Form 1042 and Forms 1042-S. Therule was incorrect. A withholding foreignpartnership is generally required to with-

hold on payments and therefore must file aForm 1042, which is an income tax return,and not merely report the amounts onForm 1065. Also, because the IRSmatches amounts reported on Forms1042-S with amounts reported on Form1042, it was incorrect to substitute FormsK-1 for Forms 1042-S. Therefore, the reg-ulation has been amended to require awithholding foreign partnership to file atax return on Form 1042 and file informa-tion returns on Form 1042-S for amountssubject to withholding paid to, or includedin the distributive share of, its foreignpartners. A withholding foreign partner-ship may also be required to file a returnon Form 1065 and make the statements onForm K-1 under section 6031 for its part-ners. However, the IRS may agree in thewithholding agreement to modify infor-mation reporting requirements to avoiddouble reporting. A rule that was formerlycontained in §1.1441–7(a), which permit-ted a withholding foreign partnership toarrange with a withholding agent to havethe withholding agent impose withholdingon a payment has been removed because awithholding foreign partnership is re-quired to assume withholding responsibil-ity.

Section 1.1441–5(c)(3) provides rulesrelating to nonwithholding foreign part-nerships. Paragraph (c)(3)(iv) has beenrevised to require a nonwithholding for-eign partnership to provide a withholdingstatement in the same manner as a non-qualified intermediary. In addition, para-graph (c)(3)(v) has been revised to con-form with revised §1.1441–1(b)(6),discussed in section A. 5 of this Explana-tion of Provisions. Thus, the regulationhas been changed to make clear that anonwithholding foreign partnership hasan obligation to report payments eventhough another withholding agent haswithheld the appropriate amount if thenonwithholding partnership has failed toprovide adequate information for a with-holding agent to report the payments ap-propriately on Form 1042-S and Form1099 or the nonwithholding foreign part-nership knows, or has reason to know,that the payments were not correctly re-ported.

Paragraph (d) of §1.1441–5 providespresumption rules that apply to determinethe status of a partnership and its partnersif a payment cannot be reliably associated

with valid documentation. The rule inparagraph (d)(3)(ii), which permitted a re-duced rate of withholding to be applied toa payment to a nonwithholding foreignpartnership if the payment could be asso-ciated with a group of documented payeesall of whom were subject to the samewithholding rate has been removed for thereasons stated in connection with thechanges made to §1.1441–1(b)(3)(v)(C).See section A. 4, of this Explanation ofProvisions. Under the revised rule, anypayment of an amount subject to with-holding paid to a foreign partnership thathas not been allocated to a specific payeeis presumed made to an undocumentedforeign payee and subject to 30 percentwithholding.

3. Payments to Foreign Trusts and Es-tates

Treasury Decision 8734 did not includenew provisions regarding withholding onpayments by and to foreign trusts and for-eign estates. The IRS provided interimguidance in the instructions to Forms W-8BEN and W-8IMY so that withholdingagents could replace documentation thatwas expiring under the withholding regu-lations with documentation that wouldmeet the requirements of TD 8734. In ad-dition, Notice 99-8 announced that Trea-sury and the IRS intended to issue regula-tions that would clarify the withholdingobligations of income paid to trusts andestates. Under the instructions and thenotice, a payment to a foreign fiduciarywas treated as a payment to a foreign in-termediary and, therefore, the foreignfiduciary was required to furnish an inter-mediary withholding certificate on FormW-8IMY. If the trust was a trust de-scribed in section 651(a) or a trust, all or aportion of which was treated as owned bythe grantor or other persons under sec-tions 671 through 679, the fiduciary wasrequired to attach Forms W-8BEN, FormsW-8EXP, or Forms W-9, from the benefi-ciaries or owners of the trust. In all othercases, the foreign trustee or executor wasrequired to attach a Form W-8BEN, FormW-8EXP, or if required, Form W-9, com-pleted on behalf of the trust or estate.

Several commentators objected to therequirement that a foreign fiduciary of acomplex trust or a foreign estate providean intermediary withholding certificate.They requested that a withholding certifi-

June 5, 2000 1170 2000–23 I.R.B.

cate be required only from the trust or es-tate itself. Requiring documentation froma fiduciary also was not consistent withthe rules under chapter 61, which gener-ally require a Form W-9 from a trust orestate and ignore the status of the fidu-ciary. Finally, Notice 99–8 did not pro-vide any presumption rules for paymentsto foreign trusts and foreign estates.

The regulations now contain a compre-hensive set of rules for payments made toforeign trusts and foreign estates in§1.1441–5(e). A foreign complex trust(as defined in paragraph (c)(25)) and aforeign estate are generally consideredbeneficial owners of income under§1.1441–1(c)(6). Therefore, under§1.1441–5(e)(2), a foreign complex trustor a foreign estate may provide a benefi-cial owner withholding certificate or otherbeneficial owner documentation for pay-ments for which a reduced rate of with-holding is not claimed under a treaty.Whether such a trust or estate can providea beneficial owner withholding certificateto claim a reduced rate of withholdingunder an income tax treaty will depend onwhether the trust or estate can claim to bea resident of a treaty country, whether itderives the income under section 894, andthe regulations thereunder, and whethertreaty benefits are denied under a limita-tion on benefits provision.

Foreign simple trusts and foreigngrantor trusts are not payees or beneficialowners under §1.1441–5(e)(3), unless thepayment is an amount that is treated as ef-fectively connected with the conduct of aU.S. trade or business. The payees ofpayments to a foreign simple trust or aforeign grantor trust are generally thebeneficiaries or owners of the trust. Thisis similar to the treatment accorded topayments to foreign partnerships, wherethe partners, rather than the partnership,are generally considered the payees of in-come paid to the partnership. Therefore,the documentation rules applicable to for-eign simple trusts and foreign grantortrusts generally accord with those applica-ble to foreign partnerships. The trust it-self provides a flow-through withholdingcertificate with which it associates thewithholding certificates or, if permitted,documentary evidence of its beneficiariesor owners. The foreign simple trust orforeign grantor trust must also associatewith its flow-through withholding certifi-

cate a withholding statement identical tothat provided by foreign partnerships andnonqualified intermediaries. The IRSmay permit a foreign trust to function as awithholding foreign trust. A withholdingforeign trust would generally be subject tothe same provisions as a withholding for-eign partnership.

Section 1.1441–1(e)(6) provides pre-sumption rules for payments of amountssubject to withholding to foreign trustsand estates. Whether a payee is a trust orestate is determined under the generalpresumption rules of §1.1441–1(b)(3)(ii).A trust or estate is presumed to be U.S.unless there are indicia of foreign status.If a payee is presumed to be a foreigntrust, but its status as a complex, simple,or grantor trust is unknown, it will betreated as a complex trust. If the trust isknown to be a foreign simple or grantortrust, its beneficiaries or owners will gen-erally be presumed to be foreign with re-spect to payments of amounts subject towithholding.

F. Changes to §1441–6

Section 1.1441–6 contains the provi-sions for claiming a reduced rate of with-holding under an income tax treaty. Sec-tion 1.1441–6(b) has been revised toclarify the requirements for claimingtreaty benefits. Specifically, the provi-sions of paragraph (b)(2), as originallydrafted, which related to use of documen-tary evidence, have been moved to newlyrevised paragraphs (c)(1) and (2) so thatall the documentary evidence rules appearin the same paragraph. Paragraph (b)(2)now contains the provisions relating totreaty claims made by interest holders offiscally transparent entities. Clarifyingchanges to those rules, which appeared informer paragraph (b)(4), have also beenmade.

Section 1.1441–6(c)(1) and (2), as orig-inally drafted, required a foreign personto establish residency by obtaining a certi-fied taxpayer identification number (certi-fied TIN) from the IRS. Those provisionsrequired a person claiming a reduced rateof withholding to submit either a certifi-cate of residency or certain other pre-scribed documentation, plus affidavits re-garding compliance with the limitation onbenefits provisions of a treaty and withthe regulations under section 894. In No-tice 99–8, the IRS announced that it

would not implement the procedures forobtaining certified TINs until January 1,2002.

The certified TIN procedures havebeen removed. New paragraph (b)(3),however, provides authority for the IRS toissue guidance on requirements that atreaty claimant must follow to establishresidency and compliance with other re-quirements imposed by treaties and theInternal Revenue Code, such as limitationon benefits provisions and the require-ment that the claimant derive the incomeunder section 894. Treasury and the IRSfully intend to implement such proce-dures. However, Treasury and the IRSdetermined that it was appropriate todelay implementation of the requirementwhile withholding agents and beneficialowners implement other requirementsunder the regulation. In addition, the IRSwill examine ways to more effectivelyimplement the certified TIN requirement.

Paragraphs (c)(3) and (4) prescribe thetypes of documentation that can be usedto claim treaty benefits for income frommarketable instruments paid outside theUnited States to offshore accounts. For-mer paragraph (b)(2) stated that docu-mentary evidence could be used, in cer-tain cases, to claim treaty benefits if thedocumentary evidence was accompaniedby the certifications required in paragraph(c)(5). Paragraph (c)(5) contained a re-quirement that a beneficial owner apply-ing for a certified TIN provide the IRSwith certifications, made in an affidavitsigned under penalties of perjury, that thebeneficial owner was in compliance withany applicable limitation on benefits pro-visions contained in a treaty and that thebeneficial owner derives the income forwhich treaty benefits will be claimed. Itwas unclear from the regulations, asdrafted, whether the certifications thatwere provided to withholding agents wererequired to be made in affidavits signedunder penalties of perjury or whether theaffidavit requirement only applied to ob-taining certified TINs. Although Treasuryand the IRS believe it is important thatstatements regarding compliance withlimitation on benefits provisions and sec-tion 894 be given in conjunction withdocumentary evidence provided to a with-holding agent, a penalties of perjury re-quirement would impose a burden thatundermines the use of documentary evi-

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dence. One reason for permitting use ofdocumentary evidence is to eliminate, asmuch as possible, the need for a penaltiesof perjury statement. Thus, the affidavitand penalties of perjury requirementshave been eliminated with respect to doc-umentary evidence provided to a with-holding agent. The IRS may, however,require an affidavit in connection with thecertified TIN procedures that it will estab-lish. The affidavit requirement in para-graph (c)(4), stating that the informationon documentary evidence is true andcomplete, has also been eliminated.

G. Changes to §1.1441–7

Section 1.1441–7 defines the termwithholding agent and provides variousrules relating to the obligations of with-holding agents, including certain due dili-gence requirements regarding the docu-mentation they receive from payees.

1. Withholding Agent Defined

§1.1441–7(a) provides the definition ofa withholding agent as well as a withhold-ing agent’s obligation to withhold the ap-propriate amount of taxes and file returns.The section has been revised by removinglanguage stating that a withholding for-eign partnership does not have to fileForms 1042–S for payments made to for-eign partners because it is required to pro-vide Forms K-1. The reason for thischange is discussed in section E. 2 of thisExplanation of Provisions.

Some U.S. withholding agents com-mented that foreign persons, includingU.S. branches of foreign persons, weretaking the position that they were notwithholding agents for purposes of chap-ter 3 of the Internal Revenue Code. Anyperson, whether U.S. or foreign, thatpays, or has control, receipt, custody, ordisposal of an amount subject to with-holding is a withholding agent. In addi-tion, with respect to a single item of in-come, each person that handles thepayment is a withholding agent. Thus,there may be more than one withholdingagent with respect to a payment of anamount subject to withholding. Exampleshave been added in new paragraph (a)(2)to illustrate these principles. In particular,examples were added to emphasize thatforeign persons that pay, or have control,receipt, or custody, of amounts subject towithholding are withholding agents, in-

cluding U.S. branches of foreign persons.

2. Reason to Know

Section 1.1441–7(b)(2)(ii), as origi-nally drafted, provided the exclusive rulesfor determining when a withholding agentthat is a financial institution making apayment of income from marketable se-curities has reason to know that documen-tation provided to the withholding agentis unreliable. Commentators noted thatthe language of paragraph (b)(2)(ii) wasinconsistent about whether the rules ap-plied only to withholding certificates (i.e.,Forms W-8) or also to documentary evi-dence. In addition, many commentatorsnoted that the rules could not be reason-ably applied to documentary evidence re-ceived through tiers of intermediaries, be-cause that documentation would often bein a foreign language. They further ar-gued that the rules relating to P.O. box ad-dresses were unreasonable because insome countries P.O. box addresses arestandard. Finally, commentators notedthat the means for curing otherwise unre-liable documentation were, in some in-stances, too restrictive.

Section 1.1441–7 (b)(3) through (10)have been added to address the com-ments. Some of the changes made toparagraph (b) reflect rules in the modelqualified intermediary agreement con-tained in Rev. Proc. 2000–12. Paragraphs(b)(4) through (b)(9) relate to the obliga-tions of a withholding agent for accountholders that have a direct account rela-tionship with the withholding agent. Therules are limited to direct account rela-tionships because they often rely on ac-count information that will exist only ifsuch a relationship exists. However,under the rules of paragraph (b)(10),which relate to documentation from per-sons that are not direct account holders,the rules in paragraph (b)(4) through (9)apply to the extent that they rely on infor-mation contained on the face of a with-holding certificate, documentary evi-dence, or a withholding statement.

Paragraph (b)(4) contains general rulesregarding the reliability of a withholdingcertificate provided on Form W-8. Para-graph (b)(5) contains rules for when aForm W-8 will be regarded as unreliableto establish a beneficial owner’s foreignstatus and applicable cure provisions.Paragraph (b)(6) contains rules for when a

Form W-8 will be regarded as unreliableto establish a beneficial owner’s claim oftreaty benefits and applicable cure provi-sions. Paragraph (b)(7) provides generalrules relating to documentary evidence.Paragraphs (b)(8) and (b)(9) contain rulesregarding documentary evidence that isunreliable to establish a beneficialowner’s status as a foreign person or aresident of a treaty country, respectively.

Paragraph (b)(10) provides rules re-garding due diligence standards for docu-mentation from payees received throughnonqualified intermediaries, flow-throughentities, and certain U.S. branches of for-eign banks and insurance companies.Under paragraph (b)(10), a withholdingagent is required to review the informa-tion contained in a withholding statementprovided by those entities and may notrely on the information contained in thewithholding statement to the extent itdoes not support the claims made for thepayee. A withholding agent must also re-view each withholding certificate to ver-ify that they support the claims made andare consistent with the information on thewithholding statement. Under a transitionrule, this review process does not apply towithholding certificates received beforeDecember 31, 2001, if the payment ismade prior to that date. If a withholdingcertificate received before December 31,2001, is relevant to a payment made afterthat date, it must be reviewed for accu-racy and matched to the information con-tained in the withholding statement. Fi-nally, a withholding agent must reviewdocumentary evidence to determine thatthere is no obvious indication that thepayee is a U.S. non-exempt recipient orno obvious indication that the documen-tary evidence does not establish the iden-tity of the person who provided the docu-mentation.

H. Changes to §1.1441–9

Section 1.1441–9 provides the rules forpayments made to foreign tax-exempt en-tities and foreign governments. Para-graph (b)(2) of that section provided thatif a tax-exempt organization did not havea determination from the IRS, it could es-tablish its exempt status by attaching to itswithholding certificate an opinion ofcounsel concluding that the organizationis described in section 501(c) of the Inter-nal Revenue Code. In addition, if the

June 5, 2000 1172 2000–23 I.R.B.

opinion concluded that the organizationwas described in section 501(c)(3) andwas not a private foundation, an affidavitregarding the operations and support ofthe organization was required to be at-tached to the organization’s withholdingcertificate as well. The opinion of coun-sel and affidavit was required to be re-newed whenever the certificate to whichit was attached was required to be re-newed.

Commentators stated that the require-ment that the opinion of tax-exempt statusbe provided by an attorney was too nar-row and that an opinion from any feder-ally authorized tax practitioner, as definedin section 7525(a)(3), should be permit-ted. In addition, the requirement that theopinion of counsel and the affidavit be re-newed whenever the certificate was re-quired to be renewed was confusing be-cause a withholding certificate from atax-exempt entity requires a TIN and, pro-vided the income paid is subject to report-ing, is valid indefinitely absent a changein circumstances.

Treasury and IRS are currently consid-ering whether an opinion issued by a per-son other than an attorney authorized topractice before the IRS should suffice.Although the Treasury and IRS have notyet concluded that a person other than anattorney should be permitted to providethe opinion, the regulation has beenamended to permit that possibility in fu-ture guidance. In addition, the require-ment to renew the opinion and affidavithas been clarified by stating that it mustbe renewed if there is a change in facts orcircumstances relevant to the organiza-tion’s status under section 501(c)(3).

I. Changes to §1.1461-1

Section 1.1461–1 contains require-ments regarding the payment and depositof tax withheld under chapter 3 of the In-ternal Revenue Code and the filing of atax return (Form 1042) and informationreturns (Forms 1042-S) by withholdingagents. Generally, the paragraph has beenamended to make a withholding agent’sobligations clearer.

Paragraphs (b)(2) and (c)(4), as origi-nally drafted, stated that a withholdingagent was not required to file a tax returnor information return if another withhold-ing agent had done so. Numerous excep-tions to the rule were provided. These

paragraphs were misleading because theyimplied that the general rule was that a taxreturn and information returns were notrequired if there was another withholdingagent in the chain of payment required tofile a tax return and information returns.The exceptions to the rule, however, re-quired every withholding agent that madepayments of an amount subject to with-holding to a foreign person to file a tax re-turn and information returns in every situ-ation, except that a nonqualifiedintermediary or flow-through entity wasnot required to file a tax return and infor-mation returns for payments that it madeprovided that it furnished to a withholdingagent sufficient information for the with-holding agent to correctly withhold andreport the payment. Section 1.1461–1(b)and (c) have been clarified to state that awithholding agent that makes a paymentof an amount subject to reporting to a re-cipient must file a Form 1042–S and pro-vide a copy to the recipient. The termsrecipient and amount subject to reportingare defined in paragraphs (c)(1)(ii) and(c)(2), respectively. A recipient includes abeneficial owner (including a foreigncomplex trust and estate), a qualified in-termediary, a withholding foreign partner-ship, a withholding foreign trust, an au-thorized foreign agent, a U.S. branchtreated as a U.S. person, a nonwithhold-ing foreign partnership or foreign simpletrust receiving income effectively con-nected with a U.S. trade or business, anypayee presumed to be a foreign person,and any other person for whom a Form1042-S is required by the instructions tothe form. A nonqualified intermediary, adisregarded entity, a flow-through entity,and a U.S. branch that is not treated as aU.S. person are not recipients. Amountspaid to such entities are reported as paidto the persons on whose behalf the entityacts or to the interest holders in the entity.The term amount subject to reporting gen-erally means amount subject to withhold-ing as defined under §1.1441–2(a). The regulation has also been clarified byproviding a more extensive, but not ex-haustive, list of those amounts subject toreporting and those amounts for whichthere is an exception to reporting. Seenew §1.1461–1(c)(2). Paragraph(c)(2)(i)(C), as originally drafted, statedthat the amount of effectively connectedincome that was required to be reported

with respect to a notional principal con-tract was the net income described in§1.446–3(d). Commentators objected tothis requirement because their systems areprogrammed to report cash payments, notaccrued amounts. New paragraph(c)(2)(i)(J) now provides that the amountrequired to be reported is limited to theamount of cash paid from the notionalprincipal contract.

Finally, the section has been clarifiedby separately stating the reporting re-quirements of U.S. withholding agents,qualified intermediaries, nonqualified in-termediaries, and flow-through entities.Withholding agents should note, in partic-ular, that information regarding nonquali-fied intermediaries, flow-through entities,and U.S. branches (other than U.S.branches treated as U.S. persons) inwhich a recipient is an account holder oran interest holder must be included onForm 1042-S. Such information is impor-tant to the IRS’s efforts to monitor com-pliance by such entities and branches withthe requirements of the regulations.

J. Changes to the regulations undersection 6041

Section 1.6041–1(d) has been revisedto require that the amount of a notionalprincipal contract payment reported onForm 1099 is the amount of cash paid onthe contract for the calendar year. Thischange conforms the Form 1099 reportingrule to that under §1.1461–1(c)(2)(i)(J).

Section 1.6041–4(a)(3) states that anonqualified intermediary, a qualified in-termediary, or certain U.S. branches offoreign banks and insurance companiesthat receive payments reportable undersection 6041 (e.g., rents, notional princi-pal contract income, and other fixed ordeterminable income) are not required toreport the payments on Form 1099 whenthey, in turn, make the payment to theiraccount holders unless they know thepayments are required to be reported andwere not so reported. Similar exceptionsapply to dividends, gross proceeds fromsales of securities, and interest under§§1.6042–3(b)(1)(vi), 1.6045–1(g)(v),and 1.6049–5(b)(14), respectively. Theseprovisions have been modified to statethat the exception does not apply to a U.S.branch of a foreign bank or insurancecompany that agrees with a withholdingagent to be treated as a U.S. person. The

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exception is inappropriate in this case be-cause such branches do not provide payeedocumentation on Form W-9 (or thename, address, TIN, and information allo-cating the payment to the payee) to awithholding agent. The exception is alsoinappropriate if a qualified intermediaryassumes Form 1099 reporting responsibil-ity. Therefore, the exception has beenchanged to exclude qualified intermedi-aries that assume Form 1099 reporting.Finally, the exceptions have beenamended to state that a nonqualified inter-mediary, qualified intermediary, or U.S.branch is deemed to know the required re-porting was not done in any case wherethe intermediary or branch has failed toprovide documentation or other informa-tion so that another payor can do the re-porting.

K. Changes to §1.6041A–1

Section 1.6041A–1(d)(3)(i)(C) hasbeen added to provide an exception fromreporting remuneration for services as adirect seller paid outside the UnitedStates. Prior to this change, remunerationfor services was subject to reporting inabsence of documentation establishingthe direct seller’s status as a foreign per-son because the presumption rules of§§1.6049–5(d)(2) and 1.1441–1(b)(3)(iii)treated a direct seller as a U.S. non-ex-empt recipient. Commentators stated thatthe presumption was inaccurate becausemost direct sellers abroad are foreign per-sons. They also argued that obtainingdocumentation from direct sellers to rebutthe presumption was overly burdensome.

L. Changes to §1.6045–1

Section 1.6045–1(g) provides an ex-ception from Form 1099 reporting for abroker if a customer is considered an ex-empt foreign person under that section.Under §1.6045–1(g)(1)(i), a broker maytreat a customer as an exempt foreign per-son if the broker receives a withholdingcertificate or documentary evidence thatestablishes the person’s status as a foreignperson. As originally drafted, the last sen-tence of §1.6045–1(g)(1)(i) stated that if awithholding certificate was provided, awithholding agent could rely on the cer-tificate to exempt the customer from re-porting only if the certificate included astatement that the beneficial owner hadnot been, and at the time the certificate

was furnished reasonably expected not tobe, present in the United States for a pe-riod aggregating 183 days or more duringeach calendar year. The regulation didnot state whether the a statement was re-quired if documentary evidence was pro-vided.

Two clarifying changes have beenmade to §1.6045–1(g)(1)(i). First, theregulation has been modified to requirethe statement relating to presence in theUnited States only from individuals. Sec-ond, the regulation states that the state-ment is not required if documentary evi-dence is provided. The statement isrequired on a withholding certificate andnot on documentary evidence because awithholding certificate is the documenta-tion required for an account maintained inthe United States. Documentary evidencecan only be used for amounts paid outsidethe United States to an offshore accountand, therefore, the likelihood that the per-son may be present in the United Statesfor the relevant period is greatly reduced.

Clarifying changes have also beenmade to §1.6045–1(g)(3)(iv). The firstsentence of that section stated that a bro-ker could treat an intermediary, as definedin §1.1441– 1(c)(13), as an exempt recipi-ent except when the broker had actualknowledge or reason to know the interme-diary was acting on behalf of a U.S. per-son. The exception should only apply ifthe intermediary is acting on behalf of aU.S. person who is subject to reporting onForm 1099, that is, a U.S. non-exempt re-cipient. The regulation has been amendedto make this clear. An erroneous cite tononwithholding foreign partnerships hasalso been eliminated.

In paragraph (g)(4) of §1.6045–1, Ex-ample 7 has been amended to reflect thechange to the regulations that now gener-ally treats accrued interest as an amountthat is not subject to withholding. Underthat example, a foreign bank that is a U.S.payor effects a sale of an interest bearingobligation at an office outside the UnitedStates on behalf of an undocumented ac-count holder. Under the regulation, asoriginally drafted, the gross proceedsfrom the sale, net of accrued interest,were reported on Form 1099 as paid to apayee that was presumed to be a U.S. per-son. However, because the accrued inter-est was considered an amount subject towithholding, it was reportable on Form

1042-S. Under the regulation, as revised,accrued interest is treated as an amountthat is not subject to withholding. There-fore, both the gross proceeds, net of ac-crued interest, and the accrued interest arenow presumed paid to a U.S. payee andreported on Form 1099 under the pre-sumption rule §1.6049–5(d)(2). Two ad-ditional examples have been added toparagraph (g)(4) to illustrate the operationof the presumption rules on a sale of ashort-term original issue discount instru-ment. These examples were added tomake clear that a sale of an OID obliga-tion outside the United States is a grossproceeds transaction and, therefore, underthe presumption rule of §1.6049–5(d)(2),presumed made to a U.S. person.Whether the gross proceeds are reportabledepends on whether the exception of§1.6045–1(a) for sales outside the UnitedStates by a non-U.S. payor applies.

M. Changes to §1.6049–5

Under §1.6049–5(c)(1), a withholdingagent or payor may generally rely on doc-umentary evidence from a foreign payeeinstead of a beneficial owner withholdingcertificate on Form W-8 if an amount ispaid outside the United States to an off-shore account. An offshore account is anaccount maintained at an office or branchof a U.S. or foreign bank or other finan-cial institution at any location outside theUnited States and outside of a U.S. pos-session. Under §1.6049–5(e), an amountis considered paid outside the UnitedStates if the payor completes the acts nec-essary to effect payment outside theUnited States.

The regulations do not specifically ad-dress whether partners of a nonwithhold-ing foreign partnership, foreign beneficia-ries of a foreign simple trust, or foreignowners of a foreign grantor trust can usedocumentary evidence to establish theirstatus as foreign payees. Paragraph (c)(1)has been amended to permit the use ofdocumentary evidence by foreign part-ners, beneficiaries, and owners in thesesituations. Documentary evidence canalso be used for purposes of chapter 3 ofthe Internal Revenue Code by virtue ofthe incorporation of §1.6049–5(c)(1) in§1.1441–1(e)(1)(ii)(A)(2). The use ofdocumentary evidence is appropriate be-cause the regulations generally treat pay-ments to foreign nonwithholding foreign

June 5, 2000 1174 2000–23 I.R.B.

partnerships, foreign simple trusts, andforeign grantor trusts similar to paymentsmade to nonqualified intermediaries, andthe latter are permitted to provide docu-mentary evidence on behalf of their ac-count holders.

Section 1.6049–5(c)(4) provides rulesthat apply to U.S. payors that make pay-ments outside the United States ofamounts not subject to withholding (e.g.,foreign source income and gross proceedsfrom the sale of securities) other than de-posit interest and interest or OID on short-term OID instruments. Non-U.S. payorsare generally exempt from reporting thesepayments. There were several issuesunder paragraph (c)(4) as originallydrafted. First, the paragraph was inter-nally inconsistent. Paragraph (c)(4)(i)stated that a bank or other financial insti-tution could establish a payee’s status as aforeign person by relying on a written de-claration made on an account openingstatement that the payee was not a U.S.person in two circumstances: (i) if it wasnot customary in a country to obtain doc-umentary evidence to establish a person’sidentity, or (ii) if it was customary to ob-tain documentary evidence but it was notcustomary to renew it. Paragraph(c)(4)(iv), however, stated that a bank orfinancial institution could not rely on adeclaration if it was customary to obtaindocumentary evidence but not customaryto renew it. Second, paragraph (c)(4)(i)did not permit a bank or financial institu-tion to rely on documentary evidence toestablish a person’s foreign status if therewas indicia of U.S. status, including em-ployment by a U.S.-based multinationalorganization. A commentator noted thatprohibiting use of documentary evidencemerely because an account holder workedfor a U.S.-based multinational organiza-tion was overly broad because such orga-nizations commonly employ local em-ployees and a withholding agent may notknow whether a particular multinationalis U.S. based. Finally, paragraph(c)(4)(iii) required a bank or financial in-stitution that relied upon a declaration offoreign status or non-renewable docu-mentary evidence to send a negative con-firmation statement each year to the ac-count holder stating that the accountholder was being treated as a foreignpayee and that the account holder was ob-ligated to notify the bank or financial in-

stitution if it became a U.S. citizen or U.S.resident. A commentator argued that theexpense of such a requirement was notjustified. The commentator argued that ifan account holder legitimately establishesforeign status, it is unlikely that the ac-count holder will become a U.S. citizen orresident and that if it does, there are fac-tors, such as a change of address, that willindicate a change in the person’s status.

Paragraph (c)(4) has been amended toremove the inconsistency and to take thecommentators’ comments into account.Under paragraph (c)(4)(ii), as revised, adeclaration of foreign status may be usedonly if it is not customary to obtain docu-mentary evidence. The declaration maybe relied upon only if there is no addressor other indicia of U.S. status. If it is cus-tomary in the country where a bank or fi-nancial institution maintains a branch oroffice to obtain, but not renew, documen-tary evidence, then the bank or financialinstitution may rely on the documentaryevidence without the need to renew it pro-vided that it may rely on the documenta-tion to establish foreign status under thedue diligence rules of §1.1441–7(b)(7)and (8). The restriction on using suchdocumentation in the case of a U.S. basedmultinational employee has been re-moved. If, however, the bank or financialinstitution may rely on the documentaryevidence as establishing foreign statuseven though there are indicia of U.S. sta-tus, it can rely on the documentary evi-dence only for a period of three full calen-dar years after the calendar year in whichit is received. Finally, neither the docu-mentation rule of paragraph (c)(4)(i) northe declaration rule of paragraph (c)(4)(ii)requires a payor to send a negative confir-mation.

Section 1.6049–5(d) contains presump-tion rules that generally apply for chapter61 reporting if a payor lacks required doc-umentation from a payee. Paragraph(d)(2) governs payments other than pay-ments to intermediaries or flow-throughentities. Paragraph (d)(2)(i) has beenclarified to state that the presumptionrules of §1.1441–1(b)(3)(iii)(D) (pay-ments to offshore accounts) do not applyto amounts that are not subject to with-holding. As originally drafted, paragraph(d)(2)(i) stated that the rules of§1.1441–1(b)(3)(iii) applied to all pay-ments, irrespective of whether they were

subject to withholding. Section1.1441–1(b)(3)(iii)(D), however, statedthat it did not apply to amounts that werenot subject to withholding. Revised para-graph (d)(2)(i) eliminates the inconsis-tency. Therefore, payments of deposit in-terest, and interest or OID arising fromthe redemption of an obligation describedin section 871(g)(1)(B)(i) paid to an off-shore account are presumed paid to a U.S.payee. In addition, gross proceeds, whichare not amounts subject to withholding,are also treated as paid to U.S. personsunder §1.6045–1(g)(1)(i). Under the ex-ceptions of §§1.6045–1(a)(1) and1.6045–1(g)(3), however, gross proceedsfrom the sale of a security by a non-U.S.payor effected outside the United Statesare not subject to reporting.

The grace period rule in§1.6049–5(d)(2)(ii), as originally drafted,did not cover the same payments as werecovered under the grace period rule of§1.1441–1(b)(3)(iv) even though the lat-ter regulation cross-references§1.6049–5(d)(2)(ii). For example, therule under the 1441 regulations, but notthe rule under section 6049, covered divi-dends from any redeemable security is-sued by an investment company andamounts paid with respect to loans of se-curities. Paragraph 5(d)(2)(ii) has beenamended to cover the same payments asare covered by the grace period rule of§1.1441–1(b)(3)(iv). In addition, para-graph (d)(2)(ii) prior to amendment statedthat the grace period expired on the earlierof the of the 90th day after the grace pe-riod began, the date on which documenta-tion is provided, or the last day of the cal-endar year. Commentators stated thatterminating the grace period at the end ofa calendar year complicated systems pro-gramming because there was a shrinkinggrace period for payments made within 90days of the end of the year. The require-ment to terminate the grace period as ofthe close of a calendar year has been elim-inated because it is not necessary.

Paragraph (d)(3) provides presumptionrules for payments made to foreign inter-mediaries. With exceptions for depositinterest and interest and OID on short-term obligations, payments to foreign in-termediaries are presumed made to for-eign payees. Paragraph (d)(4) provideddifferent presumptions for payments topartnerships. Under that paragraph, pay-

2000–23 I.R.B. 1175 June 5, 2000

ments made to foreign partnerships weregenerally presumed made to U.S. payees,even if the partnership established its sta-tus as a foreign partnership. Commenta-tors argued that the disparate treatmentbetween intermediaries and partnershipswas not justified because they are treatedsimilarly for other purposes under the reg-ulations. The differences also compli-cated payors’ information systems. In re-sponse to these comments, thepresumption rules of paragraph (d)(3)have been revised to apply to paymentsmade to all flow-through entities (non-withholding foreign partnerships, foreignsimple trusts, and foreign grantor trusts).

Paragraph (d)(3)(ii) provides rules forpayments of amounts that are not subjectto withholding (e.g., foreign source in-come and gross proceeds from the sales ofsecurities) other than deposit interest andinterest and OID on short-term obliga-tions paid to foreign intermediaries andflow-through entities. The paragraph re-quired a payor to presume that a paymentwas made to an exempt recipient unlessthe payor had actual knowledge that anyperson for whom the intermediary wascollecting the payment was a U.S. non-exempt recipient. In that case, the pay-ment was treated as made to the U.S. non-exempt recipient. The last sentence of theparagraph, however, also appeared to re-quire a payor to presume that a paymentwas made to a U.S. non-exempt recipientif it appeared that the payment might becollected on behalf of a U.S. non-exemptpayee, because, for example, an interme-diary provided Forms W-9 for some pay-ees but did not allocate a payment to anyparticular payee. The application of thelast sentence of the paragraph, however,was uncertain.

Paragraph (d)(3)(ii) has been revised togenerally reflect the principle that a pay-ment of an amount that is not subject towithholding (other than short-term OIDand deposit interest) made to an interme-diary should not be subject to Form 1099reporting by a payor if the payment wouldnot be subject to Form 1099 reporting ifmade to a U.S. non-exempt recipient byan intermediary that is not a U.S. payor.Thus, the general rule is that a paymentcovered by the paragraph (i.e., foreignsource income or gross proceeds) is pre-sumed paid to an exempt recipient unlessthe payor has actual knowledge that the

amount is attributable to a U.S. non-ex-empt recipient.

As originally drafted,§1.6049–5(d)(3)(iii) provided special pre-sumption rules for payments of depositinterest and interest or OID from short-term original issue discount obligations toforeign intermediaries. It was not clearwhether the presumption rule of the para-graph applied to the portion of the saleproceeds representing OID from the saleor exchange of short-term OID instrumentin a transaction other than a redemption.

Under paragraph (d)(3)(iii) as revised,a payment of deposit interest or interest orOID on the redemption of a short-termoriginal issue discount obligation paid toan intermediary or flow-through entity ispresumed paid to a U.S. payee. The para-graph does not apply to sales or ex-changes (other than redemption) of short-term OID instruments. Such sales orexchanges are treated as gross proceedstransactions, in conformance with therules in §§1.6045–1(c) and (d)(3) and31.3406(b)(2)–2, and are subject to thegeneral presumption rule for paymentsmade to foreign intermediaries under§1.6049–5(d)(3)(ii). Therefore, grossproceeds from the sale or exchange (otherthan a redemption) of a short-term OIDinstrument will generally be presumedpaid as made to an exempt recipient. In-termediaries that are U.S. payors, how-ever, may themselves be required to re-port such gross proceeds under§1.6045–1(c) and (1)(g)(i) and the pre-sumption rule of §1.6049–5(d)(2), whichapplies to payments made to personsother than an intermediary because underthat section gross proceeds are generallyconsidered paid to U.S. payees under thatsection.

Paragraph (d)(3)(iii)(B) contained apresumption rule for payments made toexempt recipients that had not provideddocumentation that they were acting asintermediaries. The scope and applicationof this rule were unclear. Paragraph(d)(3)(iii)(B) has been completely revisedand now states that a payment made to anexempt recipient that the payor knows, orhas reason to know, is acting as an inter-mediary is subject to the presumptionsthat apply to intermediaries.

N. Withholding Certificate TransitionalIssues

The changes made by this regulationwill require revisions to instructions to thewithholding certificates issued on FormW-8 and certain minor changes to theforms themselves. Until Forms W-8, andthe instructions, are revised withholdingagents may rely on Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY as cur-rently in effect but should take into ac-count, particularly with respect to FormW-8IMY used by intermediaries andflow-through entities, that the instructionsto the form do not reflect the withholdingstatement requirements contained in thisregulation. In particular, withholdingagents and providers of Form W-8IMYshould furnish a withholding statement inconnection with the form that conforms to§1.1441–1(e)(3)(iv).

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It has also been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions. Finally, it has been determined thatthe Regulatory Flexibility Act (5 U.S.C.chapter 6) does not apply to these regula-tions because the regulations do not im-pose a collection of information on smallentities. Pursuant to 7805(f) of the Inter-nal Revenue Code, the notice of proposedrulemaking preceding these regulations(61 F.R. 17614) was submitted to theSmall Business Administration for com-ment on its impact on small business.


The principal authors of these regula-tions are Carl Cooper, Laurie Hatten-Boyd, and Kate Hwa of the Office of As-sociate Chief Counsel (International).

* * * * *

Adoption of Amendments toRegulations

Accordingly, 26 CFR parts 1 and 31 areamended as follows:


Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

June 5, 2000 1176 2000–23 I.R.B.

Par. 2. Effective January 1, 2001,§1.1441–0 is amended by:

1. Revising the entry for§1.1441–1(b)(2)(vii).

2. Adding entries for§1.1441–1(b)(2)(vii)(A) through (F).

2a. Revising the entry for§1.1441–1(b)(3)(ii).

3. Adding entries for§1.1441–1(b)(3)(ii)(A) through (C).

4. Revising the entry for§1.1441–1(b)(3)(iv).

5. Revising entry for§1.1441–1(b)(3)(v)(B).

6. Revising the entry for§1.1441–1(b)(3)(vi).

7. Adding entries for§1.1441–1(b)(3)(vii)(A) and (B).

8. Adding entries for§1.1441–1(b)(6)(i) and (ii).

9. Revising the entries for§1.1441–1(c)(6)(ii), (c)(6)(ii)(B),(c)(6)(ii)(C), and adding a new entry for§1.1441–1(c)(6)(ii)(D).

10. Adding entries for§1.1441–1(c)(12) through (29).

11. Revising the entry for§1.1441–1(d)(4).

12. Revising the entry for§1.1441–1(e)(3)(iii), (e)(3)(iv), and(e)(3)(iv)(A) through (C).

13. Adding entries for§1.1441–1(e)(3)(iv)(D) and (E).

14. Adding entries for§1.1441–1(e)(4)(iv)(A), (B), and (C).

15. Revising the entries for§1.1441–1(e)(5)(v) and (e)(5)(v)(B) and(C).

16. Revising the entries for§1.1441–2(b)(3)(i) and (ii).

17. Removing the entries for§1.1441–2(b)(3)(iii) and (iv).

18. Revising the entry for§1.1441–5(a).

19. Revising the entries for§1.1441–5(b), (b)(1), (b)(2), and (b)(2)(i),adding entries for §1.1441–5(b)(2)(i)(A)and (b)(2)(i)(B), and revising entries for§1.1441–5(b)(2)(ii), (b)(2)(iii), (b)(2)(iv),and (b)(2)(v).

20. Revising the entry for§1.1441–5(c)(1)(iv).

21. Removing the entries for§1.1441–5(c)(2)(ii)(A) and (B).

21. Revising the entry for§1.1441–5(c)(3).

22. Revising the entries for§1.1441–5(c)(3)(iii).

23. Revising the entries for§1.1441–5(c)(3)(iv) and (v).

24. Revising the entry for§1.1441–5(d).

25. Removing the entries for§1.1441–5(d)(3)(i) through (d)(3)(iv).

26. Revising the entry for§1.1441–5(d)(4).

27. Revising the entry for§1.1441–5(e).

28. Adding entries for§1.1441–5(e)(1), (e)(2), (e)(3), (e)(3)(i),(e)(3)(ii), (e)(4), (e)(5), (e)(5)(i), (e)(5)(ii),(e)(5)(iii), (e)(5)(iv), (e)(5)(v), (e)(6),(e)(6)(i), (e)(6)(ii) and (e)(6)(iii).

29. Revising the entries for§1.1441–6(b)(2), (b)(2)(i) and (b)(2)(ii).

30. Adding entries for§1.1441–6(b)(2)(iii) and (b)(2)(iv).

31. Revising the entry for§1.1441–6(b)(3).


33. Removing the entries for§1.1441–6(b)(4)(i), (b)(4)(ii), (b)(4)(ii)(A),(b)(4)(ii)(B), (b)(4)(iii), and (b)(4)(iv).

34. Removing the entry for§1.1441–6(b)(5).

35. Revising the entry for§1.1441–6(c).

36. Revising the entry for§1.1441–6(c)(2).

37. Removing the entries for§1.1441–6(c)(2)(i), (c)(2)(ii), and(c)(2)(iii).

38. Revising the entries for§1.1441–6(c)(5), (c)(5)(i) and (c)(5)(ii).

39. Revising the entry for§1.1441–6(e).

40. Adding entries for §1.1441–7(a)(1)and (2).

41. Removing the entries for§1.1441–7(b)(2)(i) and (b)(2)(ii).


43. Adding entries for§1.1441–7(b)(4), (b)(4)(i), (b)(4)(ii), and(b)(5) through (b)(11).

The additions and revisions read as fol-lows.§1.1441–0 Outline of regulation provi-sions for section 1441. * * * * *§1.1441–1 Requirement for the deductionand withholding of tax on payments toforeign persons.* * * * *(b) * * *

(2) * * *(vii) Rules for reliably associating a pay-ment with a withholding certificate orother appropriate documentation.(A) Generally.(B) Special rules applicable to a withhold-ing certificate from a nonqualified inter-mediary or flow-through entity.(C) Special rules applicable to a withhold-ing certificate provided by a qualified in-termediary that does not assume primarywithholding responsibility.(D) Special rules applicable to a with-holding certificate provided by a qualifiedintermediary that assumes primary with-holding responsibility under chapter 3 ofthe Internal Revenue Code.(E) Special rules applicable to a withhold-ing certificate provided by a qualified in-termediary that assumes primary Form1099 reporting and backup withholdingresponsibility but not primary withhold-ing under chapter 3.(F) Special rules applicable to a with-holding certificate provided by a qualifiedintermediary that assumes primary with-holding responsibility under chapter 3 andprimary Form 1099 reporting and backupwithholding responsibility and a with-holding certificate provided by a with-holding foreign partnership.(3) * * *(ii) Presumptions of classification as indi-vidual, corporation, partnership, etc.(A) In general.(B) No documentation provided.(C) Documentary evidence furnished foroffshore account.* * * * *(iv) Grace period.(v) * * *(B) Beneficial owner documentation orallocation information is lacking or unre-liable.* * * * *(vi) U.S. branches.(vii) * * *(A) In general.(B) Special rule for offshore accounts.* * * * * (6) * * *(i) In general.(ii) Example.* * * * *(c) * * *(6) * * *(ii) Special rules.* * * * *

2000–23 I.R.B. 1177 June 5, 2000

(B) Foreign partnerships.(C) Foreign simple trusts and foreigngrantor trusts.(D) Other foreign trusts and foreign es-tates.* * * * *(12) Payee.(13) Intermediary.(14) Nonqualified intermediary.(15) Qualified intermediary.(16) Withholding certificate.(17) Documentary evidence; other appro-priate documentation.(18) Documentation.(19) Payor.(20) Exempt recipient.(21) Non-exempt recipient.(22) Reportable amounts.(23) Flow-through entity.(24) Foreign simple trust.(25) Foreign complex trust.(26) Foreign grantor trust.(27) Partnership.(28) Nonwithholding foreign partnership.(29) Withholding foreign partnership.(d) * * *(4) When a payment to an intermediary orflow-through entity may be treated asmade to a U.S. payee.(e) * * *(3) * * *(iii) Intermediary withholding certificatefrom a nonqualified intermediary.(iv) Withholding statement provided bynonqualified Intermediary.(A) In general.(B) General requirements.(C) Content of withholding statement.(D) Alternative procedures.(E) Notice procedures.* * * * *(4) * * *(iv) * * *(A) In general.(B) Requirements.(C) Special requirements for transmissionof Forms W-8 by an intermediary. [Re-served]* * * * *(5) * * *(v) Withholding statement.* * * * *(B) Content of withholding statement.(C) Withholding rate pools.* * * * *§1.1441–2 Amounts subject to withhold-ing.* * * * *

(b) * * *(3) * * *(i) Amount subject to tax.(ii) Amounts subject to withholding.* * * * *§1.1441–5 Withholding on payments topartnerships trusts, and estates.(a) In general.(b) Rules applicable to U.S. partnerships,trusts, and estates.(1) Payments to U.S. partnerships, trusts,and estates.(2) Withholding by U.S. payees.(i) U.S. partnerships.(A) In general.(B) Effectively connected income of part-ners.(ii) U.S. simple trusts.(iii) U.S. complex trusts and U.S. estates.(iv) U.S. grantor trusts(v) Subsequent distribution(c) * * *(1) * * *(iv) Examples.* * * * *(3) Nonwithholding foreign partnerships.* * * * *(iii) Withholding certificate from a non-withholding foreign partnership.(iv) Withholding statement provided bynonwithholding foreign partnership.(v) Withholding and reporting by a for-eign partnership.(d) Presumption rules.* * * * *(4) Determination by a withholding for-eign partnership of the status of its part-ners.(e) Foreign trusts and estates.(1) In general.(2) Payments to foreign complex trustsand estates.(3) Payees of payments to foreign simpletrusts and foreign grantor trusts.(i) Payments for which beneficiaries andowners are payees.(ii) Payments for which trust is payee.(4) Reliance on claim of foreign complextrust or foreign estate status.(5) Foreign simple trust and foreigngrantor trust.(i) Reliance on claim of foreign simpletrust or foreign grantor trust status.(ii) Reliance on claim of reduced with-holding by a foreign simple trust or for-eign grantor trust for its beneficiaries orowners.(iii) Withholding certificate from foreign

simple trust or foreign grantor trust.(iv) Withholding statement provided by aforeign simple trust or foreign grantortrust.(v) Withholding foreign trusts.(6) Presumption rules(i) In general(ii) Determination of status as U.S. or for-eign trust or estate in the absence of docu-mentation.(iii) Determination of beneficiary orowner’s status in the absence of certaindocumentation.* * * * *§1.1441–6 Claim of reduced withholdingunder an income tax treaty.* * * * *(b) * * *(2) Payment to fiscally transparent entity.(i) In general.(ii) Certification by qualified intermedi-ary.(iii) Dual treatment.(iv) Examples.(3) Certified TIN.(4) Claim of benefits under an income taxtreaty by a U.S. person.(c) Exemption from requirement to fur-nish a taxpayer identifying number andspecial documentary evidence rules forcertain income.* * * * *(2) Income to which special rules apply.* * * * *(5) Statements regarding entitlement totreaty benefits.(i) Statement regarding conditions under alimitation on benefits provision.(ii) Statement regarding whether the tax-payer derives the income.* * * * *(e) Competent authority.* * * * *§1.1441–7 General provisions relating towithholding agents.(a) * * *(1) In general.(2) Examples.(b) * * *(3) Financial institutions—limits on rea-son to know.(4) Rules applicable to withholding cer-tificates.(i) In general.(ii) Examples.(5) Withholding certificate—establish-ment of foreign status.(6) Withholding certificate—claim of re-

June 5, 2000 1178 2000–23 I.R.B.

duced rate of withholding under treaty.(7) Documentary evidence.(8) Documentary evidence—establish-ment of foreign status.(9) Documentary evidence—claim of re-duced rate of withholding under treaty.(10) Limits on reason to know—indirectaccount holders.(11) Additional guidance.* * * * *

Par. 3. Effective January 1, 2001, sec-tion 1.1441–1 is amended by:

1. Revising the first sentence ofparagraph (b)(2)(i).

2. Revising paragraphs (b)(2)(iv)(A),(b)(2)(iv)(B)(3), and (b)(2)(iv)(C).

3. Revising paragraphs (b)(2)(v)(A)and (b)(2)(v)(B).

4. Revising paragraph (b)(2)(vii).5. Revising the first sentence of

paragraph (b)(3)(i).6. Revising paragraph (b)(3)(ii).7. Revising paragraphs (b)(3)(iii)(C)

and (b)(3)(iii)(D).8. Revising paragraph (b)(3)(iv).9. Revising paragraph (b)(3)(v).10. Revising paragraphs (b)(3)(vi)

and (b)(3)(vii).11. Revising paragraph (b)(6).12. Revising paragraph (c)(2).13. Revising paragraph (c)(6).14. Adding paragraphs (c)(12)

through (c)(29).15. Revising paragraphs (d)(2) through

(d) (4).16. Revising paragraphs (e)(1)(ii)

(A)(1), (e)(1)(ii)(A)(3), and (e)(1)(ii)(A)(4).17. Revising paragraph (e)(3).18. Revising paragraph (e)(4)(ii)(A).19. Revising paragraphs (e)(4)(ii)(B)(1)

through (e)(4)(ii)(B)(4) and (e)(4)(ii)(B) (6),and adding paragraph (e)(4)(ii)(B)(8).

20. Revising paragraph (e)(4)(iv).21. Revising paragraph (e)(4)(vii).22. Adding paragraph (e)(4)(ix)(A)(4)

and revising paragraph (e)(4)(ix)(C).23. Revising paragraph (e)(5)(i) and

(e)(5)(iii) through (e)(5)(v).The additions and revisions read as fol-

lows:§1.1441–1 Requirement for the deductionand withholding of tax on payments toforeign persons.* * * * *

(b) * * *(2) Determination of payee and payee’s

status—(i) In general. Except as other-wise provided in this paragraph (b)(2) and

§1.1441–5(c)(1) and (e)(3), a payee is theperson to whom a payment is made, re-gardless of whether such person is thebeneficial owner of the amount (as de-fined in paragraph (c)(6) of this section).* * ** * * * *

(iv) Payments to a U.S. branch of cer-tain foreign banks or foreign insurancecompanies—(A) U.S. branch treated as aU.S. person in certain cases. A paymentto a U.S. branch of a foreign person is apayment to a foreign person. However, aU.S. branch described in this paragraph(b)(2)(iv)(A) and a withholding agent (in-cluding another U.S. branch described inthis paragraph (b)(2)(iv)(A)) may agree totreat the branch as a U.S. person for pur-poses of withholding on specified pay-ments to the U.S. branch. Notwithstand-ing the preceding sentence, a withholdingagent making a payment to a U.S. branchtreated as a U.S. person under this para-graph (b)(2)(iv)(A) shall not treat thebranch as a U.S. person for purposes ofreporting the payment made to thebranch. Therefore, a payment to suchU.S. branch shall be reported on Form1042-S under §1.1461–1(c). Further, aU.S. branch that is treated as a U.S. per-son under this paragraph (b)(2)(iv)(A)shall not be treated as a U.S. person forpurposes of the withholding certificate itmay provide to a withholding agent.Therefore, the U.S. branch must furnish aU.S. branch withholding certificate onForm W-8 as provided in paragraph(e)(3)(v) of this section and not a FormW-9. An agreement to treat a U.S. branchas a U. S. person must be evidenced by aU.S. branch withholding certificate de-scribed in paragraph (e)(3)(v) of this sec-tion furnished by the U.S. branch to thewithholding agent. A U.S. branch de-scribed in this paragraph (b)(2)(iv)(A) isany U.S. branch of a foreign bank subjectto regulatory supervision by the FederalReserve Board or a U.S. branch of a for-eign insurance company required to filean annual statement on a form approvedby the National Association of InsuranceCommissioners with the Insurance De-partment of a State, a Territory, or theDistrict of Columbia. The Internal Rev-enue Service (IRS) may approve a list ofU.S. branches that may qualify for treat-ment as a U.S. person under this para-graph (b)(2)(iv)(A) (see §601.601(d)(2)

of this chapter). See §1.6049–5(c)(5)(vi)for the treatment of U.S. branches as U.S.payors if they make a payment that is sub-ject to reporting under chapter 61 of theInternal Revenue Code. Also see§1.6049–5(d)(1)(ii) for the treatment ofU.S. branches as foreign payees underchapter 61 of the Internal Revenue Code.

(B) * * *(3) As a payment to a foreign person of

income that is effectively connected withthe conduct of a trade or business in theUnited States if the withholding agentcannot reliably associate the paymentwith a withholding certificate from theU.S. branch or any other certificate orother appropriate documentation from an-other person. See §1.1441–4(a)(2)(ii).

(C) Consequences to the U.S. branchA U.S. branch that is treated as a U.S. per-son under paragraph (b)(2)(iv)(A) of thissection shall be treated as a separate per-son solely for purposes of section 1441(a)and all other provisions of chapter 3 of theInternal Revenue Code and the regula-tions thereunder (other than for purposesof reporting the payment to the U.S.branch under §1.1461–1(c) or for pur-poses of the documentation such a branchmust furnish under paragraph (e)(3)(v) ofthis section) for any payment that it re-ceives as such. Thus, the U.S. branchshall be responsible for withholding onthe payment in accordance with the provi-sions under chapter 3 of the Internal Rev-enue Code and the regulations thereunderand other applicable withholding provi-sions of the Internal Revenue Code. Forthis purpose, it shall obtain and retaindocumentation from payees or beneficialowners of the payments that it receives asa U.S. person in the same manner as if itwere a separate entity. For example, if aU.S. branch receives a payment on behalfof its home office and the home office is aqualified intermediary, the U.S. branchmust obtain a qualified intermediary with-holding certificate described in paragraph(e)(3)(ii) of this section from its home of-fice. In addition, a U.S. branch that hasnot provided documentation to the with-holding agent for a payment that is, infact, not effectively connected income is awithholding agent with respect to thatpayment. See paragraph (b)(6) of thissection and §1.1441–4(a)(2)(ii).* * * * *

(v) Payments to a foreign

2000–23 I.R.B. 1179 June 5, 2000

intermediary—(A) Payments treated asmade to persons for whom the intermedi-ary collects the payment. Except as oth-erwise provided in paragraph (b)(2)(v)(B)of this section, the payee of a payment toa person that the withholding agent maytreat as a foreign intermediary in accor-dance with the provisions of paragraph(b)(3)(ii)(C) or (b)(3)(v)(A) of this sec-tion is the person or persons for whom theintermediary collects the payment. Thus,for example, the payee of a payment thatthe withholding agent can reliably associ-ate with a withholding certificate from aqualified intermediary (defined in para-graph (e)(5)(ii) of this section) that doesnot assume primary withholding responsi-bility or a payment to a nonqualified in-termediary are the persons for whom thequalified intermediary or nonqualified in-termediary acts and not to the intermedi-ary itself. See paragraph (b)(3)(v) of thissection for presumptions that apply if thepayment cannot be reliably associatedwith valid documentation. For similarrules for payments to flow-through enti-ties, see §1.1441–5(c)(1) and (e)(3).

(B) Payments treated as made to for-eign intermediary. The payee of a pay-ment to a person that the withholdingagent may treat as a qualified intermediaryis the qualified intermediary to the extentthat the qualified intermediary assumesprimary withholding responsibility underparagraph (e)(5)(iv) of this section for thepayment. For example if a qualified inter-mediary assumes primary withholding re-sponsibility under chapter 3 of the InternalRevenue Code but does not assume pri-mary reporting or withholding responsi-bility under chapter 61 or section 3406 ofthe Internal Revenue Code and thereforeprovides Forms W-9 for U.S. non-exemptrecipients, the qualified intermediary isthe payee except to the extent the paymentis reliably associated with a Form W-9from a U.S. non-exempt recipient.* * * * *

(vii) Rules for reliably associating apayment with a withholding certificate orother appropriate documentation—(A)Generally. The presumption rules of para-graph (b)(3) of this section and§§1.1441–5(d) and (e)(6) and 1.6049–5(d)apply to any payment, or portion of a pay-ment, that a withholding agent cannot reli-ably associate with valid documentation.Generally, a withholding agent can reli-

ably associate a payment with valid docu-mentation if, prior to the payment, it holdsvalid documentation (either directly orthrough an agent), it can reliably deter-mine how much of the payment relates tothe valid documentation, and it has no ac-tual knowledge or reason to know that anyof the information, certifications, or state-ments in, or associated with, the documen-tation are incorrect. Special rules applyfor payments made to intermediaries,flow-through entities, and certain U.S.branches. See paragraph (b)(2)(vii)(B)through (F) of this section. The documen-tation referred to in this paragraph(b)(2)(vii) is documentation described inparagraphs (c)(16) and (17) of this sectionupon which a withholding agent may relyto treat the payment as a payment made toa payee or beneficial owner, and to ascer-tain the characteristics of the payee or ben-eficial owner that are relevant to withhold-ing or reporting under chapter 3 of theInternal Revenue Code and the regulationsthereunder. For purposes of this para-graph (b)(2)(vii), documentation also in-cludes the agreement that the withholdingagent has in effect with an authorized for-eign agent in accordance with§1.1441–7(c)(2)(i). A withholding agentthat is not required to obtain documenta-tion with respect to a payment is consid-ered to lack documentation for purposesof this paragraph (b)(2)(vii). For example,a withholding agent paying U.S. sourceinterest to a person that is an exempt recip-ient, as defined in §1.6049–4(c)(1)(ii), isnot required to obtain documentation fromthat person in order to determine whetheran amount paid to that person is reportableunder an applicable information reportingprovision under chapter 61 of the InternalRevenue Code. The withholding agentmust, however, treat the payment as madeto an undocumented person for purposesof chapter 3 of the Internal Revenue Code.Therefore, the presumption rules of para-graph (b)(3)(iii) of this section apply todetermine whether the person is presumedto be a U.S. person (in which case, nowithholding is required under this sec-tion), or whether the person is presumed tobe a foreign person (in which case 30-per-cent withholding is required under thissection). See paragraph (b)(3)(v) of thissection for special reliance rules in thecase of a payment to a foreign intermedi-ary and §1.1441–5(d) and (e)(6) for spe-

cial reliance rules in the case of a paymentto a flow-through entity.

(B) Special rules applicable to a with-holding certificate from a nonqualified in-termediary or flow-through entity. (1) Inthe case of a payment made to a nonquali-fied intermediary, a flow-through entity(as defined in paragraph (c)(23) of thissection), and a U.S. branch described inparagraph (b)(2)(iv) of this section (otherthan a branch that is treated as a U.S. per-son), a withholding agent can reliably as-sociate the payment with valid documen-tation only to the extent that, prior to thepayment, the withholding agent can allo-cate the payment to a valid nonqualifiedintermediary, flow-through, or U.S.branch withholding certificate; the with-holding agent can reliably determine howmuch of the payment relates to valid doc-umentation provided by a payee as deter-mined under paragraph (c)(12) of this sec-tion (i.e., a person that is not itself anintermediary, flow-through entity, or U.S.branch); and the withholding agent hassufficient information to report the pay-ment on Form 1042-S or Form 1099, ifreporting is required. See paragraph(e)(3)(iii) of this section for the require-ments of a nonqualified intermediarywithholding certificate, paragraph(e)(3)(v) of this section for the require-ments of a U.S. branch certificate, and§§1.1441–5(c)(3)(iii) and (e)(5)(iii) forthe requirements of a flow-through with-holding certificate. Thus, a payment can-not be reliably associated with valid docu-mentation provided by a payee to theextent such documentation is lacking orunreliable, or to the extent that informa-tion required to allocate and report all or aportion of the payment to each payee islacking or unreliable. If a withholdingcertificate attached to an intermediary,U.S. branch, or flow-through withholdingcertificate is another intermediary, U.S.branch, or flow-through withholding cer-tificate, the rules of this paragraph(b)(2)(vii)(B) apply by treating the shareof the payment allocable to the other in-termediary, U.S. branch, or flow-throughentity as if the payment were made di-rectly to such other entity. See paragraph(e)(3)(iv)(D) of this section for rules per-mitting information allocating a paymentto documentation to be received after thepayment is made.

(2) The rules of paragraph (b)(2)(vii)(B)(1)

June 5, 2000 1180 2000–23 I.R.B.

of this section are illustrated by the followingexamples:

Example 1. WH, a withholding agent, makes apayment of U.S. source interest to NQI, an interme-diary that is a nonqualified intermediary. NQI pro-vides a valid intermediary withholding certificateunder paragraph (e)(3)(iii) of this section. NQI doesnot, however, provide valid documentation from thepersons on whose behalf it receives the interest pay-ment, and, therefore, the interest payment cannot bereliably associated with valid documentation pro-vided by a payee. WH must apply the presumptionrules of paragraph (b)(3)(v) of this section to thepayment.

Example 2. The facts are the same as in Example1, except that NQI does attach valid beneficialowner withholding certificates (as defined in para-graph (e)(2)(i) of this section) from A, B, C, and Destablishing their status as foreign persons. NQIdoes not, however, provide WH with any informa-tion allocating the payment among A, B, C, and Dand, therefore, WH cannot determine the portion ofthe payment that relates to each beneficial ownerwithholding certificate. The interest payment can-not be reliably associated with valid documentationfrom a payee and WH must apply the presumptionrules of paragraph (b)(3)(v) of this section to thepayment. See, however, paragraph (e)(3)(iv)(D) ofthis section providing special rules permitting allo-cation information to be received after a payment ismade.

Example 3. The facts are the same as in Example2, except that NQI does provide allocation informa-tion associated with its intermediary withholdingcertificate indicating that 25 percent of the interestpayment is allocable to A and 25 percent to B. NQIdoes not provide any allocation information regard-ing the remaining 50 percent of the payment. WHmay treat 25 percent of the payment as made to Aand 25 percent as made to B. The remaining 50 per-cent of the payment cannot be reliably associatedwith valid documentation from a payee, however,since NQI did not provide information allocating thepayment. Thus, the remaining 50 percent of the pay-ment is subject to the presumption rules of para-graph (b)(3)(v) of this section.

Example 4. WH makes a payment of U.S. sourceinterest to NQI1, an intermediary that is not a quali-fied intermediary. NQI1 provides WH with a validnonqualified intermediary withholding certificate aswell a valid beneficial owner withholding certifi-cates from A and B and a valid nonqualified inter-mediary withholding certificate from NQI2. NQI2has provided valid beneficial owner documentationfrom C sufficient to establish C’s status as a foreignperson. Based on information provided by NQI1,WH can allocate 20 percent of the interest paymentto A, and 20 percent to B. Based on information thatNQI2 provided NQI1 and that NQI1 provides toWH, WH can allocate 60 percent of the payment toNQI 2, but can only allocate one half of that pay-ment (30 percent) to C. Therefore, WH cannot reli-ably associate 30 percent of the payment made toNQI2 with valid documentation and must apply thepresumption rules of paragraph (b)(3)(v) of this sec-tion to that portion of the payment.

(C) Special rules applicable to a with-holding certificate provided by a qualifiedintermediary that does not assume pri-

mary withholding responsibility. (1) If apayment is made to a qualified intermedi-ary that does not assume primary with-holding responsibility under chapter 3 ofthe Internal Revenue Code or primaryForm 1099 reporting and backup with-holding responsibility under chapter 61and section 3406 of the Internal RevenueCode for the payment, a withholdingagent can reliably associate the paymentwith valid documentation only to the ex-tent that, prior to the payment, the with-holding agent has received a valid quali-fied intermediary withholding certificateand the withholding agent can reliably de-termine the portion of the payment thatrelates to a withholding rate pool, as de-fined in paragraph (e)(5)(v)(C) of thissection. In the case of a withholding ratepool attributable to a U.S. non-exempt re-cipient, a payment cannot be reliably as-sociated with valid documentation unless,prior to the payment, the qualified inter-mediary has provided the U.S. person’sForm W-9 (or, in the absence of the form,the name, address, and TIN, if available,of the U.S. person) and sufficient infor-mation for the withholding agent to reportthe payment on Form 1099. See para-graph (e)(5)(v)(C)(2) of this section forspecial rules regarding allocation of pay-ments among U.S. non-exempt recipients.

(2) The rules of this paragraph(b)(2)(vii)(C) are illustrated by the fol-lowing examples:

Example 1. WH, a withholding agent, makes apayment of U.S. source dividends to QI. QI pro-vides WH with a valid qualified intermediary with-holding certificate on which it indicates that it doesnot assume primary withholding responsibilityunder chapter 3 of the Internal Revenue Code or pri-mary Form 1099 reporting and backup withholdingresponsibility under chapter 61 and section 3406 ofthe Internal Revenue Code. QI does not provide anyinformation allocating the dividend to withholdingrate pools. WH cannot reliably associate the pay-ment with valid payee documentation and thereforemust apply the presumption rules of paragraph(b)(3)(v) of this section.

Example 2. WH makes a payment of U.S. sourcedividends to QI. QI has 5 customers: A, B, C, D,and E. QI has obtained documentation from A and Bestablishing their entitlement to a 15 percent rate oftax on U.S. source dividends under an income taxtreaty. C is a U.S. person that is an exempt recipientas defined in paragraph (c)(20) of this section. Dand E are U.S. non-exempt recipients who have pro-vided Forms W-9 to QI. A, B, C, D, and E are eachentitled to 20 percent of the dividend payment. QIprovides WH with a valid qualified intermediarywithholding certificate as described in paragraph(e)(2)(ii) of this section with which it associates theForms W-9 from D and E. QI associates the follow-

ing allocation information with its qualified interme-diary withholding certificate: 40 percent of the pay-ment is allocable to the 15 percent withholding ratepool, and 20 percent is allocable to each of D and E.QI does not provide any allocation information re-garding the remaining 20 percent of the payment.WH cannot reliably associate 20 percent of the pay-ment with valid documentation and, therefore, mustapply the presumption rules of paragraph (b)(3)(v)of this section to that portion of the payment. The20 percent of the payment allocable to the 15 per-cent withholding rate pool, and the portion of thepayments allocable to D and E are payments that canbe reliably associated with documentation.

(D) Special rules applicable to a with-holding certificates provided by a quali-fied intermediary that assumes primarywithholding responsibility under chapter3 of the Internal Revenue Code. (1) In thecase of a payment made to a qualified in-termediary that assumes primary with-holding responsibility under chapter 3 ofthe Internal Revenue Code with respect tothat payment (but does not assume pri-mary Form 1099 reporting and backupwithholding responsibility under chapter61 and section 3406 of the Internal Rev-enue Code), a withholding agent can reli-ably associate the payment with validdocumentation only to the extent that,prior to the payment, the withholdingagent has received a valid qualified inter-mediary withholding certificate and thewithholding agent can reliably determinethe portion of the payment that relates tothe withholding rate pool for which thequalified intermediary assumes primarywithholding responsibility under chapter3 of the Internal Revenue Code and theportion of the payment attributable towithholding rate pools for each U.S. non-exempt recipient for whom the qualifiedintermediary has provided a Form W-9(or, in absence of the form, the name, ad-dress, and TIN, if available, of the U.S.non-exempt recipient). See paragraph(e)(5)(v)(C)(2) of this section for alterna-tive allocation procedures for paymentsmade to U.S. persons that are not exemptrecipients.

(2) Examples. The following examplesillustrate the rules of paragraph(b)(2)(vii)(D)(1) of this section:

Example 1. WH makes a payment of U.S. sourceinterest to QI, a qualified intermediary. QI providesWH with a withholding certificate that indicates thatQI will assume primary withholding responsibilityunder chapter 3 of the Internal Revenue Code withrespect to the payment. In addition, QI attaches aForm W-9 from A, a U.S. non-exempt recipient, asdefined in paragraph (c)(21) of this section, and pro-vides the name, address, and TIN of B, a U.S. person

2000–23 I.R.B. 1181 June 5, 2000

that is also a non-exempt recipient but who has notprovided a Form W-9. QI associates a withholdingstatement with its qualified intermediary withhold-ing certificate indicating that 10 percent of the pay-ment is attributable to A, and 10 percent to B, andthat QI will assume primary withholding responsi-bility with respect to the remaining 80 percent of thepayment. WH can reliably associate the entire pay-ment with valid documentation. Although under thepresumption rule of paragraph (b)(3)(v) of this sec-tion, an undocumented person receiving U.S. sourceinterest is generally presumed to be a foreign person,WH has actual knowledge that B is a U.S. non-ex-empt recipient and therefore must report the pay-ment on Form 1099 and backup withhold on the in-terest payment under section 3406.

Example 2. The facts are the same as in Example1, except that no Forms W-9 or other informationhave been provided for the 20 percent of the pay-ment that is allocable to A and B. Thus, QI has ac-cepted withholding responsibility for 80 percent ofthe payment, but has provided no information for theremaining 20 percent. In this case, 20 percent of thepayment cannot be reliably associated with validdocumentation, and WH must apply the presump-tion rule of paragraph (b)(3)(v) of this section.

(E) Special rules applicable to a with-holding certificate provided by a qualifiedintermediary that assumes primary Form1099 reporting and backup withholdingresponsibility but not primary withhold-ing under chapter 3. (1). If a payment ismade to a qualified intermediary that as-sumes primary Form 1099 reporting andbackup withholding responsibility for thepayment (but does not assume primarywithholding responsibility under chapter3 of the Internal Revenue Code), a with-holding agent can reliably associate thepayment with valid documentation onlyto the extent that, prior to the payment,the withholding agent has received a validqualified intermediary withholding cer-tificate and the withholding agent can re-liably determine the portion of the pay-ment that relates to a withholding ratepool or pools provided as part of the qual-ified intermediary’s withholding state-ment and the portion of the payment forwhich the qualified intermediary assumesprimary Form 1099 reporting and backupwithholding responsibility.

(2) The following example illustratesthe rules of paragraph (b)(2)((vii)(D)(1)of this section:

Example. WH makes a payment of U.S. sourcedividends to QI, a qualified intermediary. QI hasprovided WH with a valid qualified intermediarywithholding certificate. QI states on its withholdingstatement accompanying the certificate that it as-sumes primary Form 1099 reporting and backupwithholding responsibility but does not assume pri-mary withholding responsibility under chapter 3 ofthe Internal Revenue Code. QI represents that 15

percent of the dividend is subject to a 30 percent rateof withholding, 75 percent of the dividend is subjectto a 15 percent rate of withholding, and that QI as-sumed primary Form 1099 reporting and backupwithholding for the remaining 10 percent of the pay-ment. The entire payment can be reliably associatedwith valid documentation.

(F) Special rules applicable to a with-holding certificate provided by a qualifiedintermediary that assumes primary with-holding responsibility under chapter 3and primary Form 1099 reporting andbackup withholding responsibility and awithholding certificate provided by awithholding foreign partnership. If a pay-ment is made to a qualified intermediarythat assumes both primary withholdingresponsibility under chapter 3 of the Inter-nal Revenue Code and primary Form1099 reporting and backup withholdingresponsibility under chapter 61 and sec-tion 3406 of the Internal Revenue Codefor the payment, a withholding agent canreliably associate a payment with validdocumentation provided that it receives avalid qualified intermediary withholdingcertificate as described in paragraph(e)(3)(ii) of this section. In the case of apayment made to a withholding foreignpartnership, the withholding agent can re-liably associate the payment with validdocumentation to the extent it can associ-ate the payment with a valid withholdingcertificate described in §1.1441-5(c)(2)(iv).

(3) Presumptions regarding payee’sstatus in the absence of documentation—(i) General rules. A withholding agentthat cannot, prior to the payment, reliablyassociate (within the meaning of para-graph (b)(2)(vii) of this section) a pay-ment of an amount subject to withholding(as described in §1.1441–2(a)) with validdocumentation may rely on the presump-tions of this paragraph (b)(3) to determinethe status of the payee as a U.S. or a for-eign person and the payee’s other relevantcharacteristics (e.g., as an owner or inter-mediary, as an individual, trust, partner-ship, or corporation). * * *

(ii) Presumptions of classification asindividual, corporation, partnership, etc.(A) In general. A withholding agent thatcannot reliably associate a payment with avalid withholding certificate or that hasreceived valid documentary evidenceunder §§1.1441–1(e)(1)(ii)(2) and1.6049–5(c)(1) or (4) but cannot deter-mine a payee’s classification from the

documentary evidence must apply therules of this paragraph (b)(3)(ii) to deter-mine the payee’s classification as an indi-vidual, trust, estate, corporation, or part-nership. The fact that a payee ispresumed to have a certain status underthe provisions of this paragraph (b)(3)(ii)does not mean that it is excused from fur-nishing documentation if documentationis otherwise required to obtain a reducedrate of withholding under this section.For example, if, for purposes of this para-graph (b)(3)(ii), a payee is presumed to bea tax-exempt organization based on§1.6049–4(c)(1)(ii)(B), the withholdingagent cannot rely on this presumption toreduce the rate of withholding on pay-ments to such person (if such person isalso presumed to be a foreign personunder paragraph (b)(3)(iii)(A) of this sec-tion) because a reduction in the rate ofwithholding for payments to a foreigntax-exempt organization generally re-quires that a valid Form W–8 described in§1.1441–9(b)(2) be furnished to the with-holding agent.

(B) No documentation provided. If thewithholding agent cannot reliably associ-ate a payment with a valid withholdingcertificate or valid documentary evidence,it must presume that the payee is an indi-vidual, a trust, or an estate, if the payee ap-pears to be such person (e.g., based on thepayee’s name or other indications). In theabsence of reliable indications that thepayee is an individual, trust, or an estate,the withholding agent must presume thatthe payee is a corporation or one of the per-sons enumerated under §1.6049–4(c)-(1)(ii)(B) through (Q) if it can be so treatedunder §1.6049–4(c)(1)(ii)(A)(1) or any oneof the paragraphs under §1.6049–4(c)-(1)(ii)(B) through (Q) without the need tofurnish documentation. If the withholdingagent cannot treat a payee as a person de-scribed in §1.6049–4(c)(1)(ii)(A)(1)through (Q), then the payee shall be pre-sumed to be a partnership. If such a part-nership is presumed to be foreign, it is notthe beneficial owner of the income paid toit. See paragraph (c)(6) of this section. Ifsuch a partnership is presumed to be do-mestic, it is a U.S. non-exempt recipientfor purposes of chapter 61 of the InternalRevenue Code.

(C) Documentary evidence furnishedfor offshore account. If the withholdingagent receives valid documentary evi-

June 5, 2000 1182 2000–23 I.R.B.

dence, as described in §1.6049–5(c)(1) or(4), with respect to an offshore accountfrom an entity but the documentary evi-dence does not establish the entity’s clas-sification as a corporation, trust, estate, orpartnership, the withholding agent maypresume (in the absence of actual knowl-edge otherwise) that the entity is the typeof person enumerated under§1.6049–4(c)(1)(ii)(B) through (Q) if itcan be so treated under any one of thoseparagraphs without the need to furnishdocumentation. If the withholding agentcannot treat a payee as a person describedin §1.6049–4(c)(1)(ii)(B) through (Q),then the payee shall be presumed to be acorporation unless the withholding agentknows, or has reason to know, that the en-tity is not classified as a corporation forU.S. tax purposes, the withholding agentis required to presume the payee is a U.S.person under paragraph (b)(3)(iii) of thissection, or there are indicia of U.S. status.If the withholding agent must presume thepayee is a U.S. person, or there are indiciaof U.S. status, the withholding agent shalltreat the entity as a partnership, and there-fore as a U.S. non-exempt recipient forpurposes of chapter 61 of the InternalRevenue Code; however backup with-holding under section 3406 shall notapply if backup withholding is not re-quired under §31.3406(g)–1(e) of thischapter. Indicia of U.S. status exists ifpayments are regularly made to a payee inthe United States, the payee has an ac-count with the same withholding agent inthe United States, or the payee has a U.S.address. If a payee is, or is presumed tobe, a corporation under this paragraph(b)(3)(ii)(C) and a foreign person underparagraph (b)(3)(iii) of this section, awithholding agent shall not treat thepayee as the beneficial owner of income ifthe withholding agent knows, or has rea-son to know, that the payee is not the ben-eficial owner of the income. For this pur-pose, a withholding agent shall havereason to know that the payee is not abeneficial owner if the documentary evi-dence indicates that the payee is a bank,broker, intermediary, custodian, or otheragent, or is treated under§1.6049–4(c)(1)(ii)(B) through (Q) assuch a person. A withholding agent may,however, treat such a person as a benefi-cial owner if the foreign person provides astatement, in writing and signed by a per-

son with authority to sign the statement,that is attached to the documentary evi-dence stating it is the beneficial owner ofthe income.

(iii) * * *(C) Pensions, annuities, etc. A pay-

ment from a trust described in section401(a), an annuity plan described in sec-tion 403(a), a payment with respect to anyannuity, custodial account, or retirementincome account described in section403(b), or a payment from an individualretirement account or individual retire-ment annuity described in section 408 thata withholding agent cannot reliably asso-ciate with documentation is presumed tobe made to a U.S. person only if the with-holding agent has a record of a Social Se-curity number for the payee and relies ona mailing address described in the follow-ing sentence. A mailing address is an ad-dress used for purposes of information re-porting or otherwise communicating withthe payee that is an address in the UnitedStates or in a foreign country with whichthe United States has an income tax treatyin effect and the treaty provides that thepayee, if an individual resident in thatcountry, would be entitled to an exemp-tion from U.S. tax on amounts describedin this paragraph (b)(3)(iii)(C). Any pay-ment described in this paragraph(b)(3)(iii)(C) that is not presumed to bemade to a U.S. person is presumed to bemade to a foreign person. A withholdingagent making a payment to a person pre-sumed to be a foreign person may not re-duce the 30-percent amount of withhold-ing required on such payment unless itreceives a withholding certificate de-scribed in paragraph (e)(2)(i) of this sec-tion furnished by the beneficial owner.For reduction in the 30-percent rate, see§§1.1441–4(e) or 1.1441–6(b).

(D) Certain payments to offshore ac-counts. A payment is presumed made to aforeign payee if the payment is made out-side the United States (as defined in§1.6049–5(e)) to an offshore account (asdefined in §1.6049–5(c)(1)) and the with-holding agent does not have actual knowl-edge that the payee is a U.S. person. See§1.6049–5(d)(2) and (3) for exceptions tothis rule.

(iv) Grace period. A withholdingagent may choose to apply the provisionsof §1.6049–5(d)(2)(ii) regarding a 90-day grace period for purposes of this para-

graph (b)(3) (by applying the term with-holding agent instead of the term payor)to amounts described in §1.1441–6(c)(2)and to amounts covered by a Form 8233described in §1.1441–4(b)(2)(ii). Thus,for these amounts, a withholding agentmay choose to treat an account holder as aforeign person and withhold under chap-ter 3 of the Internal Revenue Code (andthe regulations thereunder) while await-ing documentation. For purposes of de-termining the rate of withholding underthis section, the withholding agent mustwithhold at the unreduced 30-percent rateat the time that the amounts are creditedto an account. However, a withholdingagent who can reliably associate the pay-ment with a withholding certificate that isotherwise valid within the meaning of theapplicable provisions except for the factthat it is transmitted by facsimile may relyon that facsimile form for purposes ofwithholding at the claimed reduced rate.For reporting of amounts credited bothbefore and after the grace period, see§1.1461–1(c)(4)(i)(A). The following ad-justments shall be made at the expirationof the grace period:

(A) If, at the end of the grace period,the documentation is not furnished in themanner required under this section andthe account holder is presumed to be aU.S. non-exempt recipient, then backupwithholding applies to amounts creditedto the account after the expiration of thegrace period only. Amounts credited tothe account during the grace period shallbe treated as owned by a foreign payeeand adjustments must be made to correctany underwithholding on such amounts inthe manner described in §1.1461–2.

(B) If, at the end of the grace period,the documentation is not furnished in themanner required under this section, or ifdocumentation is furnished that does notsupport the claimed rate reduction, andthe account holder is presumed to be aforeign person then adjustments must bemade to correct any underwithholding onamounts credited to the account duringthe grace period, based on the adjustmentprocedures described in §1.1461–2.

(v) Special rules applicable to pay-ments to foreign intermediaries—(A) Re-liance on claim of status as foreign inter-mediary. The presumption rules ofparagraph (b)(3)(v)(B) of this sectionapply to a payment made to an intermedi-

2000–23 I.R.B. 1183 June 5, 2000

ary (whether the intermediary is a quali-fied or nonqualified intermediary) thathas provided a valid withholding certifi-cate under paragraph (e)(3)(ii) or (iii) ofthis section (or has provided documentaryevidence described in paragraph(b)(3)(ii)(C) of this section that indicatesit is a bank, broker, custodian, intermedi-ary, or other agent) to the extent the with-holding agent cannot treat the payment asbeing reliably associated with valid docu-mentation under the rules of paragraph(b)(2)(vii) of this section. For this pur-pose, a U.S. person’s foreign branch thatis a qualified intermediary defined inparagraph (e)(5)(ii) of this section shall betreated as a foreign intermediary. A payeethat the withholding agent may not reli-ably treat as a foreign intermediary underthis paragraph (b)(3)(v)(A) is presumed tobe a payee other than an intermediarywhose classification as an individual, cor-poration, partnership, etc., must be deter-mined in accordance with paragraph(b)(3)(ii) of this section to the extent rele-vant. In addition, such payee is presumedto be a U.S. or a foreign payee based uponthe presumptions described in paragraph(b)(3)(iii) of this section. The provisionsof paragraph (b)(3)(v)(B) of this sectionare not relevant to a withholding agentthat can reliably associate a payment witha withholding certificate from a personrepresenting to be a qualified intermedi-ary to the extent the qualified intermedi-ary has assumed primary withholding re-sponsibility in accordance with paragraph(e)(5)(iv) of this section.

(B) Beneficial owner documentation orallocation information is lacking or unre-liable. Any portion of a payment that thewithholding agent may treat as made to aforeign intermediary (whether a nonquali-fied or a qualified intermediary) but thatthe withholding agent cannot treat as reli-ably associated with valid documentationunder the rules of paragraph (b)(2)(vii) ofthis section is presumed made to an un-known, undocumented foreign payee. Asa result, a withholding agent must deductand withhold 30 percent from any pay-ment of an amount subject to withhold-ing. If a withholding certificate attachedto an intermediary certificate is anotherintermediary withholding certificate or aflow-through withholding certificate, therules of this paragraph (b)(3)(v)(B) (or§1.1441–5(d)(3) or (e)(6)(iii)) apply by

treating the share of the payment alloca-ble to the other intermediary or flow-through entity as if it were made directlyto the other intermediary or flow-throughentity. Any payment of an amount subjectto withholding that is presumed made toan undocumented foreign person must bereported on Form 1042-S. See§1.1461–1(c). See §1.6049–5(d) for pay-ments that are not subject to withholding.

(vi) U.S. branches. The rules of para-graph (b)(3)(v)(B) of this section shallapply to payments to a U.S. branch de-scribed in paragraph (b)(2)(iv)(A) of thissection that has not agreed to be treated asa U.S. person.

(vii) Joint payees—(A) In general. Ex-cept as provided in paragraph(b)(3)(vii)(B) of this section, if a with-holding agent makes a payment to jointpayees and cannot reliably associate apayment with valid documentation fromall payees, the payment is presumed madeto an unidentified U.S. person. However,if one of the joint payees provides a FormW-9 furnished in accordance with the pro-cedures described in §§31.3406(d)–1through 31.3406(d)–5 of this chapter, thepayment shall be treated as made to thatpayee. See §31.3406(h)–2 of this chapterfor rules to determine the relevant payeeif more than one Form W–9 is provided.For purposes of applying this paragraph(b)(3), the grace period rules in paragraph(b)(3)(iv) of this section shall apply onlyif each payee meets the conditions de-scribed in paragraph (b)(3)(iv) of this sec-tion.

(B) Special rule for offshore accounts.If a withholding agent makes a paymentto joint payees and cannot reliably associ-ate a payment with valid documentationfrom all payees, the payment is presumedmade to an unknown foreign payee if thepayment is made outside the UnitedStates (as defined in §1.6059–5(e)) to anoffshore account (as defined in§1.6049–5(c)(1)).* * * * *

(6) Rules of withholding for paymentsby a foreign intermediary or certain U.S.branches—(i) In general. A foreign inter-mediary described in paragraph (e)(3)(i)of this section or a U.S. branch describedin paragraph (b)(2)(iv) of this section thatreceives an amount subject to withholding(as defined in §1.1441–2(a)) shall be re-quired to withhold (if another withholding

agent has not withheld the full amount re-quired) and report such payment underchapter 3 of the Internal Revenue Codeand the regulations thereunder except asotherwise provided in this paragraph(b)(6). A nonqualified intermediary orU.S. branch described in paragraph(b)(2)(iv) of this section (other than abranch that is treated as a U.S. person)shall not be required to withhold or reportif it has provided a valid nonqualified in-termediary withholding certificate or aU.S. branch withholding certificate, it hasprovided all of the information requiredby paragraph (e)(3)(iv) of this section(withholding statement), and it does notknow, and has no reason to know, that an-other withholding agent failed to withholdthe correct amount or failed to report thepayment correctly under §1.1461–1(c). Aqualified intermediary’s obligations towithhold and report shall be determinedin accordance with its qualified interme-diary withholding agreement.

(ii) Examples. The following examplesillustrate the rules of paragraph (b)(6)(i)of this section:

Example 1. FB, a foreign bank, acts an interme-diary for five different persons, A, B, C, D, and E,each of whom owns U.S. securities that generateU.S. source dividends. The dividends are paid byUSWA, a U.S. withholding agent. FB furnishedUSWA with a nonqualified intermediary withhold-ing certificate, described in paragraph (e)(3)(iii) ofthis section, to which it attached the withholdingcertificates of each of A, B, C, D, and E. The with-holding certificates from A and B claim a 15 percentreduced rate of withholding under an income taxtreaty. C, D, and E claim no reduced rate of with-holding. FB provides a withholding statement thatmeets all of the requirements of paragraph (e)(3)(iv)of this section, including information allocating 20percent of each dividend payment to each of A, B, C,D, and E. FB does not have actual knowledge or rea-son to know that USWA did not withhold the correctamounts or report the dividends on Forms 1042-S toeach of A, B, C, D, and E. FB is not required towithhold or to report the dividends to A, B, C, D,and E.

Example 2. The facts are the same as in Example1, except that FB did not provide any informationfor USWA to determine how much of the dividendpayments were made to A, B, C, D, and E. BecauseUSWA could not reliably associate the dividendpayments with documentation under paragraph(b)(2)(vii) of this section, USWA applied the pre-sumption rules of paragraph (b)(3)(v) of this sectionand withheld 30 percent from all dividend payments.In addition, USWA filed a single Form 1042-S re-porting the payment to an unknown foreign payee.FB is deemed to know that USWA did not report thepayment to A, B, C, D, and E because it did not pro-vide all of the information required on a withholdingstatement under paragraph (e)(3)(iv) of this section(i.e., allocation information). Although FB is not re-

June 5, 2000 1184 2000–23 I.R.B.

quired to withhold on the payment because the full30 percent withholding was imposed by USWA, it isrequired to report the payments on Forms 1042-S toA, B, C, D, and E. FB’s intentional failure to do sowill subject it to intentional disregard penaltiesunder sections 6721 and 6722.

* * * * *(c) * * *(2) Foreign and U.S. person. The term

foreign person means a nonresident alienindividual, a foreign corporation, a for-eign partnership, a foreign trust, a foreignestate, and any other person that is not aU.S. person described in the next sen-tence. Solely for purposes of the regula-tions under chapter 3 of the Internal Rev-enue Code, the term foreign person alsomeans, with respect to a payment by awithholding agent, a foreign branch of aU.S. person that furnishes an intermediarywithholding certificate described in para-graph (e)(3)(ii) of this section. Such abranch continues to be a U.S. payor forpurposes of chapter 61 of the InternalRevenue Code. See §1.6049–5(c)(4). AU.S. person is a person described in sec-tion 7701(a)(30), the U.S. government(including an agency or instrumentalitythereof), a State (including an agency orinstrumentality thereof), or the District ofColumbia (including an agency or instru-mentality thereof).* * * * *

(6) Beneficial owner—(i) General rule.This paragraph (c)(6) defines the termbeneficial owner for payments of incomeother than a payment for which a reducedrate of withholding is claimed under anincome tax treaty. The term beneficialowner means the person who is the ownerof the income for tax purposes and whobeneficially owns that income. A personshall be treated as the owner of the in-come to the extent that it is required underU.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). Bene-ficial ownership of income is determinedunder the provisions of section 7701(l)and the regulations under that section andany other applicable general U.S. taxprinciples, including principles governingthe determination of whether a transactionis a conduit transaction. Thus, a personreceiving income in a capacity as a nomi-nee, agent, or custodian for another per-son is not the beneficial owner of the in-

come. In the case of a scholarship, thestudent receiving the scholarship is thebeneficial owner of that scholarship. Inthe case of a payment of an amount that isnot income, the beneficial owner determi-nation shall be made under this paragraph(c)(6) as if the amount were income.

(ii) Special rules—(A) General rule.The beneficial owners of income paid toan entity described in this paragraph(c)(6)(ii) are those persons described inparagraphs (c)(6)(ii)(B) through (D) ofthis section.

(B) Foreign partnerships. The benefi-cial owners of income paid to a foreignpartnership (whether a nonwithholding ora withholding foreign partnership) are thepartners in the partnership, unless theythemselves are not the beneficial ownersof the income under this paragraph (c)(6).For example, a partnership (first tier) thatis a partner in another partnership (secondtier) is not the beneficial owner of incomepaid to the second tier partnership sincethe first tier partnership is not the ownerof the income under U.S. tax principles.Rather, the partners of the first tier part-nership are the beneficial owners (to theextent they are not themselves personsthat are not beneficial owners under thisparagraph (c)(6)). See §1.1441–5(b) forapplicable withholding procedures forpayments to a domestic partnership. Seealso §1.1441–5(c)(3)(ii) for applicablewithholding procedures for payments to aforeign partnership where one of the part-ners (at any level in the chain of tiers) is adomestic partnership.

(C) Foreign simple trusts and foreigngrantor trusts. The beneficial owners ofincome paid to a foreign simple trust, asdescribed in paragraph (c)(23) of this sec-tion, are the beneficiaries of the trust, un-less they themselves are not the beneficialowners of the income under this para-graph (c)(6). The beneficial owners of in-come paid to a foreign grantor trust, asdescribed in paragraph (c)(26) of this sec-tion, are the persons treated as the ownersof the trust, unless they themselves arenot the beneficial owners of the incomeunder this paragraph (c)(6).

(D) Other foreign trusts and foreign es-tates. The beneficial owner of incomepaid to a foreign complex trust as definedin paragraph (c)(25) of this section or to aforeign estate is the foreign complex trustor estate itself.

* * * * *(12) Payee. For purposes of chapter 3

of the Internal Revenue Code, the termpayee of a payment is determined underparagraph (b)(2) of this section,§1.1441–5(c)(1) (relating to partner-ships), and §1.1441–5(e)(2) and (3) (relat-ing to trusts and estates) and includes for-eign persons, U.S. exempt recipients, andU.S. non-exempt recipients. A nonquali-fied intermediary and a qualified interme-diary (to the extent it does not assume pri-mary withholding responsibility) are notpayees if they are acting as intermediariesand not the beneficial owner of income.In addition, a flow-through entity is not apayee unless the income is (or is deemedto be) effectively connected with the con-duct of a trade or business in the UnitedStates. See §1.6049–5(d)(1) for rules todetermine the payee for purposes of chap-ter 61 of the Internal Revenue Code. See§§1.1441–1(b)(3), 1.1441–5(d), and(e)(6) and 1.6049–5(d)(3) for presump-tion rules that apply if a payee’s identitycannot be determined on the basis of validdocumentation.

(13) Intermediary. An intermediarymeans, with respect to a payment that it re-ceives, a person that, for that payment, actsas a custodian, broker, nominee, or other-wise as an agent for another person, regard-less of whether such other person is the ben-eficial owner of the amount paid, aflow-through entity, or another intermediary.

(14) Nonqualified intermediary. Anonqualified intermediary means any in-termediary that is not a qualified interme-diary, as defined in paragraph (e)(5)(ii) ofthis section, or a qualified intermediarythat is not acting in its capacity as a quali-fied intermediary with respect to a pay-ment. For example, to the extent an entitythat is a qualified intermediary providesanother withholding agent with a foreignbeneficial owner withholding certificateas defined in paragraph (e)(2)(i) of thissection, the entity is not acting in its ca-pacity as a qualified intermediary.Notwithstanding the preceding sentence,a qualified intermediary is acting as aqualified intermediary to the extent it pro-vides another withholding agent withForms W-9, or other information regard-ing U.S. non-exempt recipients pursuantto its qualified intermediary agreementwith the IRS.

(15) Qualified intermediary. The term

2000–23 I.R.B. 1185 June 5, 2000

qualified intermediary is defined in para-graph (e)(5)(ii) of this section.

(16) Withholding certificate. The termwithholding certificate means a Form W-8 described in paragraph (e)(2)(i) ofthis section (relating to foreign beneficialowners), paragraph (e)(3)(i) of this sec-tion (relating to foreign intermediaries),§1.1441–5(c)(2)(iv), (c)(3)(iii), and(e)(3)(iv) (relating to flow-through enti-ties), a Form 8233 described in §1.1441–4(b)(2), a Form W-9 as described in para-graph (d) of this section, a statement de-scribed in §1.871–14(c)(2)(v) (relating toportfolio interest), or any other certifi-cates that under the Internal RevenueCode or regulations certifies or estab-lishes the status of a payee or beneficialowner as a U.S. or a foreign person.

(17) Documentary evidence; other ap-propriate documentation. The terms docu-mentary evidence or other appropriate doc-umentation refer to documents other than awithholding certificate that may be pro-vided for payments made outside theUnited States to offshore accounts or anyother evidence that under the Internal Rev-enue Code or regulations certifies or estab-lishes the status of a payee or beneficialowner as a U.S. or foreign person. See§§1.1441–6(b)(2), (c)(3) and (4) (relatingto treaty benefits), and 1.6049–5(c)(1) and(4) (relating to chapter 61 reporting). Alsosee §1.1441–4(a)(3)(ii) regarding docu-mentary evidence for notional principalcontracts.

(18) Documentation. The term docu-mentation refers to both withholding cer-tificates, as defined in paragraph (c)(16)of this section, and documentary evidenceor other appropriate documentation, asdefined in paragraph (c)(17) of this sec-tion.

(19) Payor. The term payor is definedin §31.3406(a)–2 of this chapter and§1.6049– 4(a)(2) and generally includes awithholding agent, as defined in§1.1441–7(a). The term also includes anyperson that makes a payment to an inter-mediary, flow-through entity, or U.S.branch that is not treated as a U.S. personto the extent the intermediary, flow-through, or U.S. branch provides a FormW-9 or other appropriate information re-lating to a payee so that the payment canbe reported under chapter 61 of the Inter-nal Revenue Code and, if required, sub-ject to backup withholding under section

3406. This latter rule does not precludethe intermediary, flow-through entity, orU.S. branch from also being a payor.

(20) Exempt recipient. The term ex-empt recipient means a person that is ex-empt from reporting under chapter 61 ofthe Internal Revenue Code and backupwithholding under section 3406 and thatis described in §§1.6041–3(q),1.6045–2(b)(2)(i), and 1.6049–4(c)(1)(ii),and §5f.6045–1(c)(3)(i)(B) of this chap-ter. Exempt recipients are not exemptfrom withholding under chapter 3 of theInternal Revenue Code unless they areU.S. persons or foreign persons entitled toan exemption from withholding underchapter 3.

(21) Non-exempt recipient. A non-ex-empt recipient is any person that is not anexempt recipient under paragraph (c)(20)of this section.

(22) Reportable amounts. Reportableamounts are defined in paragraph(e)(3)(vi) of this section.

(23) Flow-through entity. A flow-through entity means any entity that is de-scribed in this paragraph (c)(23) and thatmay provide documentation on behalf ofothers to a withholding agent. The enti-ties described in this paragraph are a for-eign partnership (other than a withholdingforeign partnership), a foreign simpletrust (other than a withholding foreigntrust) that is described in paragraph(c)(24) of this section, a foreign grantortrust (other than a withholding foreigntrust) that is described in paragraph(c)(25) of this section, or, for any pay-ments for which a reduced rate of with-holding under an income tax treaty isclaimed, any entity to the extent the entityis considered to be fiscally transparentunder section 894 with respect to the pay-ment by an interest holder’s jurisdiction.

(24) Foreign simple trust. A foreignsimple trust is a foreign trust that is de-scribed in section 651(a).

(25) Foreign complex trust. A foreigncomplex trust is a foreign trust other thana trust described in section 651(a) or sec-tions 671 through 679.

(26) Foreign grantor trust. A foreigngrantor trust is a foreign trust but only tothe extent all or a portion of the income ofthe trust is treated as owned by the grantoror another person under sections 671through 679.

(27) Partnership. The term partner-

ship means any entity treated as a partner-ship under §301.7701–2 or –3 of thischapter.

(28) Nonwithholding foreign partner-ship. A nonwithholding foreign partner-ship is a foreign partnership that is not awithholding foreign partnership, as de-fined in §1.1441–5(c)(2)(i).

(29) Withholding foreign partnership.A withholding foreign partnership is de-fined in §1.1441–5(c)(2)(i).

(d) * * *(2) Payments for which a Form W-9 is

otherwise required. A withholding agentmay treat as a U.S. payee any person whois required to furnish a Form W-9 andwho furnishes it in accordance with theprocedures described in §§31.3406(d)–1through 31.3406(d)–5 of this chapter (in-cluding the requirement that the payeefurnish its taxpayer identifying number(TIN)) if the withholding agent meets allthe requirements described in§31.3406(h)–3(e) of this chapter regard-ing reliance by a payor on a Form W–9.Providing a Form W–9 or valid substituteform shall serve as a statement that theperson whose name is on the form is aU.S. person. Therefore, a foreign person,including a U.S. branch treated as a U.S.person under paragraph (b)(2)(iv) of thissection, shall not provide a Form W-9. AU.S. branch of a foreign person may es-tablish its status as a foreign person ex-empt from reporting under chapter 61 andbackup withholding under section 3406by providing a withholding certificate onForm W-8.

(3) Payments for which a Form W-9 isnot otherwise required. In the case of apayee who is not required to furnish aForm W-9 under section 3406 (e.g., a per-son exempt from reporting under chapter61 of the Internal Revenue Code), thewithholding agent may treat the payee as aU.S. payee if the payee provides the with-holding agent with a Form W-9 or a sub-stitute form described in§31.3406(h)–3(c)(2) of this chapter (relat-ing to forms for exempt recipients) thatcontains the payee’s name, address, andTIN. The form must be signed underpenalties of perjury by the payee if so re-quired by the form or by §31.3406(h)–3 ofthis chapter. Providing a Form W-9 orvalid substitute form shall serve as a state-ment that the person whose name is on thecertificate is a U.S. person. A Form W-9

June 5, 2000 1186 2000–23 I.R.B.

or valid substitute form shall not be pro-vided by a foreign person, including anyU.S. branch of a foreign person whether ornot the branch is treated as a U.S. personunder paragraph (b)(2)(iv) of this section.See paragraph (e)(3)(v) of this section forwithholding certificates provided by U.S.branches described in paragraph (b)(2)(iv)of this section. The procedures describedin §31.3406(h)–2(a) of this chapter shallapply to payments to joint payees. A with-holding agent that receives a Form W-9 tosatisfy this paragraph (d)(3) must retainthe form in accordance with the provisionsof §31.3406(h)–3(g) of this chapter, if ap-plicable, or of paragraph (e)(4)(iii) of thissection (relating to the retention of with-holding certificates) if §31.3406(h)–3(g)of this chapter does not apply. The rulesof this paragraph (d)(3) are only intendedto provide a method by which a withhold-ing agent may determine that a payee is aU.S. person and do not otherwise impose arequirement that documentation be fur-nished by a person who is otherwisetreated as an exempt recipient for purposesof the applicable information reportingprovisions under chapter 61 of the InternalRevenue Code (e.g., §1.6049–4(c)(1)(ii)for payments of interest).

(4) When a payment to an intermediaryor flow-through entity may be treated asmade to a U.S. payee. A withholdingagent that makes a payment to an interme-diary (whether a qualified intermediary ornonqualified intermediary), a flow-through entity, or a U.S. branch describedin paragraph (b)(2)(iv) of this section maytreat the payment as made to a U.S. payeeto the extent that, prior to the payment,the withholding agent can reliably associ-ate the payment with a Form W-9 de-scribed in paragraph (d)(2) or (3) of thissection attached to a valid intermediary,flow-through, or U.S. branch withholdingcertificate described in paragraph (e)(3)(i)of this section or to the extent the with-holding agent can reliably associate thepayment with a Form W-8 described inparagraph (e)(3)(v) of this section that ev-idences an agreement to treat a U.S.branch described in paragraph (b)(2)(iv)of this section as a U.S. person. In addi-tion, a withholding agent may treat thepayment as made to a U.S. payee only if itcomplies with the electronic confirmationprocedures described in paragraph(e)(4)(v) of this section, if required, and it

has not been notified by the IRS that anyof the information on the withholding cer-tificate or other documentation is incor-rect or unreliable. In the case of a FormW-9 that is required to be furnished for areportable payment that may be subject tobackup withholding, the withholdingagent may be notified in accordance withsection 3406(a)(1)(B) and the regulationsunder that section. See applicable proce-dures under section 3406(a)(1)(B) and theregulations under that section for payorswho have been notified with regard tosuch a Form W-9. Withholding agentswho have been notified in relation toother Forms W-9, including under section6724(b) pursuant to section 6721, mayrely on the withholding certificate orother documentation only to the extentprovided under procedures as prescribedby the IRS (see §601.601(d)(2) of thischapter).

(e) * * * (1) * * *(ii) * * * (A) * * *(1) That the withholding agent can reli-

ably associate the payment with a benefi-cial owner withholding certificate de-scribed in paragraph (e)(2) of this sectionfurnished by the person whose name is onthe certificate or attached to a valid for-eign intermediary, flow-through, or U.S.branch withholding certificate;* * * * *

(3) That the withholding agent can reli-ably associate the payment with a validqualified intermediary withholding cer-tificate, as described in paragraph(e)(3)(ii) of this section, and the qualifiedintermediary has provided sufficient in-formation for the withholding agent to al-locate the payment to a withholding ratepool other than a withholding rate pool orpools established for U.S. non-exempt re-cipients;

(4) That the withholding agent can reli-ably associate the payment with a with-holding certificate described in§1.1441–5(c)(3)(iii) or (e)(5)(iii) from aflow-through entity claiming the incomeis effectively connected income;* * * * *

(3) Intermediary, flow-through, or U.S.branch withholding certificate—(i) Ingeneral. An intermediary withholdingcertificate is a Form W-8 by which apayee represents that it is a foreign personand that it is an intermediary (whether aqualified or nonqualified intermediary)

with respect to a payment and not the ben-eficial owner. See paragraphs (e)(3)(ii)and (iii) of this section. A flow-throughwithholding certificate is a Form W-8used by a flow-through entity as definedin paragraph (c)(23) of this section. See§1.1441–5(c)(3)(iii) (a nonwithholdingforeign partnership), §1.1441–5(e)(5)(iii)(a foreign simple trust or foreign grantortrust) or §1.1441–6(b)(2) (foreign entitypresenting claims on behalf of its interestholders for a reduced rate of withholdingunder an income tax treaty). A U.S.branch certificate is a Form W-8 fur-nished under paragraph (e)(3)(v) of thissection by a U.S. branch described inparagraph (b)(2)(iv) of this section. Seeparagraph (e)(4)(viii) of this section forapplicable reliance rules.

(ii) Intermediary withholding certifi-cate from a qualified intermediary. Aqualified intermediary shall provide aqualified intermediary withholding cer-tificate for reportable amounts receivedby the qualified intermediary. See para-graph (e)(3)(vi) of this section for the def-inition of reportable amount. A qualifiedintermediary withholding certificate isvalid only if it is furnished on a Form W-8, an acceptable substitute form, orsuch other form as the IRS may prescribe,it is signed under penalties of perjury by aperson with authority to sign for the qual-ified intermediary, its validity has not ex-pired, and it contains the following infor-mation, statement, and certifications—

(A) The name, permanent residence ad-dress (as described in paragraph (e)(2)(ii)of this section), qualified intermediaryemployer identification number (QI-EIN), and the country under the laws ofwhich the intermediary is created, incor-porated, or governed. A qualified inter-mediary that does not act in its capacity asa qualified intermediary must not use itsQI-EIN. Rather the intermediary shouldprovide a nonqualified intermediary with-holding certificate, if it is acting as an in-termediary, and should use the taxpayeridentification number, if any, that it usesfor all other purposes;

(B) A certification that, with respect toaccounts it identifies on its withholdingstatement (as described in paragraph(e)(5)(v) of this section), the qualified in-termediary is not acting for its own ac-count but is acting as a qualified interme-diary;

2000–23 I.R.B. 1187 June 5, 2000

(C) A certification that the qualified in-termediary has provided, or will provide,a withholding statement as required byparagraph (e)(5)(v) of this section; and

(D) Any other information, certifica-tions, or statements as may be required bythe form or accompanying instructions inaddition to, or in lieu of, the informationand certifications described in this para-graph (e)(3)(ii) or paragraph (e)(3)(v) ofthis section. See paragraph (e)(5)(v) ofthis section for the requirements of awithholding statement associated with thequalified intermediary withholding cer-tificate.

(iii) Intermediary withholding certifi-cate from a nonqualified intermediary. Anonqualified intermediary shall provide anonqualified intermediary withholdingcertificate for reportable amounts receivedby the nonqualified intermediary. Seeparagraph (e)(3)(vi) of this section for thedefinition of reportable amount. A non-qualified intermediary withholding certifi-cate is valid only to the extent it is fur-nished on a Form W-8, an acceptablesubstitute form, or such other form as theIRS may prescribe, it is signed underpenalties of perjury by a person authorizedto sign for the nonqualified intermediary,it contains the information, statements,and certifications described in this para-graph (e)(3)(iii) and paragraph (e)(3)(iv)of this section, its validity has not expired,and the withholding certificates and otherappropriate documentation for all personsto whom the certificate relates are associ-ated with the certificate. Withholding cer-tificates and other appropriate documenta-tion consist of beneficial ownerwithholding certificates described in para-graph (e)(2)(i) of this section, intermedi-ary and flow-through withholding certifi-cates described in paragraph (e)(3)(i) ofthis section, withholding foreign partner-ship certificates described in§1.1441–5(c)(2)(iv), documentary evi-dence described in §§1.1441–6(c)(3) or(4) and 1.6049–5(c)(1), and any otherdocumentation or certificates applicableunder other provisions of the Internal Rev-enue Code or regulations that certify or es-tablish the status of the payee or beneficialowner as a U.S. or a foreign person. If anonqualified intermediary is acting on be-half of another nonqualified intermediaryor a flow-through entity, then the nonqual-ified intermediary must associate with its

own withholding certificate the other non-qualified intermediary withholding certifi-cate or the flow-through withholding cer-tificate and separately identify all of thewithholding certificates and other appro-priate documentation that are associatedwith the withholding certificate of theother nonqualified intermediary or flow-through entity. Nothing in this paragraph(e)(3)(iii) shall require an intermediary tofurnish original documentation. Copies ofcertificates or documentary evidence maybe transmitted to the U.S. withholdingagent, in which case the nonqualified in-termediary must retain the original docu-mentation for the same time period thatthe copy is required to be retained by thewithholding agent under paragraph(e)(4)(iii) of this section and must provideit to the withholding agent upon request.For purposes of this paragraph (e)(3)(iii),a valid intermediary withholding certifi-cate also includes a statement described in§1.871–14(c)(2)(v) furnished for interestto qualify as portfolio interest for purposesof sections 871(h) and 881(c). The infor-mation and certifications required on aForm W-8 described in this paragraph(e)(3)(iii) are as follows—

(A) The name and permanent residentaddress (as described in paragraph(e)(2)(ii) of this section) of the nonquali-fied intermediary, and the country underthe laws of which the nonqualified inter-mediary is created, incorporated, or gov-erned;

(B) A certification that the nonqualifiedintermediary is not acting for its own ac-count;

(C) If the nonqualified intermediarywithholding certificate is used to transmitwithholding certificates or other appropri-ate documentation for more than one per-son on whose behalf the nonqualified in-termediary is acting, a withholdingstatement associated with the Form W-8that provides all the information requiredby paragraph (e)(3)(iv) of this section;and

(D) Any other information, certifica-tions, or statements as may be required bythe form or accompanying instructions inaddition to, or in lieu of, the information,certifications, and statements described inthis paragraph (e)(3)(iii) or paragraph(e)(3)(iv) of this section.

(iv) Withholding statement provided bynonqualified intermediary—(A) In gen-

eral. A nonqualified intermediary shallprovide a withholding statement requiredby this paragraph (e)(3)(iv) to the extentthe nonqualified intermediary is requiredto furnish, or does furnish, documentationfor payees on whose behalf it receives re-portable amounts (as defined in para-graph (e)(3)(vi) of this section) or to theextent it otherwise provides the documen-tation of such payees to a withholdingagent. A nonqualified intermediary is notrequired to disclose information regardingpersons for whom it collects reportableamounts unless it has actual knowledgethat any such person is a U.S. non-exemptrecipient as defined in paragraph (c)(21)of this section. Information regardingU.S. non-exempt recipients requiredunder this paragraph (e)(3)(iv) must beprovided irrespective of any requirementunder foreign law that prohibits the dis-closure of the identity of an accountholder of a nonqualified intermediary orfinancial information relating to such ac-count holder. Although a nonqualified in-termediary is not required to provide doc-umentation and other informationrequired by this paragraph (e)(3)(iv) forpersons other than U.S. non-exempt re-cipients, a withholding agent that does notreceive documentation and such informa-tion must apply the presumption rules ofparagraph (b) of this section,§§1.1441–5(d) and (e)(6) and1.6049–5(d) or the withholding agentshall be liable for tax, interest, and penal-ties. A withholding agent must apply thepresumption rules even if it is not re-quired under chapter 61 of the InternalRevenue Code to obtain documentation totreat a payee as an exempt recipient andeven though it has actual knowledge thatthe payee is a U.S. person. For example,if a nonqualified intermediary fails to pro-vide a withholding agent with a Form W-9 for an account holder that is a U.S. ex-empt recipient, the withholding agentmust presume (even if it has actualknowledge that the account holder is aU.S. exempt recipient), that the accountholder is an undocumented foreign personwith respect to amounts subject to with-holding. See paragraph (b)(3)(v) of thissection for applicable presumptions.Therefore, the withholding agent mustwithhold 30 percent from the paymenteven though if a Form W-9 had been pro-vided, no withholding or reporting on the

June 5, 2000 1188 2000–23 I.R.B.

payment attributable to a U.S. exempt re-cipient would apply. Further, a nonquali-fied intermediary that fails to provide thedocumentation and the information underthis paragraph (e)(3)(iv) for another with-holding agent to report the payments onForms 1042-S and Forms 1099 is not re-lieved of its responsibility to file informa-tion returns. See paragraph (b)(6) of thissection. Therefore, unless the nonquali-fied intermediary itself files such returnsand provides copies to the payees, it shallbe liable for penalties under sections 6721(failure to file information returns), and6722 (failure to furnish payee state-ments), including the penalties underthose sections for intentional failure tofile information returns. In addition, fail-ure to provide either the documentation orthe information required by this para-graph (e)(3)(iv) results in a payment notbeing reliably associated with valid docu-mentation. Therefore, the beneficial own-ers of the payment are not entitled to re-duced rates of withholding and if the fullamount required to be held under the pre-sumption rules is not withheld by thewithholding agent, the nonqualified inter-mediary must withhold the difference be-tween the amount withheld by the with-holding agent and the amount required tobe withheld. Failure to withhold shall re-sult in the nonqualified intermediarybeing liable for tax under section 1461,interest, and penalties, including penaltiesunder section 6656 (failure to deposit)and section 6672 (failure to collect andpay over tax).

(B) General requirements. A withhold-ing statement must be provided prior tothe payment of a reportable amount andmust contain the information specified inparagraph (e)(3)(iv)(C) of this section.The statement must be updated as often asrequired to keep the information in thewithholding statement correct prior toeach subsequent payment. The withhold-ing statement forms an integral part of thewithholding certificate provided underparagraph (e)(3)(iii) of this section, andthe penalties of perjury statement pro-vided on the withholding certificate shallapply to the withholding statement. Thewithholding statement may be provided inany manner the nonqualified intermediaryand the withholding agent mutually agree,including electronically. If the withhold-ing statement is provided electronically,

there must be sufficient safeguards to en-sure that the information received by thewithholding agent is the information sentby the nonqualified intermediary and alloccasions of user access that result in thesubmission or modification of the with-holding statement information must berecorded. In addition, an electronic sys-tem must be capable of providing a hardcopy of all withholding statements pro-vided by the nonqualified intermediary.A withholding agent will be liable for tax,interest, and penalties in accordance withparagraph (b)(7) of this section to the ex-tent it does not follow the presumptionrules of paragraph (b)(3) of this section or§§1.1441–5(d) and (e)(6), and1.6049–5(d) for any payment of a re-portable amount, or portion thereof, forwhich it does not have a valid withhold-ing statement prior to making a payment.

(C) Content of withholding statement.The withholding statement provided by anonqualified intermediary must containthe information required by this para-graph (e)(3)(iv)(C).

(1) The withholding statement mustcontain the name, address, TIN (if any)and the type of documentation (documen-tary evidence, Form W-9, or type of FormW-8) for every person from whom docu-mentation has been received by the non-qualified intermediary to the withholdingagent and whether that person is a U.S.exempt recipient, a U.S. non-exempt re-cipient, or a foreign person. See para-graphs (c)(2), (20), and (21) of this sec-tion for the definitions of foreign person,U.S. exempt recipient, and U.S. non-ex-empt recipient. In the case of a foreignperson, the statement must indicatewhether the foreign person is a beneficialowner or an intermediary, flow-throughentity, or U.S. branch described in para-graph (b)(2)(iv) of this section and in-clude the type of recipient, based on re-cipient codes used for filing Forms1042-S, if the foreign person is a recipientas defined in §1.1461–1(c)(1)(ii).

(2) The withholding statement must al-locate each payment, by income type, toevery payee (including U.S. exempt re-cipients) for whom documentation hasbeen provided. Any payment that cannotbe reliably associated with valid docu-mentation from a payee shall be treated asmade to an unknown payee in accordancewith the presumption rules of paragraph

(b) of this section and §§1.1441–5(d) and(e)(6) and 1.6049–5(d). For this purpose,a type of income is determined by thetypes of income required to be reportedon Forms 1042–S or 1099, as appropriate.Notwithstanding the preceding sentence,deposit interest (including original issuediscount) described in section871(i)(2)(A) or 881(d) and interest ororiginal issue discount on short-termobligations as described in section871(g)(1)(B) or 881(e) is only required tobe allocated to the extent it is required tobe reported on Form 1099 or Form 1042-S. See §1.6049–8 (regarding reporting ofbank deposit interest to certain foreignpersons). If a payee receives incomethrough another nonqualified intermedi-ary, flow-through entity, or U.S. branchdescribed in paragraph (e)(2)(iv) of thissection (other than a U.S. branch treatedas a U.S. person), the withholding certifi-cate must also state, with respect to thepayee, the name, address, and TIN, ifknown, of the other nonqualified interme-diary or U.S. branch from which thepayee directly receives the payment or theflow-through entity in which the payeehas a direct ownership interest. If anothernonqualified intermediary, flow-throughentity, or U.S. branch fails to allocate apayment, the name of the nonqualified in-termediary, flow-through entity, or U.S.branch that failed to allocate the paymentshall be provided with respect to suchpayment.

(3) If a payee is identified as a foreignperson, the nonqualified intermediarymust specify the rate of withholding towhich the payee is subject, the payee’scountry of residence and, if a reduced rateof withholding is claimed, the basis forthat reduced rate (e.g., treaty benefit, port-folio interest, exempt under section501(c)(3), 892, or 895). The allocationstatement must also include the taxpayeridentification numbers of those foreignpersons for whom such a number is re-quired under paragraph (e)(4)(vii) of thissection or §1.1441–6(b)(1) (regardingclaims for treaty benefits). In the case ofa claim of treaty benefits, the nonquali-fied intermediary’s withholding statementmust also state whether the limitation onbenefits and section 894 statements re-quired by §1.1441–6(c)(5) have been pro-vided, if required, in the beneficialowner’s Form W-8 or associated with

2000–23 I.R.B. 1189 June 5, 2000

such owner’s documentary evidence.(4) The withholding statement must

also contain any other information thewithholding agent reasonably requests inorder to fulfill its obligations under chap-ter 3, chapter 61 of the Internal RevenueCode, and section 3406.

(D) Alternative procedures—(1) Ingeneral. Under the alternative proceduresof this paragraph (e)(3)(iv)(D), a nonqual-ified intermediary may provide informa-tion allocating a payment of a reportableamount to each payee (including U.S. ex-empt recipients) otherwise required underparagraph (e)(3)(iv)(B)(2) of this sectionafter a payment is made. To use the alter-native procedure of this paragraph(e)(3)(iv)(D), the nonqualified intermedi-ary must inform the withholding agent ona statement associated with its nonquali-fied intermediary withholding certificatethat it is using the procedure under thisparagraph (e)(3)(iv)(D) and the withhold-ing agent must agree to the procedure. Ifthe requirements of the alternative proce-dure are met, a withholding agent, includ-ing the nonqualified intermediary usingthe procedures, can treat the payment asreliably associated with documentationand, therefore, the presumption rules ofparagraph (b)(3) of this section and§§1.1441-5(d) and (e)(6) and 1.6049–5(d)do not apply even though information al-locating the payment to each payee hasnot been received prior to the payment.See paragraph (e)(3)(iv)(D)(7) of this sec-tion, however, for a nonqualified interme-diary’s liability for tax and penalties if therequirements of this paragraph(e)(3)(iv)(D) are not met. These alterna-tive procedures shall not be used for pay-ments that are allocable to U.S. non-ex-empt recipients. Therefore, anonqualified intermediary is required toprovide a withholding agent with infor-mation allocating payments of reportableamounts to U.S. non-exempt recipientsprior to the payment being made by thewithholding agent.

(2) Withholding rate pools. In place ofthe information required in paragraph(e)(3)(iv)(B)(2) of this section allocatingpayments to each payee, the nonqualifiedintermediary must provide a withholdingagent with withholding rate pool informa-tion prior to the payment of a reportableamount. The withholding statement mustcontain all other information required by

paragraph (e)(3)(iv)(B) of this section.Further, each payee listed in the withhold-ing statement must be assigned to an iden-tified withholding rate pool. To the extenta nonqualified intermediary is required to,or does provide, documentation, the alter-native procedures do not relieve the non-qualified intermediary from the require-ment to provide documentation prior tothe payment being made. Therefore,withholding certificates or other appropri-ate documentation and all information re-quired by paragraph (e)(3)(iv)(B) of thissection (other than allocation informa-tion) must be provided to a withholdingagent before any new payee receives a re-portable amount. In addition, the with-holding statement must be updated by as-signing a new payee to a withholding ratepool prior to the payment of a reportableamount. A withholding rate pool is a pay-ment of a single type of income, deter-mined in accordance with the categoriesof income used to file Form 1042-S, thatis subject to a single rate of withholding.A withholding rate pool may be estab-lished by any reasonable method to whichthe nonqualified intermediary and a with-holding agent agree (e.g., by establishinga separate account for a single withhold-ing rate pool, or by dividing a paymentmade to a single account into portions al-locable to each withholding rate pool).The nonqualified intermediary shall de-termine withholding rate pools based onvalid documentation or, to the extent apayment cannot be reliably associatedwith valid documentation, the presump-tion rules of paragraph (b)(3) of this sec-tion and §§1.1441–5(d) and (e)(6) and1.6049–5(d).

(3) Allocation information. The non-qualified intermediary must provide thewithholding agent with sufficient infor-mation to allocate the income in eachwithholding rate pool to each payee (in-cluding U.S. non-exempt recipients)within the pool no later than January 31 ofthe year following the year of payment.Any payments that are not allocated topayees for whom documentation has beenprovided shall be allocated to an undocu-mented payee in accordance with the pre-sumption rules of paragraph (b)(3) of thissection and §§1.1441–5(d) and (e)(6) and1.6049–5(d). Notwithstanding the pre-ceding sentence, deposit interest (includ-ing original issue discount) described in

section 871(i)(2)(A) or 881(d) and inter-est or original issue discount on short-term obligations as described in section871(g)(1)(B) or 881(e) is not required tobe allocated to a U.S. exempt recipient ora foreign payee, except as required under§1.6049–8 (regarding reporting of depositinterest paid to certain foreign persons).

(4) Failure to provide allocation infor-mation. If a nonqualified intermediaryfails to provide allocation information, ifrequired, by January 31 for any withhold-ing rate pool, a withholding agent shallnot apply the alternative procedures ofthis paragraph (e)(3)(iv)(D) to any pay-ments of reportable amounts paid afterJanuary 31 in the taxable year followingthe calendar year for which allocation in-formation was not given and any subse-quent taxable year. Further, the alterna-tive procedures shall be unavailable forany other withholding rate pool eventhough allocation information was givenfor that other pool. Therefore, the with-holding agent must withhold on a pay-ment of a reportable amount in accor-dance with the presumption rules ofparagraph (b)(3) of this section, and§§1.1441–5(d) and (e)(6) and1.6049–5(d), unless the nonqualified in-termediary provides all of the informa-tion, including information sufficient toallocate the payment to each specificpayee, required by paragraph(e)(3)(iv)(A) through (C) of this sectionprior to the payment. A nonqualified in-termediary must allocate at least 90 per-cent of the income required to be allo-cated for each withholding rate pool orthe nonqualified intermediary will betreated as having failed to provide alloca-tion information for purposes of this para-graph (e)(3)(iv)(D). See paragraph(e)(3)(iv)(D)(7) of this section for liabilityfor tax and penalties if a nonqualified in-termediary fails to provide allocation in-formation in whole or in part.

(5) Cure provision. A nonqualified in-termediary may cure any failure to pro-vide allocation information by providingthe required allocation information to thewithholding agent no later than February14 following the calendar year of pay-ment. If the withholding agent receivesthe allocation information by that date, itmay apply the adjustment procedures of§1.1461–2 to any excess withholding forpayments made on or after February 1 and

June 5, 2000 1190 2000–23 I.R.B.

on or before February 14. Any nonquali-fied intermediary that fails to cure by Feb-ruary 14, may request the ability to usethe alternative procedures of this para-graph (e)(3)(iv)(D) by submitting a re-quest, in writing, to the Assistant Com-missioner (International). The requestmust state the reason that the nonqualifiedintermediary did not comply with the al-ternative procedures of this paragraph(e)(3)(iv)(D) and steps that the nonquali-fied intermediary has taken, or will take,to ensure that no failures occur in the fu-ture. If the Assistant Commissioner (In-ternational) determines that the alterna-tive procedures of this paragraph(e)(3)(iv)(D) may apply, a determinationto that effect will be issued by the IRS tothe nonqualified intermediary.

(6) Form 1042-S reporting in case ofallocation failure. If a nonqualified inter-mediary fails to provide allocation infor-mation by February 14 following the yearof payment for a withholding rate pool,the withholding agent must file Forms1042-S for payments made to each payeein that pool (other than U.S. exempt recip-ients) in the prior calendar year by pro rat-ing the payment to each payee (includingU.S. exempt recipients) listed in the with-holding statement for that withholdingrate pool. If the nonqualified intermedi-ary fails to allocate10 percent or less of anamount required to be allocated for awithholding rate pool, a withholdingagent shall report the unallocated amountas paid to a single unknown payee in ac-cordance with the presumption rules ofparagraph (b) of this section and§§1.1441–5(d) and (e)(6) and1.6049–5(d). The portion of the paymentthat can be allocated to specific recipi-ents, as defined in §1.1461–1(c)(1)(ii),shall be reported to each recipient in ac-cordance with the rules of §1.1461–1(c).

(7) Liability for tax, interest, andpenalties. If a nonqualified intermediaryfails to provide allocation information byFebruary 14 following the year of pay-ment for all or a portion of the paymentsmade to any withholding rate pool, thewithholding agent from whom the non-qualified intermediary received paymentsof reportable amounts shall not be liablefor any tax, interest, or penalties, duesolely to the errors or omissions of thenonqualified intermediary. See§1.1441–7(b)(2) through (10) for the due

diligence requirements of a withholdingagent. Because failure by the nonquali-fied intermediary to provide allocation in-formation results in a payment not beingreliably associated with valid documenta-tion, the beneficial owners for whom thenonqualified intermediary acts are not en-titled to a reduced rate of withholding.Therefore, the nonqualified intermediary,as a withholding agent, shall be liable forany tax not withheld by the withholdingagent in accordance with the presumptionrules, interest on the under withheld tax ifthe nonqualified intermediary fails to paythe tax timely, and any applicable penal-ties, including the penalties under sec-tions 6656 (failure to deposit), 6721 (fail-ure to file information returns) and 6722(failure to file payee statements). Failureto provide allocation information formore than 10 percent of the paymentsmade to a particular withholding rate poolwill be presumed to be an intentional fail-ure within the meaning of sections6721(e) and 6722(c). The nonqualifiedintermediary may rebut the presumption.

(8) Applicability to flow-through enti-ties and certain U.S. branches. See para-graph (e)(3)(v) of this section and§1.1441–5(c)(3)(iv) and (e)(5)(iv) for theapplicability of this paragraph (e)(3)(iv)to U.S. branches described in paragraph(b)(2)(iv) of this section (other than U.S.branches treated as U.S. persons) andflow-through entities.

(E) Notice procedures. The IRS maynotify a withholding agent that the alter-native procedures of paragraph(e)(3)(iv)(D) of this section are not ap-plicable to a specified nonqualified inter-mediary, a U.S. branch described in para-graph (b)(2)(iv) of this section, or aflow-through entity. If a withholdingagent receives such a notice, it must com-mence withholding in accordance withthe presumption rules of paragraph (b)(3)of this section and §§1.1441–5(d) and(e)(6) and 1.6049–5(d) unless the non-qualified intermediary, U.S. branch, orflow-through entity complies with theprocedures in paragraphs (e)(3)(iv)(A)through (C) of this section. In addition,the IRS may notify a withholding agent,in appropriate circumstances, that it mustapply the presumption rules of paragraph(b)(3) of this section and §§1.1441–5(d)and (e)(6) and 1.6049–5(d) to paymentsmade to a nonqualified intermediary, a

U.S. branch, or a flow-through entityeven if the nonqualified intermediary,U.S. branch or flow-through entity pro-vides allocation information prior to thepayment. A withholding agent that re-ceives a notice under this paragraph(e)(3)(iv)(E) must commence withholdingin accordance with the presumption ruleswithin 30 days of the date of the notice.The IRS may withdraw its prohibitionagainst using the alternative procedures ofparagraph (e)(3)(iv)(D) of this section, orits requirement to follow the presumptionrules, if the nonqualified intermediary,U.S. branch, or flow-through entity candemonstrate to the satisfaction of the As-sistant Commissioner (International) orhis delegate that it is capable of comply-ing with the rules under chapter 3 of theInternal Revenue Code and any other con-ditions required by the Assistant Commis-sioner (International).

(v) Withholding certificate from cer-tain U.S. branches. A U.S. branch certifi-cate is a withholding certificate providedby a U.S. branch described in paragraph(b)(2)(iv) of this section that is not thebeneficial owner of the income. Thewithholding certificate is provided withrespect to reportable amounts and muststate that such amounts are not effectivelyconnected with the conduct of a trade orbusiness in the United States. The with-holding certificate must either transmitthe appropriate documentation for thepersons for whom the branch receives thepayment (i.e., as an intermediary) or beprovided as evidence of its agreementwith the withholding agent to be treatedas a U.S. person with respect to any pay-ment associated with the certificate. AU.S. branch withholding certificate isvalid only if it is furnished on a Form W-8, an acceptable substitute form, or suchother form as the IRS may prescribe, it issigned under penalties of perjury by a per-son authorized to sign for the branch, itsvalidity has not expired, and it containsthe information, statements, and certifica-tions described in this paragraph(e)(3)(v). If the certificate is furnished totransmit withholding certificates andother documentation, it must contain theinformation, certifications, and statementsdescribed in paragraphs (e)(3)(v)(A)through (C) of this section and in para-graphs (e)(3)(iii) and (iv) (alternative pro-cedures) of this section, applying the term

2000–23 I.R.B. 1191 June 5, 2000

U.S. branch for the term nonqualified in-termediary. If the certificate is furnishedpursuant to an agreement to treat the U.S.branch as a U.S. person, the informationand certifications required on the with-holding certificate are limited to the fol-lowing—

(A) The name of the person of whichthe branch is a part and the address of thebranch in the United States;

(B) A certification that the paymentsassociated with the certificate are not ef-fectively connected with the conduct ofits trade or business in the United States;and

(C) Any other information, certifica-tions, or statements as may be required bythe form or accompanying instructions inaddition to, or in lieu of, the informationand certification described in this para-graph (e)(3)(v).

(vi) Reportable amounts. For purposesof chapter 3 of the Internal RevenueCode, a nonqualified intermediary, quali-fied intermediary, flow-through entity,and U.S. branch described in paragraph(b)(2)(iv) of this section (other than a U.S.branch that agrees to be treated as a U.S.person) must provide a withholding cer-tificate and associated documentation andother information with respect to re-portable amounts. For purposes of theregulations under chapter 3 of the InternalRevenue Code, the term reportableamount means an amount subject to with-holding within the meaning of§1.1441–2(a), bank deposit interest (in-cluding original issue discount) and simi-lar types of deposit interest described insection 871(i)(2)(A) or 881(d) that arefrom sources within the United States,and any amount of interest or originalissue discount from sources within theUnited States on the redemption of certainshort-term obligations described in sec-tion 871(g)(1)(B) or 881(e). Reportableamounts shall not include amounts re-ceived on the sale or exchange (other thana redemption) of an obligation describedin section 871(g)(1)(B) or 881(e) that iseffected at an office outside the UnitedStates. See §1.6045–1(g)(3) to determinewhether a sale is effected at an office out-side the United States. Reportableamounts also do not include paymentswith respect to deposits with banks andother financial institutions that remain ondeposit for a period of two weeks or less,

to amounts of original issue discount aris-ing from a sale and repurchase transactionthat is completed within a period of twoweeks or less, or to amounts described in§1.6049–5(b)(7), (10) or (11) (relating tocertain obligations issued in bearer form).While short–term OID and bank depositinterest are not subject to withholdingunder chapter 3 of the Internal RevenueCode, such amounts may be subject to in-formation reporting under section 6049 ifpaid to a U.S. person who is not an ex-empt recipient described in §1.6049-4(c)(1)(ii) and to backup withholdingunder section 3406 in the absence of doc-umentation. See §1.6049–5(d)(3)(iii) forapplicable procedures when such amountsare paid to a foreign intermediary.

(4) * * *(ii) Period of validity—(A) Three-year

period. A withholding certificate de-scribed in paragraph (e)(2)(i) of this sec-tion, or a certificate described in §1.871-14(c)(2)(v) (furnished to qualify interestas portfolio interest for purposes of sec-tions 871(h) and 881(c)), shall remainvalid until the earlier of the last day of thethird calendar year following the year inwhich the withholding certificate issigned or the day that a change in circum-stances occurs that makes any informa-tion on the certificate incorrect. For ex-ample, a withholding certificate signed onSeptember 30, 2001, remains validthrough December 31, 2004, unless cir-cumstances change that make the infor-mation on the form no longer correct.Documentary evidence described in§§1.1441-6(c)(3) or (4) or 1.6049–5(c)(1)shall remain valid until the earlier of thelast day of the third calendar year follow-ing the year in which the documentary ev-idence is provided to the withholdingagent or the day that a change in circum-stances occurs that makes any informa-tion on the documentary evidence incor-rect.

(B) * * *(1) A withholding certificate described

in paragraph (e)(2)(ii) of this section thatis furnished with a TIN, provided that thewithholding agent reports at least onepayment annually to the beneficial ownerunder §1.1461–1(c) or the TIN furnishedon the certificate is reported to the IRSunder the procedures described in§1.1461–1(d). For example, assume awithholding agent receives a Form W-8 in

2001 from a beneficial owner with respectto an account that contains bonds, the in-terest on which must be reported on Form1042-S under §1.1461–1(c). The FormW-8 contains a valid TIN and the with-holding agent reports on Forms 1042-Sinterest to the beneficial owner for 2001through 2005. In 2005, the beneficialowner sells some of the bonds. For pur-poses of the exemption from Form 1099reporting under §1.6045–1(g), the with-holding agent may consider the Form W-8as valid, even though the payment of thesales proceeds is not reportable on Form1042-S under §1.1461–1(c) and eventhough the Form W-8 was provided morethan three years previously.

(2) A certificate described in paragraph(e)(3)(ii) of this section (a qualified inter-mediary withholding certificate) but notincluding the withholding certificates,documentary evidence, statements orother information associated with the cer-tificate.

(3) A certificate described in paragraph(e)(3)(iii) of this section (a nonqualifiedintermediary certificate), but not includ-ing the withholding certificates, docu-mentary evidence, statements or other in-formation associated with the certificate.

(4) A certificate described in paragraph(e)(3)(v) of this section (a U.S. branchwithholding certificate), but not includingthe withholding certificates, documentaryevidence, statements or other informationassociated with the certificate.* * * * *

(6) A certificate described in §1.1441-5(c)(3)(iii) (a withholding certificate froma nonwithholding foreign partnership) butnot including the withholding certificates,documentary evidence, statements orother information required to be associ-ated with the certificate.* * * * *

(8) A withholding certificate describedin §1.1441–5(e)(5)(iii) provided by a for-eign simple trust or a foreign grantor trustto transmit documentation of beneficia-ries or owners, but not including the with-holding certificates, documentary evi-dence, statements or other informationassociated with the certificate.* * * * *

(iv) Electronic transmission of infor-mation—(A) In general. A withholdingagent may establish a system for a benefi-cial owner or payee to electronically fur-

June 5, 2000 1192 2000–23 I.R.B.

nish a Form W-8, an acceptable substituteForm W-8, or such other form as the In-ternal Revenue Service may prescribe.The system must meet the requirementsdescribed in paragraph (e)(4)(iv)(B) ofthis section. A withholding agent may ac-cept Forms W-8 that are furnished elec-tronically on or after January 1, 2000,provided the requirements of paragraph(e)(4)(iv)(B) of this section are met.

(B) Requirements—(1) In general. Theelectronic system must ensure that the in-formation received is the informationsent, and must document all occasions ofuser access that result in the submissionrenewal, or modification of a Form W-8.In addition, the design and operation ofthe electronic system, including accessprocedures, must make it reasonably cer-tain that the person accessing the systemand furnishing Form W-8 is the personnamed in the Form.

(2) Same information as paper FormW-8. The electronic transmission mustprovide the withholding agent or payorwith exactly the same information as thepaper Form W-8.

(3) Perjury statement and signature re-quirements. The electronic transmissionmust contain an electronic signature bythe person whose name is on the Form W-8 and the signature must be under penal-ties of perjury in the manner described inthis paragraph (e)(4)(iv)(B)(3).

(i) Perjury statement. The perjurystatement must contain the language thatappears on the paper Form W-8. Theelectronic system must inform the personwhose name is on the Form W-8 that theperson must make the declaration con-tained in the perjury statement and thatthe declaration is made by signing theForm W-8. The instructions and the lan-guage of the perjury statement must im-mediately follow the person’s certifyingstatements and immediately precede theperson’s electronic signature.

(ii) Electronic signature. The act of theelectronic signature must be effected bythe person whose name is on the elec-tronic Form W-8. The signature must alsoauthenticate and verify the submission.For this purpose, the terms authenticateand verify have the same meanings asthey do when applied to a written signa-ture on a paper Form W-8. An electronicsignature can be in any form that satisfiesthe foregoing requirements. The elec-

tronic signature must be the final entry inthe person’s Form W-8 submission.

(4) Requests for electronic Form W-8data. Upon request by the Internal Rev-enue Service during an examination, thewithholding agent must supply a hardcopy of the electronic Form W-8 and astatement that, to the best of the withhold-ing agent’s knowledge, the electronicForm W-8 was filed by the person whosename is on the form. The hard copy ofthe electronic Form W-8 must provide ex-actly the same information as, but neednot be identical to, the paper Form W-8.

(C) Special requirements for transmis-sion of Forms W-8 by an intermediary.[Reserved]* * * * *

(vii) Requirement of taxpayer identify-ing number. A TIN must be stated on awithholding certificate when required bythis paragraph (e)(4)(vii). A TIN is re-quired to be stated on—

(A) A withholding certificate on whicha beneficial owner is claiming the benefitof a reduced rate under an income taxtreaty (other than for amounts describedin §1.1441–6(c)(2);

(B) A withholding certificate on whicha beneficial owner is claiming exemptionfrom withholding because income is ef-fectively connected with a U.S. trade orbusiness;

(C) A withholding certificate on whicha beneficial owner is claiming exemptionfrom withholding under section 871(f) forcertain annuities received under qualifiedplans;

(D) A withholding certificate on whicha beneficial owner is claiming an exemp-tion based solely on a foreign organiza-tion’s claim of tax exempt status undersection 501(c) or private foundation status(however, a TIN is not required from aforeign private foundation that is subjectto the 4-percent tax under section 4948(a)on income if that income would be ex-empt from withholding but for section4948(a) (e.g., portfolio interest));

(E) A withholding certificate from aperson representing to be a qualified in-termediary described in paragraph(e)(5)(ii) of this section;

(F) A withholding certificate from aperson representing to be a withholdingforeign partnership described in§1.1441–5(c)(2)(i));

(G) A withholding certificate from a

person representing to be a foreigngrantor trust with 5 or fewer grantors;

(H) A withholding certificate providedby a foreign organization that is describedin section 501(c);

(I) A withholding certificate from a per-son representing to be a U.S. branch de-scribed in paragraph (b)(2)(iv) of this sec-tion.* * * * *

(ix) * * *(A) * * *(4) A withholding agent may rely on

documentation furnished by a beneficialowner or payee to an agent of the with-holding agent. The agent may retain thedocumentation as part of an informationsystem maintained for a single or multiplewithholding agents provided that the sys-tem permits any withholding agent thatuses the system to easily access data re-garding the nature of the documentation,the information contained in the docu-mentation, and its validity, and mustallow the withholding agent to easilytransmit data into the system regardingany facts of which it becomes aware thatmay affect the reliability of the documen-tation. The withholding agent must beable to establish how and when it has ac-cessed the data regarding the documenta-tion and, if applicable, how and when ithas transmitted data regarding any factsof which it became aware that may affectthe reliability of the documentation. Inaddition, the withholding agent must beable to establish that any data it has trans-mitted to the information system has beenprocessed and appropriate due diligencehas been exercised regarding the validityof the documentation.* * * * *

(C) Special rule for brokers—(1) Ingeneral. A withholding agent may rely onthe certification of a broker that the bro-ker holds a valid beneficial owner with-holding certificate described in paragraph(e)(2)(i) of this section or other appropri-ate documentation for that beneficialowner with respect to any readily tradableinstrument, as defined in§31.3406(h)–1(d) of this chapter, if thebroker is a United States person (includ-ing a U.S. branch treated as a U.S. personunder paragraph (b)(2)(iv) of this section)that is acting as the agent of a beneficialowner and the U.S. broker has been pro-vided a valid Form W-8 or other appropri-

2000–23 I.R.B. 1193 June 5, 2000

ate documentation. The certification mustbe in writing or in electronic form andcontain all of the information required ofa nonqualified intermediary under para-graphs (e)(3)(iv)(B) and (C) of this sec-tion. If a U.S. broker chooses to use thisparagraph (e)(4)(ix)(C), that U.S. brokerwill be solely responsible for applying therules of §1.1441–7(b) to the withholdingcertificates or other appropriate documen-tation. For purposes of this paragraph(c)(4)(ix)(C), the term broker means aperson treated as a broker under§1.6045–1(a).

(2) The following example illustratesthe rules of this paragraph (e)(4)(ix)(C):

Example. SCO is a U.S. securities clearing orga-

nization that provides clearing services for corre-

spondent broker, CB, a U.S. corporation. Pursuant

to a fully disclosed clearing agreement, CB fully dis-

closes the identity of each of its customers to SCO.

Part of SCO’s clearing duties include the crediting

of income and gross proceeds of readily tradeable

instruments (as defined in §31.3406(h)–1(d)) to each

customer’s account. For each disclosed customer

that is a foreign beneficial owner, CB provides SCO

with information required under paragraphs

(e)(3)(iv)(B) and (C) of this section that is necessary

to apply the correct rate of withholding and to file

Forms 1042-S. SCO may use the representations

and beneficial owner information provided by CB to

determine the proper amount of withholding and to

file Forms 1042-S. CB is responsible for determin-

ing the validity of the withholding certificates or

other appropriate documentation under §1.1441-

1(b).

* * * * *(5) Qualified intermediaries—(i) Gen-

eral rule. A qualified intermediary, as de-fined in paragraph (e)(5)(ii) of this sec-tion, may furnish a qualified intermediarywithholding certificate to a withholdingagent. The withholding certificate pro-vides certifications on behalf of other per-sons for the purpose of claiming and veri-fying reduced rates of withholding undersection 1441 or 1442 and for the purposeof reporting and withholding under otherprovisions of the Internal Revenue Code,such as the provisions under chapter 61and section 3406 (and the regulationsunder those provisions). Furnishing sucha certificate is in lieu of transmitting to awithholding agent withholding certifi-cates or other appropriate documentationfor the persons for whom the qualified in-termediary receives the payment, includ-ing interest holders in a qualified interme-

diary that is fiscally transparent under theregulations under section 894. Althoughthe qualified intermediary is required toobtain withholding certificates or otherappropriate documentation from benefi-cial owners, payees, or interest holderspursuant to its agreement with the IRS, itis generally not required to attach suchdocumentation to the intermediary with-holding certificate. Notwithstanding thepreceding sentence a qualified intermedi-ary must provide a withholding agentwith the Forms W-9, or disclose thenames, addresses, and taxpayer identify-ing numbers, if known, of those U.S. non-exempt recipients for whom the qualifiedintermediary receives reportable amounts(within the meaning of paragraph(e)(3)(vi) of this section) to the extent re-quired in the qualified intermediary’sagreement with the IRS. A person mayclaim qualified intermediary status beforean agreement is executed with the IRS ifit has applied for such status and the IRSauthorizes such status on an interim basisunder such procedures as the IRS mayprescribe.* * * * *

(iii) Withholding agreement—(A) Ingeneral. The IRS may, upon request,enter into a withholding agreement with aforeign person described in paragraph(e)(5)(ii) of this section pursuant to suchprocedures as the IRS may prescribe inpublished guidance (see §601.601(d)(2)of this chapter). Under the withholdingagreement, a qualified intermediary shallgenerally be subject to the applicablewithholding and reporting provisions ap-plicable to withholding agents and payorsunder chapters 3 and 61 of the InternalRevenue Code, section 3406, the regula-tions under those provisions, and otherwithholding provisions of the InternalRevenue Code, except to the extent pro-vided under the agreement.

(B) Terms of the withholding agree-ment. Generally, the agreement shallspecify the type of certifications and doc-umentation upon which the qualified in-termediary may rely to ascertain the clas-sification (e.g., corporation orpartnership) and status (i.e., U.S. or for-eign) of beneficial owners and payeeswho receive payments collected by thequalified intermediary and, if necessary,entitlement to the benefits of a reducedrate under an income tax treaty. The

agreement shall specify if, and to whatextent, the qualified intermediary may as-sume primary withholding responsibilityin accordance with paragraph (e)(5)(iv) ofthis section. It shall also specify the ex-tent to which applicable return filing andinformation reporting requirements aremodified so that, in appropriate cases, thequalified intermediary may report pay-ments to the IRS on an aggregated basis,without having to disclose the identity ofbeneficial owners and payees. However,the qualified intermediary may be re-quired to provide to the IRS the name andaddress of those foreign customers whobenefit from a reduced rate under an in-come tax treaty pursuant to the qualifiedintermediary arrangement for purposes ofverifying entitlement to such benefits,particularly under an applicable limitationon benefits provision. Under the agree-ment, a qualified intermediary may agreeto act as an acceptance agent to performthe duties described in§301.6109–1(d)(3)(iv)(A) of this chapter.The agreement may specify the manner inwhich applicable procedures for adjust-ments for underwithholding and over-withholding, including refund procedures,apply in the context of a qualified inter-mediary arrangement and the extent towhich applicable procedures may bemodified. In particular, a withholdingagreement may allow a qualified interme-diary to claim refunds of overwithheldamounts. If relevant, the agreement shallspecify the manner in which the qualifiedintermediary may deal with payments toother intermediaries and flow-through en-tities. In addition, the agreement shallspecify the manner in which the IRS willverify compliance with the agreement. Inappropriate cases, the IRS may agree torely on audits performed by an intermedi-ary’s approved auditor. In such a case, theIRS’s audit may be limited to the audit ofthe auditor’s records (including work pa-pers of the auditor and reports preparedby the auditor indicating the methodologyemployed to verify the entity’s compli-ance with the agreement). For this pur-pose, the agreement shall specify the au-ditor or class of auditors that areapproved. Generally, an auditor will notbe approved if the auditor is not subject tolaws, regulations, or rules that imposesanctions for failure to exercise its inde-pendence and to perform the audit compe-

June 5, 2000 1194 2000–23 I.R.B.

tently. The agreement may include provi-sions for the assessment and collection oftax in the event that failure to complywith the terms of the agreement results inthe failure by the withholding agent or thequalified intermediary to withhold anddeposit the required amount of tax. Fur-ther, the agreement may specify the pro-cedures by which deposits of amountswithheld are to be deposited, if differentfrom the deposit procedures under the In-ternal Revenue Code and applicable regu-lations. To determine whether to enter aqualified intermediary withholding agree-ment and the terms of any particular with-holding agreement, the IRS will considerappropriate factors including whether ornot the foreign person agrees to assumeprimary withholding responsibility, thetype of local know-your-customer lawsand practices to which it is subject, theextent and nature of supervisory and regu-latory control exercised under the laws ofthe foreign country over the foreign per-son, the volume of investments in U.S. se-curities (determined in dollar amountsand number of account holders), the fi-nancial condition of the foreign person,and whether the qualified intermediary isa resident of a country with which theUnited States has an income tax treaty.

(iv) Assignment of primary withholdingresponsibility. Any person who meets thedefinition of a withholding agent under§1.1441–7(a) (whether a U.S. person or aforeign person) is required to withholdand deposit any amount withheld under§1.1461–1(a) and to make the returns pre-scribed by §1.1461–1(b) and (c). If per-mitted by its qualified intermediary agree-ment, a qualified intermediary agreementmay, however, inform a withholdingagent from which it receives a paymentthat it will assume the primary obligationto withhold, deposit, and report amountsunder chapter 3 of the Internal RevenueCode and/or under chapter 61 of the Inter-nal Revenue Code and section 3406. If awithholding agent makes a payment of anamount subject to withholding, as definedin §1.1441–2(a), or a reportable payment,as defined in section 3406(b), to a quali-fied intermediary that represents to thewithholding agent that it has assumed pri-mary withholding responsibility for thepayment, the withholding agent is not re-quired to withhold on the payment. Thewithholding agent is not required to deter-

mine that the qualified intermediaryagreement actually permits the qualifiedintermediary to assume primary withhold-ing responsibility. A qualified intermedi-ary that assumes primary withholding re-sponsibility under chapter 3 of theInternal Revenue Code or primary report-ing and backup withholding responsibilityunder chapter 61 and section 3406 is notrequired to assume primary withholdingresponsibility for all accounts it has with awithholding agent but must assume pri-mary withholding responsibility for allpayments made to any one account that ithas with the withholding agent. A quali-fied intermediary may agree with thewithholding agent to assume primarywithholding responsibility under chapter3 and section 3406, only if expressly per-mitted to do so under its agreement withthe IRS.

(v) Withholding statement—(A) In gen-eral. A qualified intermediary must pro-vide each withholding agent from which itreceives reportable amounts, as defined inparagraph (e)(3)(vi) of this section, as aqualified intermediary with a written state-ment (the withholding statement) contain-ing the information specified in paragraph(e)(5)(v)(B) of this section. A withholdingstatement is not required, however, if allof the information a withholding agentneeds to fulfill its withholding and report-ing requirements is contained in the with-holding certificate. The qualified interme-diary agreement may require, inappropriate circumstances, the qualifiedintermediary to include information in itswithholding statement relating to pay-ments other than payments of reportableamounts. The withholding statementforms an integral part of the qualified in-termediary’s qualified intermediary with-holding certificate and the penalties ofperjury statement provided on the with-holding certificate shall apply to the with-holding statement as well. The withhold-ing statement may be provided in anymanner, and in any form, to which quali-fied intermediary and the withholdingagent mutually agree, including electroni-cally. If the withholding statement is pro-vided electronically, there must be suffi-cient safeguards to ensure that theinformation received by the withholdingagent is the information sent by qualifiedintermediary and must also document alloccasions of user access that result in the

submission or modification of withhold-ing statement information. In addition, theelectronic system must be capable of pro-viding a hard copy of all withholdingstatements provided by the qualified inter-mediary. The withholding statement shallbe updated as often as necessary for thewithholding agent to meet its reportingand withholding obligations under chap-ters 3 and 61 of the Internal Revenue Codeand section 3406. A withholding agentwill be liable for tax, interest, and penal-ties in accordance with paragraph (b)(7) ofthis section to the extent it does not followthe presumption rules of paragraph (b)(3)of this section, §§1.1441–5(d) and (e)(6),and 1.6049–5(d) for any payment, or por-tion thereof, for which it does not have avalid withholding statement prior to mak-ing a payment.

(B) Content of withholding statement.The withholding statement must containsufficient information for a withholdingagent to apply the correct rate of with-holding on payments from the accountsidentified on the statement and to prop-erly report such payments on Forms1042-S and Forms 1099, as applicable.The withholding statement must—

(1) Designate those accounts for whichthe qualified intermediary acts as a quali-fied intermediary;

(2) Designate those accounts for whichqualified intermediary assumes primarywithholding responsibility under chapter3 of the Internal Revenue Code and/orprimary reporting and backup withhold-ing responsibility under chapter 61 andsection 3406; and

(3) Provide information regardingwithholding rate pools, as described inparagraph (e)(5)(v)(C) of this section.

(C) Withholding rate pools—(1) Ingeneral. Except to the extent it has as-sumed both primary withholding respon-sibility under chapter 3 of the InternalRevenue Code and primary reporting andbackup withholding responsibility underchapter 61 and section 3406 with respectto a payment, a qualified intermediaryshall provide as part of its withholdingstatement the withholding rate pool infor-mation that is required for the withhold-ing agent to meet its withholding and re-porting obligations under chapters 3 and61 of the Internal Revenue Code and sec-tion 3406. A withholding rate pool is apayment of a single type of income, deter-

2000–23 I.R.B. 1195 June 5, 2000

mined in accordance with the categoriesof income reported on Form 1042-S orForm 1099, as applicable, that is subjectto a single rate of withholding. A with-holding rate pool may be established byany reasonable method on which the qual-ified intermediary and a withholdingagent agree (e.g., by establishing a sepa-rate account for a single withholding ratepool, or by dividing a payment made to asingle account into portions allocable toeach withholding rate pool). To the extenta qualified intermediary does not assumeprimary reporting and backup withhold-ing responsibility under chapter 61 andsection 3406, a qualified intermediary’swithholding statement must establish aseparate withholding rate pool for eachU.S. non-exempt recipient account holderthat the qualified intermediary has dis-closed to the withholding agent unless thequalified intermediary uses the alternativeprocedures in paragraph (e)(5)(v)(C)(2)of this section. A qualified intermediaryshall determine withholding rate poolsbased on valid documentation that it ob-tains under its withholding agreementwith the IRS, or if a payment cannot bereliably associated with valid documenta-tion, under the applicable presumptionrules. If a qualified intermediary has anaccount holder that is another intermedi-ary (whether a qualified intermediary or anonqualified intermediary) or a flow-through entity, the qualified intermediarymay combine the account holder informa-tion provided by the intermediary or flow-through entity with the qualified interme-diary’s direct account holder informationto determine the qualified intermediary’swithholding rate pools.

(2) Alternative procedure for U.S. non-exempt recipients. If permitted under itsagreement with the IRS, a qualified inter-mediary may, by mutual agreement with awithholding agent, establish a singlewithholding rate pool (not subject tobackup withholding) for all U.S. non-ex-empt recipient account holders for whomthe qualified intermediary has providedForms W-9 prior to the withholding agentpaying any reportable payments, as de-fined in section 3406(b), and a separatewithholding rate pool (subject to 31-per-cent withholding) for all U.S. non-exemptrecipient account holders for whom aqualified intermediary has not providedForms W-9 prior to the withholding agent

paying any reportable payments. If aqualified intermediary chooses the alter-native procedure of this paragraph(e)(5)(v)(C)(2), the qualified intermediarymust provide sufficient information to thewithholding agent no later than January15 of the year following the year in whichthe reportable payments are paid that allo-cates the reportable payments to eachU.S. non-exempt recipient accountholder. Failure to provide such informa-tion will result in the application of penal-ties to the qualified intermediary undersections 6721 and 6722, as well as anyother applicable penalties, and may resultin the termination of the qualified inter-mediary’s withholding agreement withthe IRS. A withholding agent shall not beliable for tax, interest, or penalties forfailure to backup withhold or report infor-mation under chapter 61 of the InternalRevenue Code due solely to the errors oromissions of the qualified intermediary.If a qualified intermediary fails to providethe allocation information required by thisparagraph (e)(5)(v)(C)(2), the withhold-ing agent shall report the entire amountpaid from the withholding rate pool to anunknown recipient, or otherwise in accor-dance with the appropriate Form 1099and the instructions accompanying theform.* * * * *

Par 4. Effective January 1, 2001,§1.1441–2 is amended by:

1. Revising paragraph (a).2. Revising paragraph (b)(1)(i).3. Removing paragraph (b)(2)(ii),

redesignating paragraph (b)(2)(iii) asparagraph (b)(2)(ii), and adding the word“and” after the semicolon in paragraph(b)(2)(i).

4. Revising paragraph (b)(3).The revisions read as follows:§1.1441–2 Amounts subject to withhold-ing.

(a) In general. For purposes of the reg-ulations under chapter 3 of the InternalRevenue Code, the term amounts subjectto withholding means amounts fromsources within the United States that con-stitute either fixed or determinable annualor periodical income described in para-graph (b) of this section or other amountssubject to withholding described in para-graph (c) of this section. For purposes ofthis paragraph (a), an amount shall betreated as being from sources within the

United States if the source of the amountcannot be determined at the time of pay-ment. See §1.1441–3(d)(1) for determin-ing the amount to be withheld from a pay-ment in the absence of information at thetime of payment regarding the source ofthe amount. Amounts subject to with-holding include amounts that are not fixedor determinable annual or periodical in-come and upon which withholding isspecifically required under a provision ofthis section or another section of the regu-lations under chapter 3 of the InternalRevenue Code (such as corporate distrib-utions upon which withholding is re-quired under §1.1441–3(c)(1) that do notconstitute dividend income). Amountssubject to withholding do not include—

(1) Amounts described in§1.1441–1(b)(4)(i) to the extent they in-volve interest on obligations in bearerform or on foreign-targeted registeredobligations (but, in the case of a foreign-targeted registered obligation, only to theextent of those amounts paid to a regis-tered owner that is a financial institutionwithin the meaning of section871(h)(5)(B) or a member of a clearingorganization which member is the benefi-cial owner of the obligation);

(2) Amounts described in§1.1441–1(b)(4)(ii) (dealing with bankdeposit interest and similar types of inter-est (including original issue discount) de-scribed in section 871(i)(2)(A) or 881(d));

(3) Amounts described in§1.1441–1(b)(4)(iv) (dealing with interestor original issue discount on certain short-term obligations described in section871(g)(1)(B) or 881(e));

(4) Amounts described in§1.1441–1(b)(4)(xx) (dealing with in-come from certain gambling winnings ex-empt from tax under section 871(j));

(5) Amounts paid as part of the pur-chase price of an obligation sold or ex-changed between interest payment dates,unless the sale or exchange is part of aplan the principal purpose of which is toavoid tax and the withholding agent hasactual knowledge or reason to know ofsuch plan;

(6) Original issue discount paid as partof the purchase price of an obligation soldor exchanged in a transaction other than aredemption of such obligation, unless thepurchase is part of a plan the principalpurpose of which is to avoid tax and the

June 5, 2000 1196 2000–23 I.R.B.

withholding agent has actual knowledgeor reason to know of such plan; and

(7) Insurance premiums paid with re-spect to a contract that is subject to thesection 4371 excise tax.

(b) Fixed or determinable annual orperiodical income—(1) In general—(i)Definition. For purposes of chapter 3 ofthe Internal Revenue Code and the regula-tions thereunder, fixed or determinableannual or periodical income includes allincome included in gross income undersection 61 (including original issue dis-count) except for the items specified inparagraph (b)(2) of this section. Items ofincome that are excluded from gross in-come under a provision of law without re-gard to the U.S. or foreign status of theowner of the income, such as interest ex-cluded from gross income under section103(a) or qualified scholarship incomeunder section 117, shall not be treated asfixed or determinable annual or periodicalincome under chapter 3 of the InternalRevenue Code. Income excluded fromgross income under section 892 (incomeof foreign governments) or section 115(income of a U.S. possession) is fixed ordeterminable annual or periodical incomesince the exclusion from gross incomeunder those sections is dependent on theforeign status of the owner of the income.See §1.306-3(h) for treating income fromthe disposition of section 306 stock asfixed or determinable annual or periodicalincome.* * * * *

(3) Original issue discount—(i)Amount subject to tax. An amount repre-senting original issue discount is fixed ordeterminable annual or periodical incomethat is subject to tax under sections871(a)(1)(C) and 881(a)(3) to the extentprovided in those sections and this para-graph (b)(3) if not otherwise excludedunder paragraph (a) of this section. Anamount of original issue discount is sub-ject to tax with respect to a foreign benefi-cial owner of an obligation carrying origi-nal issue discount upon a sale or exchangeof the obligation or when a payment ismade on such obligation. The amounttaxable is the amount of original issue dis-count that accrued while the foreign per-son held the obligation up to the time thatthe obligation is sold or exchanged or thata payment is made on the obligation, re-duced by any amount of original issue

discount that was taken into account priorto that time (due to a payment made onthe obligation). In the case of a paymentmade on the obligation, the tax due on theamount of original issue discount may notexceed the amount of the payment re-duced by the tax imposed on any portionof the payment that is qualified stated in-terest.

(ii) Amounts subject to withholding. Awithholding agent must withhold on thetaxable amount of original issue discountpaid on the redemption of an originalissue discount obligation unless an excep-tion to withholding applies (e.g., portfoliointerest or treaty exception). In addition,withholding is required on the taxableamount of original issue discount uponthe sale or exchange of an original issuediscount obligation, other than in a re-demption, to the extent the withholdingagent has actual knowledge or reason toknow that the sale or exchange is part of aplan the principal purpose of which is toavoid tax. If a withholding agent cannotdetermine the taxable amount of originalissue discount on the redemption of anoriginal issue discount obligation (or onthe sale or exchange of such an obligationif the principal purpose of the sale is toavoid tax), then it must withhold on theentire amount of original issue discountaccrued from the date of issue until thedate of redemption (or the date the obliga-tion is sold or exchanged) determined onthe basis of the most recently published“List of Original Issue Discount Instru-ments” (IRS Publication 1212, availablefrom the IRS Forms Distribution Center)or similar list published by the IRS as ifthe beneficial owner of the obligation hadheld the obligation since its original issue.

(iii) Exceptions to withholding. To theextent that this paragraph (b)(3) applies torequire withholding by a person otherthan an issuer of an original issue dis-count obligation, or the issuer’s agent, itshall apply only to obligations issued afterDecember 31, 2000.* * * * *


1. Revising paragraph (b)(2)(i).2. Revising paragraph (c)(1).3. Revising paragraph (c)(4)(i)(C). The revisions read as follows:

§1.1441–3 Determination of amounts tobe withheld.

* * * * *(b) * * *

(2) No withholding between interestpayment dates—(i) In general. A with-holding agent is not required to withholdunder §1.1441–1 upon interest accrued onthe date of a sale or exchange of a debtobligation when that sale occurs betweentwo interest payment dates (even thoughthe amount is treated as interest under§1.61–7(c) or (d) and is subject to taxunder section 871 or 881). See§1.6045–1(c) for reporting requirementsby brokers with respect to sale proceeds.See §1.61–7(c) regarding the character ofpayments received by the acquirer of anobligation subsequent to such acquisition(that is, as a return of capital or interestaccrued after the acquisition). Any ex-emption from withholding pursuant tothis paragraph (b)(2)(i) applies without arequirement that documentation be fur-nished to the withholding agent. How-ever, documentation may have to be fur-nished for purposes of the informationreporting provisions under section 6045or 6049 and backup withholding undersection 3406. The exemption from with-holding granted by this paragraph (b)(2)is not a determination that the accrued in-terest is not fixed or determinable annualor periodical income under section 871(a)or 881(a).* * * * *

(c) Corporate distributions—(1) Gen-eral rule. A corporation making a distrib-ution with respect to its stock or any inter-mediary (described in §1.1441–1(c)(13))making a payment of such a distributionis required to withhold under section1441, 1442, or 1443 on the entire amountof the distribution, unless it elects to re-duce the amount of withholding under theprovisions of this paragraph (c). Any ex-ceptions from withholding provided bythis paragraph (c) apply without any re-quirement to furnish documentation to thewithholding agent. However, documenta-tion may have to be furnished for pur-poses of the information reporting provi-sions under section 6042 or 6045 andbackup withholding under section 3406.See §1.1461–1(c) to determine whetheramounts excepted from withholdingunder this section are considered amountsthat are subject to reporting.* * * * *

(4) * * * (i) * * *

2000–23 I.R.B. 1197 June 5, 2000

(C) Coordination with REIT withhold-ing. Withholding is required under sec-tion 1441 (or 1442 or 1443) on the portionof a distribution from a REIT that is notdesignated as a capital gain dividend, areturn of basis, or a distribution in excessof a shareholder’s adjusted basis in thestock of the REIT that is treated as a capi-tal gain under section 301(c)(3). A distri-bution in excess of a shareholder’s ad-justed basis in the stock of the REIT is,however, subject to withholding undersection 1445, unless the interest in theREIT is not a U.S. real property interest(e.g., an interest in a domestically con-trolled REIT under section 897(h)(2)). Inaddition, withholding is required undersection 1445 on the portion of the distrib-ution designated by a REIT as a capitalgain dividend. See §1.1445–8.* * * * *


1. Revising paragraph (a)(3)(i).2. Revising paragraph (b)(1)(ii).The revisions read as follows:

§1.1441–4 Exemptions from withholdingfor certain effectively connected incomeand other amounts.

(a) * * *(3) Income on notional principal con-

tracts—(i) General rule. A withholdingagent that pays amounts attributable to anotional principal contract described in§1.863–7(a) or 1.988–2(e) shall have noobligation to withhold on the amountspaid under the terms of the notional prin-cipal contract regardless of whether awithholding certificate is provided. How-ever, a withholding agent must file returnsunder §1.1461–1(b) and (c) reporting theincome that it must treat as effectivelyconnected with the conduct of a trade orbusiness in the United States under theprovisions of this paragraph (a)(3). Ex-cept as otherwise provided in paragraph(a)(3)(ii) of this section, a withholdingagent must treat the income as effectivelyconnected with the conduct of a U.S.trade or business if the income is paid to,or to the account of, a qualified businessunit of a foreign person located in theUnited States or, if the payment is paid to,or to the account of, a qualified businessunit of a foreign person located outsidethe United States, the withholding agentknows, or has reason to know, the pay-ment is effectively connected with the

conduct of a trade or business within theUnited States. Income on a notional prin-cipal contract does not include the amountcharacterized as interest under the provi-sions of §1.446–3(g)(4).* * * * *

(b) * * * (1) * * *(ii) Such compensation would be sub-

ject to withholding under section 3402 butfor the provisions of section 3401(a) (notincluding section 3401(a)(6)) and the reg-ulations under that section. This para-graph (b)(1)(ii) does not apply to pay-ments to a nonresident alien individualfrom any trust described in section401(a), any annuity plan described in sec-tion 403(a), any annuity, custodial ac-count, or retirement income account de-scribed in section 403(b), or an individualretirement account or individual retire-ment annuity described in section 408.Instead, these payments are subject towithholding under this section to the ex-tent they are exempted from the definitionof wages under section 3401(a)(12) or tothe extent they are from an annuity, custo-dial account, or retirement income ac-count described in section 403(b), or anindividual retirement account or individ-ual retirement annuity described in sec-tion 408. Thus, for example, payments toa nonresident alien individual from a trustdescribed in section 401(a) are subject towithholding under section 1441 and notunder section 3405 or section 3406.* * * * *

Par. 7. Effective January 1, 2001, in§1.1441–5 paragraphs (a) through (e) arerevised to read as follows:§1.1441–5 Withholding on payments topartnerships, trusts, and estates.

(a) In general. This section describesthe rules that apply to payments made topartnerships, trusts, and estates. Para-graph (b) of this section prescribes therules that apply to a withholding agentmaking a payment to a U.S. partnership,trust, or estate. It also prescribes theobligations of a U.S. partnership, trust, orestate that makes a payment to a foreignpartner, beneficiary, or owner. Paragraph(c) of this section prescribes rules thatapply to a withholding agent that makes apayment to a foreign partnership. Para-graph (d) of this section provides pre-sumption rules that apply to paymentsmade to foreign partnerships. Paragraph(e) of this section prescribes rules, includ-

ing presumption rules, that apply to awithholding agent that makes a paymentto a foreign trust or foreign estate.

(b) Rules applicable to U.S. partner-ships, trusts, and estates—(1) Paymentsto U.S. partnerships, trusts, and estates.No withholding is required under section1.1441–1(b)(1) on a payment of anamount subject to withholding (as definedin §1.1441–2(a)) that a withholding agentmay treat as made to a U.S. payee. There-fore, if a withholding agent can reliablyassociate (within the meaning of§1.1441–2(b)(vii)) a Form W-9 providedin accordance with §1.1441–1(d)(2) or (4)by a U.S. partnership, U.S. trust, or a U.S.estate the withholding agent may treat thepayment as made to a U.S. payee and thepayment is not subject to withholdingunder section 1441 even though the part-nership, trust, or estate may have foreignpartners, beneficiaries, or owners. Awithholding agent is also not required towithhold under section 1441 on a pay-ment it makes to an entity presumed to bea U.S. payee under paragraphs (d)(2) and(e)(6)(ii) of this section.

(2) Withholding by U.S. payees—(i)U.S. partnerships—(A) In general. AU.S. partnership is required to withholdunder §1.1441–1 as a withholding agenton an amount subject to withholding (asdefined in §1.1441–2(a)) that is includiblein the gross income of a partner that is aforeign person. Subject to paragraph(b)(2)(v) of this section, a U.S. partner-ship shall withhold when any distribu-tions that include amounts subject towithholding (including guaranteed pay-ments made by a U.S. partnership) aremade. To the extent a foreign partner’sdistributive share of income subject towithholding has not actually been distrib-uted to the foreign partner, the U.S. part-nership must withhold on the foreign part-ner’s distributive share of the income onthe earlier of the date that the statementrequired under section 6031(b) is mailedor otherwise provided to the partner or thedue date for furnishing the statement.

(B) Effectively connected income ofpartners. Withholding on items of in-come that are effectively connected in-come in the hands of the partners who areforeign persons is governed by section1446 and not by this section. In such acase, partners in a domestic partnershipare not required to furnish a withholding

June 5, 2000 1198 2000–23 I.R.B.

certificate in order to claim an exemptionfrom withholding under section1441(c)(1) and §1.1441–4.

(ii) U.S. simple trusts. A U.S. trust thatis described in section 651(a) (a U.S. sim-ple trust) is required to withhold underchapter 3 of the Internal Revenue Code asa withholding agent on the distributablenet income includible in the gross incomeof a foreign beneficiary to the extent thedistributable net income is an amountsubject to withholding (as defined in§1.1441–2(a)). A U.S. simple trust shallwithhold when a distribution is made to aforeign beneficiary. The U.S. trust maymake a reasonable estimate of the portionof the distribution that constitutes distrib-utable net income consisting of an amountsubject to withholding and apply the ap-propriate rate of withholding to the esti-mated amount. If, at the end of the tax-able year in which the distribution ismade, the U.S. simple trust determinesthat it underwithheld under section 1441or 1442, the trust shall be liable as a with-holding agent for the amount under with-held under section 1461. No penaltiesshall be imposed for failure to withholdand deposit the tax if the U.S. simpletrust’s estimate was reasonable and thetrust pays the underwithheld amount on orbefore the due date of Form 1042 undersection 1461. Any payment of underwith-held amounts by the U.S. simple trustshall not be treated as income subject toadditional withholding even if thatamount is treated as additional income tothe foreign beneficiary, unless the addi-tional amount is income to the foreignbeneficiary as a result of a contractualarrangement between the parties regard-ing the satisfaction of the foreign benefi-ciary’s tax liability. To the extent a U.S.simple trust is required to, but does not,distribute such income to a foreign bene-ficiary, the U.S. trust must withhold onthe foreign beneficiary’s allocable shareat the time the income is required (with-out extension) to be reported on Form1042–S under §1.1461–1(c).

(iii) U.S. complex trusts and U.S. es-tates. A U.S. trust that is not a trust de-scribed in section 651(a) (a U.S. complextrust) is required to withhold under chap-ter 3 of the Internal Revenue Code as awithholding agent on the distributable netincome includible in the gross income ofa foreign beneficiary to the extent the dis-

tributable net income consists of anamount subject to withholding (as definedin §1.1441–2(a)) that is, or is required tobe, distributed currently. The U.S. com-plex trust shall withhold when a distribu-tion is made to a foreign beneficiary. Thetrust may use the same procedures regard-ing an estimate of the amount subject towithholding as a U.S. simple trust underparagraph (b)(2)(ii) of this section. Tothe extent an amount subject to withhold-ing is required to be, but is not actuallydistributed, the U.S. complex trust mustwithhold on the foreign beneficiary’s allo-cable share at the time the income is re-quired to be reported on Form 1042-Sunder §1.1461–1(c), without extension.A U.S. estate is required to withholdunder chapter 3 of the Internal RevenueCode on the distributable net income in-cludible in the gross income of a foreignbeneficiary to the extent the distributablenet income consists of an amount subjectto withholding (as defined in§1.1441–2(a)) that is actually distributed.A U.S. estate may also use the reasonableestimate procedures of paragraph(b)(2)(ii) of this section. However, thoseprocedures apply to an estate that has ataxable year other than a calendar yearonly if the estate files an amended returnon Form 1042 for the calendar year inwhich the distribution was made and paysthe underwithheld tax and interest within60 days after the close of the taxable yearin which the distribution was made.

(iv) U.S. grantor trusts. A U.S. trustthat is described in section 671 through679 (a U.S. grantor trust) must withholdon any income includible in the gross in-come of a foreign person that is treated asan owner of the grantor trust to the extentthe amount includible consists of anamount that is subject to withholding (asdescribed in §1.1441–2(a)). The with-holding must occur at the time the incomeis received by, or credited to, the trust.

(v) Subsequent distribution. If a U.S.partnership or U.S. trust withholds on aforeign partner, beneficiary, or owner’sshare of an amount subject to withholdingbefore the amount is actually distributedto the partner, beneficiary, or owner, with-holding is not required when the amountis subsequently distributed.

(c) Foreign partnerships—(1) Determi-nation of payee—(i) Payments treated asmade to partners. Except as otherwise

provided in paragraph (c)(1)(ii) of thissection, the payees of a payment to a per-son that the withholding agent may treatas a nonwithholding foreign partnershipunder paragraph (c)(3)(i) or (d)(2) of thissection are the partners (looking throughpartners that are foreign intermediaries orflow-through entities) as follows—

(A) If the withholding agent can reli-ably associate a partner’s distributiveshare of the payment with a valid FormW-9 provided under §1.1441–1(d), thepartner is a U.S. payee;

(B) If the withholding agent can reli-ably associate a partner’s distributiveshare of the payment with a valid FormW-8, or other appropriate documentation,provided under §1.1441-1(e)(1)(ii), thepartner is a payee that is a foreign benefi-cial owner;

(C) If the withholding agent can reli-ably associate a partner’s distributiveshare of the payment with a qualified in-termediary withholding certificate under§1.1441–1(e)(3)(ii), a nonqualified inter-mediary withholding certificate under§1.1441–1(e)(3)(iii), or a U.S. branch cer-tificate under §1.1441–1(e)(3)(v), thenthe rules of §1.1441–1(b)(2)(v) shallapply to determine who the payee is in thesame manner as if the partner’s distribu-tive share of the payment had been paiddirectly to such intermediary or U.S.branch;

(D) If the withholding agent can reli-ably associate the partner’s distributiveshare with a withholding foreign partner-ship certificate under paragraph (c)(2)(iv)of this section or a nonwithholding for-eign partnership certificate under para-graph (c)(3)(iii) of this section, then therules of this paragraph (c)(1)(i) or para-graph (c)(1)(ii) of this section shall applyto determine whether the payment istreated as made to the partners of thehigher-tier partnership under this para-graph (c)(1)(i) or to the higher-tier part-nership itself (under the rules of para-graph (c)(1)(ii) of this section) in thesame manner as if the partner’s distribu-tive share of the payment had been paiddirectly to the higher-tier foreign partner-ship;

(E) If the withholding agent can reli-ably associate the partner’s distributiveshare with a withholding certificate de-scribed in paragraph (e) of this section re-garding a foreign trust or estate, then the

2000–23 I.R.B. 1199 June 5, 2000

rules of paragraph (e) of this section shallapply to determine who the payees are;and

(F) If the withholding agent cannot reli-ably associate the partner’s distributiveshare with a withholding certificate orother appropriate documentation, thepartners are considered to be the payeesand the presumptions described in para-graph (d)(3) of this section shall apply todetermine their classification and status.

(ii) Payments treated as made to thepartnership. A payment to a person thatthe withholding agent may treat as a for-eign partnership is treated as a payment tothe foreign partnership and not to its part-ners only if—

(A) The withholding agent can reliablyassociate the payment with a withholdingcertificate described in paragraph(c)(2)(iv) of this section (withholding cer-tificate of a withholding foreign partner-ship);

(B) The withholding agent can reliablyassociate the payment with a withholdingcertificate described in paragraph(c)(3)(iii) of this section (nonwithholdingforeign partnership) certifying that thepayment is income that is effectively con-nected with the conduct of a trade or busi-ness in the United States; or

(C) The withholding agent can treat theincome as effectively connected incomeunder the presumption rules of§1.1441–4(a)(2)(ii) or (3)(i).

(iii) Rules for reliably associating apayment with documentation. For rulesregarding the reliable association of apayment with documentation, see§1.1441–1(b)(2)(vii). In the absence ofdocumentation, see §§1.1441–1(b)(3) and1.6049–5(d) and paragraphs (d) and (e)(6)of this section for applicable presump-tions.

(iv) Examples. The rules of paragraphs(c)(1)(i) and (ii) of this section are illus-trated by the following examples:

Example 1. FP is a nonwithholding foreign part-nership organized in Country X. FP has two part-ners, FC, a foreign corporation, and USP, a U.S.partnership. USWH, a U.S. withholding agent,makes a payment of U.S. source interest to FP. FPhas provided USWH with a valid nonwithholdingforeign partnership certificate, as described in para-graph (c)(3)(iii) of this section, with which it associ-ates a beneficial owner withholding certificate fromFC and a Form W-9 from USP together with thewithholding statement required by paragraph(c)(3)(iv) of this section. USWH can reliably asso-ciate the payment of interest with the withholdingcertificates from FC and USP. Under paragraph

(c)(1)(i) of this section, the payees of the interestpayment are FC and USP.

Example 2. The facts are the same as in Example1, except that FP1, a nonwithholding foreign part-nership, is a partner in FP rather than USP. FP1 hastwo partners, A and B, both foreign persons. FP pro-vides USWH with a valid nonwithholding foreignpartnership certificate, as described in paragraph(c)(3)(iii) of this section, with which it associates abeneficial owner withholding certificate from FCand a nonwithholding foreign partnership certificatefrom FP1. In addition, foreign beneficial ownerwithholding certificates from A and B are associatedwith the nonwithholding foreign partnership with-holding certificate from FP1. FP also provides thewithholding statement required by paragraph(c)(3)(iv) of this section. USWH can reliably asso-ciate the interest payment with the withholding cer-tificates provided by FC, A, and B. Therefore, underparagraph (c)(1)(i) of this section, the payees of theinterest payment are FC, A, and B.

Example 3. USWH makes a payment of U.S.source dividends to WFP, a withholding foreignpartnership. WFP has two partners, FC1 and FC2,both foreign corporations. USWH can reliably asso-ciate the payment with a valid withholding foreignpartnership withholding certificate from WFP.Therefore, under paragraph (c)(1)(ii)(A) of this sec-tion, WFP is the payee of the dividends.

Example 4. USWH makes a payment of U.S.source royalties to FP, a foreign partnership. USWHcan reliably associate the royalties with a valid with-holding certificate from FP on which FP certifiesthat the income is effectively connected with theconduct of a trade or business in the United States.Therefore, under paragraph (c)(1)(ii)(B) of this sec-tion, FP is the payee of the royalties.

(2) Withholding foreign partnerships—(i) Reliance on claim of withholding for-eign partnership status. A withholdingforeign partnership is a foreign partner-ship that has entered into an agreementwith the Internal Revenue Service (IRS),as described in paragraph (c)(2)(ii) of thissection, with respect to distributions andguaranteed payments it makes to its part-ners. A withholding agent that can reli-ably associate a payment with a certificatedescribed in paragraph (c)(2)(iv) of thissection may treat the person to whom itmakes the payment as a withholding for-eign partnership for purposes of withhold-ing under chapter 3 of the Internal Rev-enue Code, information reporting underchapter 61 of the Internal Revenue Code,backup withholding under section 3406,and withholding under other provisions ofthe Internal Revenue Code. Furnishingsuch a certificate is in lieu of transmittingto a withholding agent withholding cer-tificates or other appropriate documenta-tion for its partners. Although the with-holding foreign partnership generally willbe required to obtain withholding certifi-

cates or other appropriate documentationfrom its partners pursuant to its agreementwith the IRS, it will generally not be re-quired to attach such documentation to itswithholding foreign partnership withhold-ing certificate. A foreign partnership mayact as a qualified intermediary under§1.1441–1(e)(5) with respect to paymentsit makes to persons other than its partners.In addition, the IRS may permit a foreignpartnership to act as a qualified intermedi-ary under §1.1441–1(e)(5)(ii)(D) with re-spect to its partners in appropriate circum-stances.

(ii) Withholding agreement. The IRSmay, upon request, enter into a withhold-ing agreement with a foreign partnershippursuant to such procedures as the IRSmay prescribe in published guidance (see§601.601(d)(2) of this chapter). Underthe withholding agreement, a foreignpartnership shall generally be subject tothe applicable withholding and reportingprovisions applicable to withholdingagents and payors under chapters 3 and 61of the Internal Revenue Code, section3406, the regulations under those provi-sions, and other withholding provisions ofthe Internal Revenue Code, except to theextent provided under the agreement.Under the agreement, a foreign partner-ship may agree to act as an acceptanceagent to perform the duties described in§301.6109–1(d)(3)(iv)(A) of this chapter.The agreement may specify the manner inwhich applicable procedures for adjust-ments for underwithholding and over-withholding, including refund procedures,apply to the withholding foreign partner-ship and its partners and the extent towhich applicable procedures may bemodified. In particular, a withholdingagreement may allow a withholding for-eign partnership to claim refunds of over-withheld amounts on behalf of its cus-tomers. In addition, the agreement mustspecify the manner in which the IRS willaudit the foreign partnership’s books andrecords in order to verify the partnership’scompliance with its agreement. A with-holding foreign partnership must file a re-turn on Form 1042 and information re-turns on Form 1042-S. The withholdingforeign partnership agreement may alsorequire a withholding foreign partnershipto file a partnership return under section6031(a) and partner statements under6031(b).

June 5, 2000 1200 2000–23 I.R.B.

(iii) Withholding responsibility. Awithholding foreign partnership must as-sume primary withholding responsibilityunder chapter 3 of the Internal RevenueCode. It is not required to provide infor-mation to the withholding agent regardingeach partner’s distributive share of thepayment. The withholding foreign part-nership will be responsible for reportingthe payments under §1.1461–1(c) andchapter 61 of the Internal Revenue Code.A withholding agent making a payment toa withholding foreign partnership is notrequired to withhold any amount underchapter 3 of the Internal Revenue Code ona payment to the withholding foreignpartnership, unless it has actual knowl-edge or reason to know that the foreignpartnership is not a withholding foreignpartnership. The withholding foreignpartnership shall withhold the paymentsunder the same procedures and at thesame time as prescribed for withholdingby a U.S. partnership under paragraph(b)(2) of this section, except that, for pur-poses of determining the partner’s status,the provisions of paragraph (d)(4) of thissection shall apply.

(iv) Withholding certificate from awithholding foreign partnership. Therules of §1.1441–1(e)(4) shall apply towithholding certificates described in thisparagraph (c)(2)(iv). A withholding cer-tificate furnished by a withholding for-eign partnership is valid with regard toany partner on whose behalf the certifi-cate is furnished only if it is furnished ona Form W-8, an acceptable substituteform, or such other form as the IRS mayprescribe, it is signed under penalties ofperjury by a partner with authority to signfor the partnership, its validity has not ex-pired, and it contains the information,statement, and certifications described inthis paragraph (c)(2)(iv) as follows—

(A) The name, permanent residence ad-dress (as described in§1.1441–1(e)(2)(ii)), and the employeridentification number of the partnership,and the country under the laws of whichthe partnership is created or governed;

(B) A certification that the partnershipis a withholding foreign partnershipwithin the meaning of paragraph (c)(2)(i)of this section; and

(C) Any other information, certifica-tions or statements as may be required bythe withholding foreign partnership

agreement with the IRS or the form or ac-companying instructions in addition to, orin lieu of, the information, statements,and certifications described in this para-graph (c)(2)(iv).

(3) Nonwithholding foreign partner-ships—(i) Reliance on claim of foreignpartnership status. A withholding agentmay treat a person as a nonwithholdingforeign partnership if it receives from thatperson a nonwithholding foreign partner-ship withholding certificate as describedin paragraph (c)(3)(iii) of this section. Awithholding agent that does not receive anonwithholding foreign partnership with-holding certificate, or does not receive avalid withholding certificate, from an en-tity it knows, or has reason to know, is aforeign partnership, must apply the pre-sumption rules of §§1.1441–1(b)(3) and1.6049–5(d) and paragraphs (d) and (e)(6)of this section. In addition, to the extent awithholding agent cannot, prior to a pay-ment, reliably associate the payment withvalid documentation from a payee that isassociated with the nonwithholding for-eign partnership withholding certificate orhas insufficient information to report thepayment on Form 1042-S or Form 1099,to the extent reporting is required, mustalso apply the presumption rules. See§1.1441–1(b)(2)(vii)(A) and (B) for rulesregarding reliable association. See para-graph (c)(3)(iv) of this section and§1.1441–1(e)(3)(iv) for alternative proce-dures permitting allocation information tobe received after a payment is made.

(ii) Reliance on claim of reduced with-holding by a partnership for its partners.This paragraph (c)(3)(ii) describes themanner in which a withholding agent mayrely on a claim of reduced withholdingwhen making a payment to a nonwith-holding foreign partnership. To the extentthat a withholding agent treats a paymentto a nonwithholding foreign partnershipas a payment to the nonwithholding for-eign partnership’s partners (whether di-rect or indirect) in accordance with para-graph (c)(1)(i) of this section, it may relyon a claim for reduced withholding by thepartner if, prior to the payment, the with-holding agent can reliably associate thepayment (within the meaning of§1.1441–1(b)(2)(vii)) with a valid with-holding certificate or other appropriatedocumentation from the partner that es-tablishes entitlement to a reduced rate of

withholding. A withholding certificate orother appropriate documentation that es-tablishes entitlement to a reduced rate ofwithholding is a beneficial owner with-holding certificate described in§1.1441–1(e)(2)(i), documentary evi-dence described in §1.1441–6(c)(3) or (4)or 1.6049–5(c)(1) (for a partner claimingto be a foreign person and a beneficialowner, determined under the provisionsof §1.1441–1(c)(6)), a Form W–9 de-scribed in §1.1441–1(d) (for a partnerclaiming to be a U.S. payee), or a with-holding foreign partnership withholdingcertificate described in paragraph(c)(2)(iv) of this section. Unless a non-withholding foreign partnership withhold-ing certificate is provided for incomeclaimed to be effectively connected withthe conduct of a trade or business in theUnited States, a claim must be presentedfor each portion of the payment that rep-resents an item of income includible inthe distributive share of a partner as re-quired under paragraph (c)(3)(iii)(C) ofthis section. When making a claim forseveral partners, the partnership may pre-sent a single nonwithholding foreign part-nership withholding certificate to whichthe partners’ certificates or other appro-priate documentation are associated.Where the nonwithholding foreign part-nership withholding certificate is pro-vided for income claimed to be effec-tively connected with the conduct of atrade or business in the United Statesunder paragraph (c)(3)(iii)(D) of this sec-tion, the claim may be presented withouthaving to identify any partner’s distribu-tive share of the payment.

(iii) Withholding certificate from a non-withholding foreign partnership. A non-withholding foreign partnership shall pro-vide a nonwithholding foreign partnershipwithholding certificate with respect to re-portable amounts received by the non-withholding foreign partnership. A non-withholding foreign partnershipwithholding certificate is valid only to theextent it is furnished on a Form W-8 (oran acceptable substitute form or suchother form as the IRS may prescribe), it issigned under penalties of perjury by apartner with authority to sign for the part-nership, its validity has not expired, and itcontains the information, statements, andcertifications described in this paragraph(c)(3)(iii) and paragraph (c)(3)(iv) of this

2000–23 I.R.B. 1201 June 5, 2000

section, and the withholding certificatesand other appropriate documentation forall the persons to whom the certificate re-lates are associated with the certificate.The rules of §1.1441–1(e)(4) shall applyto withholding certificates described inthis paragraph (c)(3)(iii). No withholdingcertificates or other appropriate documen-tation from persons who derive incomethrough a partnership (whether or notU.S. exempt recipients) are required to beassociated with the nonwithholding for-eign partnership withholding certificate ifthe certificate is furnished solely for in-come claimed to be effectively connectedwith the conduct of a trade or business inthe United States. Withholding certifi-cates and other appropriate documenta-tion that may be associated with the non-withholding foreign partnershipwithholding certificate consist of benefi-cial owner withholding certificates under§1.1441–1(e)(2)(i), intermediary with-holding certificates under§1.1441–1(e)(3)(i), withholding foreignpartnership withholding certificates underparagraph (c)(2)(iv) of this section, non-withholding foreign partnership withhold-ing certificates under this paragraph(c)(3)(iii), withholding certificates fromforeign trusts or estates under paragraph(e) of this section, documentary evidencedescribed in §1.1441–6(c)(3) or (4) ordocumentary evidence described in§1.6049–5(c)(1), and any other documen-tation or certificates applicable underother provisions of the Internal RevenueCode or regulations that certify or estab-lish the status of the payee or beneficialowner as a U.S. or a foreign person.Nothing in this paragraph (c)(3)(iii) shallrequire a nonwithholding foreign partner-ship to furnish original documentation.Copies of certificates or documentary evi-dence may be transmitted to the U.S.withholding agent, in which case the non-withholding foreign partnership must re-tain the original documentation for thesame time period that the copy is requiredto be retained by the withholding agentunder §1.1441–1(e)(4)(iii) and must pro-vide it to the withholding agent upon re-quest. The information, statement, andcertifications required on the withholdingcertificate are as follows—

(A) The name, permanent residence ad-dress (as described in§1.1441–1(e)(2)(ii)), and the employer

identification number of the partnership,if any, and the country under the laws ofwhich the partnership is created or gov-erned;

(B) A certification that the personwhose name is on the certificate is a for-eign partnership;

(C) A withholding statement associatedwith the nonwithholding foreign partner-ship withholding certificate that providesall of the information required by para-graph (c)(3)(iv) of this section and§1.1441–1(e)(3)(iv). No withholdingstatement is required, however, for a non-withholding foreign partnership withhold-ing certificate furnished for incomeclaimed to be effectively connected withthe conduct of a trade or business in theUnited States;

(D) A certification that the income iseffectively connected with the conduct ofa trade or business in the United States, ifapplicable; and

(E) Any other information, certifica-tions, or statements required by the formor accompanying instructions in additionto, or in lieu of, the information and certi-fications described in this paragraph(c)(3)(iii).

(iv) Withholding statement provided bynonwithholding foreign partnership. Theprovisions of §1.1441–1(e)(3)(iv) (re-garding a withholding statement) shallapply to a nonwithholding foreign part-nership by substituting the term nonwith-holding foreign partnership for the termnonqualified intermediary.

(v) Withholding and reporting by a for-eign partnership. A nonwithholding for-eign partnership described in this para-graph (c)(3) that receives an amountsubject to withholding (as defined in§1.1441–2(a)) shall be required to with-hold and report such payment under chap-ter 3 of the Internal Revenue Code and theregulations thereunder except as other-wise provided in this paragraph (c)(3)(v).A nonwithholding foreign partnershipshall not be required to withhold and re-port if it has provided a valid nonwith-holding foreign partnership withholdingcertificate, it has provided all of the infor-mation required by paragraph (c)(3)(iv) ofthis section (withholding statement), andit does not know, and has no reason toknow, that another withholding agentfailed to withhold the correct amount orfailed to report the payment correctly

under §1.1461–1(c). A withholding for-eign partnership’s obligations to withholdand report shall be determined in accor-dance with its withholding foreign part-nership agreement.

(d) Presumption rules—(1) In general.This paragraph (d) contains the applicablepresumptions for a withholding agent (in-cluding a partnership) to determine theclassification and status of a partnershipand its partners in the absence of docu-mentation. The provisions of§1.1441–1(b)(3)(iv) (regarding the 90-day grace period) and§1.1441–1(b)(3)(vii) through (ix) shallapply for purposes of this paragraph (d).

(2) Determination of partnership statusas U.S. or foreign in the absence of docu-mentation. In the absence of a valid rep-resentation of U.S. partnership status inaccordance with paragraph (b)(1) of thissection or of foreign partnership status inaccordance with paragraph (c)(2)(i) or(3)(i) of this section, the withholdingagent shall determine the classification ofthe payee under the presumptions setforth in §1.1441–1(b)(3)(ii). If the with-holding agent treats the payee as a part-nership under §1.1441–1(b)(3)(ii), thewithholding agent shall presume the part-nership to be a U.S. partnership unlessthere are indicia of foreign status. If thereare indicia of foreign status, the withhold-ing agent may presume the partnership tobe foreign. Indicia of foreign status existonly if the withholding agent has actualknowledge of the payee’s employer iden-tification number and that number beginswith the two digits “98,” the withholdingagent’s communications with the payeeare mailed to an address in a foreigncountry, or the payment is made outsidethe United States (as defined in§1.6049–5(e)). For rules regarding reli-able association with a withholding cer-tificate from a domestic or a foreign part-nership, see §1.1441–1(b)(2)(vii).

(3) Determination of partners’ status inthe absence of certain documentation. Ifa nonwithholding foreign partnership hasprovided a nonwithholding foreign part-nership withholding certificate underparagraph (c)(3)(iii) of this section thatwould be valid except that the withhold-ing agent cannot reliably associate all or aportion of the payment with valid docu-mentation from a partner of the partner-ship, then the withholding agent may

June 5, 2000 1202 2000–23 I.R.B.

apply the presumption rule of this para-graph (d)(3) with respect to all or a por-tion of the payment for which documenta-tion has not been received. See§1.1441–1(b)(2)(vii)(A) and (B) for rulesregarding reliable association. The pre-sumption rule of this paragraph (d)(3)also applies to a person that is presumedto be a foreign partnership under the ruleof paragraph (d)(2) of this section. Anyportion of a payment that the withholdingagent cannot treat as reliably associatedwith valid documentation from a partnermay be presumed made to a foreignpayee. As a result, any payment of anamount subject to withholding is subjectto withholding at a rate of 30 percent.Any payment that is presumed to be madeto an undocumented foreign payee mustbe reported on Form 1042-S. See§1.1461–1(c).

(4) Determination by a withholdingforeign partnership of the status of itspartners. A withholding foreign partner-ship shall determine whether the partnersor some other persons are the payees ofthe partners’ distributive shares of anypayment made by a withholding foreignpartnership by applying the rules of§1.1441–1(b)(2), paragraph (c)(1) of thissection (in the case of a partner that is aforeign partnership), and paragraph (e)(3)of this section (in the case of a partner thatis a foreign estate or a foreign trust). Fur-ther, the provisions of paragraph (d)(3) ofthis section shall apply to determine thestatus of partners and the applicable with-holding rates to the extent that, at the timethe foreign partnership is required towithhold on a payment, it cannot reliablyassociate the amount with documentationfor any one or more of its partners.

(e) Foreign trusts and estates—(1) Ingeneral. This paragraph (e) providesrules applicable to payments of amountssubject to withholding (as defined in§1.1441–2(a)) that a withholding agentmay treat as made to any foreign trust or aforeign estate. For rules relating to pay-ments to a U.S. trust or a U.S. estate, seeparagraph (b) of this section. For the def-initions of foreign simple trust, foreigncomplex trust, and foreign grantor trust,see §1.1441–1(c)(24), (25), and (26).

(2) Payments to foreign complex trustsand foreign estates. Under §1.1441–1(c)(6)(ii)(D), a foreign complex trust orforeign estate is generally considered to

be the beneficial owner of income paid tothe foreign complex trust or foreign es-tate. See paragraph (e)(4) of this sectionfor rules describing when a withholdingagent may treat a payment as made to aforeign complex trust or a foreign estate.

(3) Payees of payments to foreign sim-ple trusts and foreign grantor trusts—(i)Payments for which beneficiaries andowners are payees. For purposes of theregulations under chapters 3 and 61 of theInternal Revenue Code and section 3406,a foreign simple trust is not a beneficialowner or a payee of a payment. Also, aforeign grantor trust (or a portion of atrust that is a foreign grantor trust) is notconsidered a beneficial owner or a payeeof a payment. Except as otherwise pro-vided in paragraph (e)(3)(ii) of this sec-tion, the payees of a payment made to aperson that the withholding agent maytreat as a foreign simple trust or a foreigngrantor trust (or a portion of a trust that isa foreign grantor trust) are determinedunder the rules of this paragraph (e)(3)(i).The payees shall be treated as the benefi-cial owners if they may be so treatedunder §1.1441–1(c)(6)(ii)(C) and theyprovide documentation supporting theirstatus as the beneficial owners. The pay-ees of a payment to a foreign simple trustor foreign grantor trust are determined asfollows—

(A) If the withholding agent can reli-ably associate a payment with a validForm W-9 provided under §1.1441–1(d)from a beneficiary or owner of the foreigntrust, then the beneficiary or owner is aU.S. payee;

(B) If the withholding agent can reli-ably associate a payment with a validForm W-8, or other appropriate documen-tation, provided under §1.1441–1(e)(1)(ii)from a beneficiary or owner of the foreigntrust, then the beneficiary or owner is apayee that is a foreign beneficial owner;

(C) If the withholding agent can reli-ably associate a payment with a qualifiedintermediary withholding certificateunder §1.1441–1(e)(3)(ii), a nonqualifiedintermediary withholding certificateunder §1.1441–1(e)(3)(ii), or a U.S.branch withholding certificate under§1.1441–1(e)(3)(v), then the rules of§1.1441–1(b)(2)(v) shall apply to deter-mine the payee in the same manner as ifthe payment had been paid directly tosuch intermediary or U.S. branch;

(D) If the withholding agent can reli-ably associate a payment with a withhold-ing foreign partnership withholding cer-tificate under paragraph (c)(2)(iv) of thissection or a nonwithholding foreign part-nership withholding certificate underparagraph (c)(3)(iii) of this section, thenthe rules of paragraph (c)(1)(i) or (ii) ofthis section shall apply to determine thepayee;

(E) If the withholding agent can reli-ably associate the payment with a foreignsimple trust withholding certificate or aforeign grantor trust withholding certifi-cate (both described in paragraph(e)(5)(iii) of this section) from a second orhigher-tier foreign simple trust or foreigngrantor trust, then the rules of this para-graph (e)(3)(i) or paragraph (e)(3)(ii) ofthis section shall apply to determinewhether the payment is treated as made toa beneficiary or owner of the higher-tiertrust or to the trust itself in the same man-ner as if the payment had been made di-rectly to the higher-tier trust; and

(F) If the withholding agent cannot reli-ably associate a payment with a withhold-ing certificate or other appropriate docu-mentation, the payees shall be determinedby applying the presumptions describedin paragraph (e)(6) of this section.

(ii) Payments for which trust is payee.A payment to a person that the withhold-ing agent may treat as made to a foreigntrust under paragraph (e)(5)(iii) of thissection is treated as a payment to the trust,and not to a beneficiary of the trust, onlyif—

(A) The withholding agent can reliablyassociate the payment with a foreign com-plex trust withholding certificate underparagraph (e)(4) of this section;

(B) The withholding agent can reliablyassociate the payment with a foreign sim-ple trust withholding certificate underparagraph (e)(5)(iii) of this section certi-fying that the payment is income that istreated as effectively connected with theconduct of a trade or business in theUnited States; or

(C) The withholding agent can treat theincome as effectively connected incomeunder the presumption rules of§1.1441–4(a)(3)(i).

(4) Reliance on claim of foreign com-plex trust or foreign estate status. A with-holding agent may treat a payment asmade to a foreign complex trust or a for-

2000–23 I.R.B. 1203 June 5, 2000

eign estate if the withholding agent canreliably associate the payment with a ben-eficial owner withholding certificate de-scribed in §1.1441–1(e)(2)(i) or otherdocumentary evidence under§1.1441–6(c)(3) or (4) (regarding a claimfor treaty benefits) or §1.6049–5(c)(1)(regarding documentary evidence to es-tablish foreign status for purposes ofchapter 61 of the Internal Revenue Code)that establishes the foreign complex trustor foreign estate’s status as a beneficialowner. See paragraph (e)(6) of this sec-tion for presumption rules if documenta-tion is lacking.

(5) Foreign simple trust and foreigngrantor trust—(i) Reliance on claim of for-eign simple trust or foreign grantor truststatus. A withholding agent may treat aperson as a foreign simple trust or foreigngrantor trust if it receives from that person aforeign simple trust or foreign grantor trustwithholding certificate as described in para-graph (e)(5)(iii) of this section. A withhold-ing agent must apply the presumption rulesof §§1.1441–1(b)(3) and 1.6049–5(d) andparagraphs (d) and (e)(6) of this section tothe extent it cannot, prior to the payment,reliably associate a payment (within themeaning of §1.1441–1(b)(2)(vii)) with avalid foreign simple trust or foreign grantortrust withholding certificate, it cannot reli-ably determine how much of the paymentrelates to valid documentation provided bya payee (e.g., a person that is not itself anonqualified intermediary, flow-throughentity, or U.S. branch) associated with theforeign simple trust or foreign grantor trustwithholding certificate, or it does not havesufficient information to report the paymenton Form 1042-S or Form 1099, if reportingis required. See §1.1441–1(b)(2)(vii)(A)and (B).

(ii) Reliance on claim of reduced with-holding by a foreign simple trust or for-eign grantor trust for its beneficiaries orowners. This paragraph (e)(5)(ii) de-scribes the manner in which a withhold-ing agent may rely on a claim of reducedwithholding when making a payment to aforeign simple trust or foreign grantortrust. To the extent that a withholdingagent treats a payment to a foreign simpletrust or foreign grantor trust as a paymentto payees other than the trust in accor-dance with paragraph (e)(3)(i) of this sec-tion, it may rely on a claim for reducedwithholding by a beneficiary or owner if,

prior to the payment, the withholdingagent can reliably associate the payment(within the meaning of§1.1441–1(b)(2)(vii)) with a valid with-holding certificate or other appropriatedocumentation from a payee or beneficialowner that establishes entitlement to a re-duced rate of withholding. A withholdingcertificate or other appropriate documen-tation that establishes entitlement to a re-duced rate of withholding is a beneficialowner withholding certificate describedin §1.1441–1(e)(2)(i) or documentary evi-dence described in §1.1441–6(c)(3) or(4)or in §1.6049–5(c)(1) (for a beneficiary orowner claiming to be a foreign person anda beneficial owner, determined under theprovisions of §1.1441–1(c)(6)), a FormW–9 described in §1.1441–1(d) (for abeneficiary or owner claiming to be aU.S. payee), or a withholding foreignpartnership withholding certificate de-scribed in paragraph (c)(2)(iv) of this sec-tion. Unless a foreign simple trust or for-eign grantor trust withholding certificateis provided for income treated as incomeeffectively connected with the conduct ofa trade or business in the United States, aclaim must be presented for each payee’sportion of the payment. When making aclaim for several payees, the trust maypresent a single foreign simple trust orforeign grantor trust withholding certifi-cate with which the payees’ certificates orother appropriate documentation are asso-ciated. Where the foreign simple trust orforeign grantor trust withholding certifi-cate is provided for income that is treatedas effectively connected with the conductof a trade or business in the United Statesunder paragraph (e)(5)(iii)(D) of this sec-tion, the claim may be presented withouthaving to identify any partner’s distribu-tive share of the payment.

(iii) Withholding certificate from for-eign simple trust or foreign grantor trust.A withholding certificate furnished by aforeign simple trust or a foreign grantortrust that is not a withholding foreign trust(within the meaning of paragraph(e)(5)(v) of this section) is valid only if itis furnished on a Form W-8, an acceptablesubstitute form, or such other form as theIRS may prescribe, it is signed underpenalties of perjury by a trustee, its valid-ity has not expired, it contains the infor-mation, statements, and certifications re-quired by this paragraph (e)(5)(iii) and

§1.1441–1(e)(3)(iv), and the withholdingcertificates or other appropriate documen-tation for all of the payees (as determinedunder paragraph (e)(3)(i) of this section)to whom the certificate relates are associ-ated with the foreign simple trust or for-eign grantor trust withholding certificate.The rules of §1.1441–1(e)(4) shall applyto withholding certificates described inthis paragraph (e)(5)(iii). No withholdingcertificates or other appropriate documen-tation from persons who derive incomethrough a foreign simple trust or a foreigngrantor trust (whether or not U.S. exemptrecipients) are required to be associatedwith the foreign simple trust or foreigngrantor trust withholding certificate if thecertificate is furnished solely for incomethat is treated as effectively connectedwith the conduct of a trade or business inthe United States. Withholding certifi-cates and other appropriate documenta-tion (as determined under paragraph(e)(3)(i) of this section) that may be asso-ciated with a foreign simple trust or for-eign grantor trust withholding certificateconsist of beneficial owner withholdingcertificates under §1.1441–1(e)(2)(i), in-termediary withholding certificates under§1.1441–1(e)(3)(i), withholding foreignpartnership withholding certificates underparagraph (c)(2)(iv) of this section, non-withholding foreign partnership withhold-ing certificates under paragraph (c)(3)(iii)of this section, withholding certificatesfrom foreign trusts or estates under para-graph (e)(4) or (5)(iii) of this section, doc-umentary evidence described in§§1.1441–6(c)(3) or (4), or1.6049–5(c)(1), and any other documen-tation or certificates applicable underother provisions of the Internal RevenueCode or regulations that certify or estab-lish the status of the payee or beneficialowner as a U.S. or a foreign person.Nothing in this paragraph (e)(5)(iii) shallrequire a foreign simple trust or foreigngrantor trust to provide original documen-tation. Copies of certificates or documen-tary evidence may be passed up to theU.S. withholding agent, in which case theforeign simple trust or foreign grantortrust must retain the original documenta-tion for the same time period that the copyis required to be retained by the withhold-ing agent under §1.1441–1(e)(4)(iii) andmust provide it to the withholding agentupon request. The information, state-

June 5, 2000 1204 2000–23 I.R.B.

ment, and certifications required on a for-eign simple trust or foreign grantor trustwithholding certificate are as follows—

(A) The name, permanent residence ad-dress (as described in§1.1441–1(e)(2)(ii)), and the employeridentification number, if required, of thetrust and the country under the laws ofwhich the trust is created;

(B) A certification that the personwhose name is on the certificate is a for-eign simple trust or a foreign grantortrust;

(C) A withholding statement associatedwith the foreign simple trust or foreigngrantor trust withholding certificate thatprovides all of the information requiredby paragraph (e)(5)(iv) of this section.No withholding statement is required,however, for a foreign simple trust with-holding certificate furnished for incomethat is treated as effectively connectedwith the conduct of a trade or business inthe United States;

(D) A certification on a foreign simpletrust withholding certificate that the in-come is treated as effectively connectedwith the conduct of a trade or business inthe United States, if applicable; and

(E) Any other information, certifica-tions, or statements required by the formor accompanying instructions in additionto, or in lieu of, the information, certifica-tions, and statements described in thisparagraph (e)(5)(iii);

(iv) Withholding statement provided bya foreign simple trust or foreign grantortrust. The provisions of§1.1441–1(e)(3)(iv) (regarding a with-holding statement) shall apply to a foreignsimple trust or foreign grantor trust bysubstituting the term foreign simple trustor foreign grantor trust for the term non-qualified intermediary.

(v) Withholding foreign trusts. TheIRS may enter an agreement with a for-eign trust to treat the trust or estate as awithholding foreign trust. Such an agree-ment shall generally follow the same prin-ciples as an agreement with a withholdingforeign partnership under paragraph(c)(2)(ii) of this section. A withholdingagent may treat a payment to a withhold-ing foreign trust in the same manner thewithholding agent would treat a paymentto a withholding foreign partnership. TheIRS may also enter an agreement to treat atrust as a qualified intermediary in appro-

priate circumstances. See§1.1441–1(e)(5)(ii)(D).

(6) Presumption rules—(i) In general.This paragraph (e)(6) contains the applic-able presumptions for a withholding agent(including a trust or estate) to determinethe classification and status of a trust orestate and its beneficiaries or owners inthe absence of valid documentation. Theprovisions of §1.1441–1(b)(3)(iv) (re-garding the 90-day grace period) and§1.1441–1(b)(3)(vii) through (ix) shallapply for purposes of this paragraph(e)(6).

(ii) Determination of status as U.S. orforeign trust or estate in the absence ofdocumentation. In the absence of validdocumentation that establishes the U.S.status of a trust or estate under paragraph(b)(1) of this section and of documenta-tion that establishes the foreign status of atrust or estate under paragraph (e)(4) or(5)(iii) of this section, the withholdingagent shall determine the classification ofthe payee based upon the presumptionsset forth in §1.1441–1(b)(3)(ii). If, basedupon those presumptions, the withholdingagent classifies the payee as a trust or es-tate, the trust or estate shall be presumedto be a U.S. trust or U.S. estate unlessthere are indicia of foreign status, inwhich case the trust or estate shall be pre-sumed to be foreign. Indicia of foreignstatus exists if the withholding agent hasactual knowledge of the payee’s employeridentification number and that number be-gins with the two digits “98,” the with-holding agent’s communications with thepayee are mailed to an address in a for-eign country, or the payment is made out-side the United States (as defined in§1.6049–5(e)). If an undocumentedpayee is presumed to be a foreign trust itshall be presumed to be a foreign complextrust. If a withholding agent has docu-mentary evidence that establishes that anentity is a foreign trust, but the withhold-ing agent cannot determine whether theforeign trust is a complex trust, a simpletrust, or foreign grantor trust, the with-holding agent may presume that the trustis a foreign complex trust.

(iii) Determination of beneficiary orowner’s status in the absence of certaindocumentation. If a foreign simple trustor foreign grantor trust has provided a for-eign simple trust or foreign grantor trustwithholding certificate under paragraph

(e)(5)(iii) of this section but the paymentto such trust cannot be reliably associatedwith valid documentation from a specificbeneficiary or owner of the trust, then anyportion of a payment that a withholdingagent cannot treat as reliably associatedwith valid documentation from a benefi-ciary or owner may be presumed made toa foreign payee. As a result, any paymentof an amount subject to withholding issubject to withholding at a rate of 30 per-cent. Any such payment that is presumedto be made to an undocumented foreignperson must be reported on Form 1042–S.See §1.1461–1(c).* * * * *


1. Revising paragraphs (b)(1),(b)(2), and (b)(3).

2. Removing paragraph (b)(4) andredesignating paragraph (b)(5) as newparagraph (b)(4).

3. Revising paragraphs (c) and (e).The revisions read as follows:

§1.1441–6 Claim of reduced withholdingunder an income tax treaty.* * * * *

(b) Reliance on claim of reduced with-holding under an income tax treaty—(1)In general. The withholding imposedunder section 1441, 1442, or 1443 on anypayment to a foreign person is eligible forreduction under the terms of an incometax treaty only to the extent that such pay-ment is treated as derived by a resident ofan applicable treaty jurisdiction, such res-ident is a beneficial owner, and all otherrequirements for benefits under the treatyare satisfied. See section 894 and the reg-ulations thereunder to determine whethera resident of a treaty country derives theincome. Absent actual knowledge or rea-son to know otherwise, a withholdingagent may rely on a claim that a beneficialowner is entitled to a reduced rate of with-holding based upon an income tax treatyif, prior to the payment, the withholdingagent can reliably associate the paymentwith a beneficial owner withholding cer-tificate, described in §1.1441–1(e)(2),that contains the information necessary tosupport the claim, or, in the case of a pay-ment of income described in paragraph(c)(2) of this section made outside theUnited States with respect to an offshoreaccount, documentary evidence describedin paragraphs (c)(3), (4) and (5) of this

2000–23 I.R.B. 1205 June 5, 2000

section. See §§1.6049–5(e) for the defini-tion of payments made outside the UnitedStates and 1.6049–5(c)(1) for the defini-tion of offshore account. For purposes ofthis paragraph (b)(1), a beneficial ownerwithholding certificate described in§1.1441–1(e)(2)(i) contains informationnecessary to support the claim for a treatybenefit only if it includes the beneficialowner’s taxpayer identifying number (ex-cept as otherwise provided in paragraph(c)(1) of this section) and the representa-tions that the beneficial owner derives theincome under section 894 and the regula-tions thereunder, if required, and meetsthe limitation on benefits provisions ofthe treaty, if any. The withholding certifi-cate must also contain any other represen-tations required by this section and anyother information, certifications, or state-ments as may be required by the form oraccompanying instructions in addition to,or in place of, the information and certifi-cations described in this section. Absentactual knowledge or reason to know thatthe claims are incorrect (and subject to thestandards of knowledge in §1.1441–7(b)),a withholding agent may rely on theclaims made on a withholding certificateor on documentary evidence. A withhold-ing agent may also rely on the informa-tion contained in a withholding statementprovided under §§1.1441–1(e)(3)(iv) and1.1441–5(c)(3)(iv) and (e)(5)(iv) to deter-mine whether the appropriate statementsregarding section 894 and limitation onbenefits have been provided in connectionwith documentary evidence. If the bene-ficial owner is a person related to thewithholding agent within the meaning ofsection 482, the withholding certificatemust also contain a representation that thebeneficial owner will file the statementrequired under §301.6114–1(d) of thischapter (if applicable). The requirementto file an information statement undersection 6114 for income subject to with-holding applies only to amounts receivedduring the calendar year that, in the ag-gregate, exceed $500,000. See§301.6114–1(d) of this chapter. The In-ternal Revenue Service (IRS) may applythe provisions of §1.1441–1(e)(1)(ii)(B)to notify the withholding agent that thecertificate cannot be relied upon to grantbenefits under an income tax treaty. See§1.1441–1(e)(4)(viii) regarding relianceon a withholding certificate by a with-

holding agent. The provisions of§1.1441–1(b)(3)(iv) dealing with a 90-day grace period shall apply for purposesof this section.

(2) Payment to fiscally transparent en-tity—(i) In general. If the person claiminga reduced rate of withholding under an in-come tax treaty is the interest holder of anentity that is considered to be fiscally trans-parent (as defined in the regulations undersection 894) by the interest holder’s juris-diction with respect to an item of income,then, with respect to such income derivedby that person through the entity, the entityshall be treated as a flow-through entity andmay provide a flow-through withholdingcertificate with which the withholding cer-tificate or other documentary evidence ofthe interest holder that supports the claimfor treaty benefits is associated. For pur-poses of the preceding sentence, interestholders do not include any direct or indirectinterest holders that are themselves treatedas fiscally transparent entities with respectto that income by the interest holder’s juris-diction. See §1.1441–1(c)(23) and (e)(3)(i)for the definition of flow-through entity andflow-through withholding certificate. Theentity may provide a beneficial owner with-holding certificate, or beneficial ownerdocumentation, with respect to any remain-ing portion of the income to the extent theentity is receiving income and is not treatedas fiscally transparent by its own jurisdic-tion. Further, the entity may claim a re-duced rate of withholding with respect tothe portion of a payment for which it is nottreated as fiscally transparent if it meets allthe requirements to make such a claim and,in the case of treaty benefits, it provides thedocumentation required by paragraph(b)(1) of this section. If dual claims, as de-scribed in paragraph (b)(2)(iii) of this sec-tion, are made, multiple withholding certifi-cates may have to be furnished. Multiplewithholding certificates may also have tobe furnished if the entity receives incomefor which a reduction of withholding isclaimed under a provision of the InternalRevenue Code (e.g., portfolio interest) andincome for which a reduction of withhold-ing is claimed under an income tax treaty.

(ii) Certification by qualified interme-diary. Notwithstanding paragraph(b)(2)(i) of this section, a foreign entitythat is fiscally transparent, as defined inthe regulations under section 894, that isalso a qualified intermediary for purposes

of claiming a reduced rate of withholdingunder an income tax treaty for its interestholders (who are deriving the income paidto the entity as residents of an applicabletreaty jurisdiction) may furnish a singlequalified intermediary withholding cer-tificate, as described in§1.1441–1(e)(3)(ii), for amounts forwhich it claims a reduced rate of with-holding under an income tax treaty on be-half of its interest holders.

(iii) Dual treatment. Under paragraph(b)(2)(i) of this section, a withholdingagent may make a payment to a foreignentity that is simultaneously claiming tobe the beneficial owner of a portion of theincome (whether or not it is also claiminga reduced rate of tax on its own behalf)and a reduced rate on behalf of persons intheir capacity as interest holders in the en-tity with respect to the same, or a differ-ent, portion of the income. If the sameportion of a payment may be reliably as-sociated with both the entity’s claim andan interest holder’s claim, the withholdingagent may choose to reject both claimsand request new documentation and infor-mation allocating the payment among thebeneficial owners of the payment or thewithholding agent may choose whichclaim to apply. If the entity and the inter-est holder’s claims are reliably associatedwith separate portions of the payment, thewithholding agent may, at its option, ac-cept such dual claims based on withhold-ing certificates or other appropriate docu-mentation furnished by the entity and itsinterest holders with respect to their re-spective shares of the payment eventhough this will result in the withholdingagent treating the entity differently withrespect to different portions of the samepayment. Alternatively, the withholdingagent may choose to apply only the claimmade by the entity, provided the entitymay be treated as a beneficial owner ofthe income. If the withholding agent doesnot accept claims for a reduced rate ofwithholding presented by any one or moreof the interest holders, or by the entity,any interest holder or the entity may sub-sequently claim a refund or credit of anyamount so withheld to the extent the inter-est holder’s or entity’s share of such with-holding exceeds the amount of tax due.

(iv) Examples. The following exam-ples illustrate the rules of this paragraph(b)(2):

June 5, 2000 1206 2000–23 I.R.B.

Example 1. (i) Facts. Entity E is a business or-ganization formed under the laws of country Y.Country Y has an income tax treaty with the UnitedStates. The treaty contains a limitation on benefitsprovision. E receives U.S. source royalties fromwithholding agent W and claims a reduced rate ofwithholding under the U.S.-Y tax treaty on its ownbehalf (rather than on behalf of its interest holders).E furnishes a beneficial owner withholding certifi-cate described in paragraph (b)(1) of this section thatrepresents that E is a resident of country Y (withinthe meaning of the U.S.-Y tax treaty), is the benefi-cial owner of the income, derives the income undersection 894 and the regulations thereunder, and isnot precluded from claiming benefits by the treaty’slimitation on benefits provision.

(ii) Analysis. Absent actual knowledge or reasonto know otherwise, W may rely on the representa-tions made by E to apply a reduced rate of withhold-ing.

Example 2. (i) Facts. The facts are the same asunder Example 1, except that one of E’s interestholders, H, is an entity organized in country Z. TheU.S.-Z tax treaty reduces the rate on royalties to zerowhereas the rate on royalties under the U.S.-Y taxtreaty applicable to E is 5 percent. H is not fiscallytransparent under country Z’s tax law with respect tosuch income. H furnishes a beneficial owner with-holding certificate to E that represents that H de-rives, within the meaning of section 894 and the reg-ulations thereunder, its share of the royalty incomepaid to E as a resident of country Z, is the beneficialowner of the royalty income, and is not precludedfrom claiming treaty benefits by virtue of the limita-tion on benefits provision in the U.S.-Z treaty. Efurnishes to W a flow-through withholding certifi-cate described in §1.1441-1(e)(3)(i) to which it at-taches H’s beneficial owner withholding certificateand a withholding statement for the portion of thepayment that H claims as its distributive share of theroyalty income. E also furnishes to W a beneficialowner withholding certificate for itself for the por-tion of the payment that H does not claim as its dis-tributive share.

(ii) Analysis. Absent actual knowledge or reasonto know otherwise, W may rely on the documenta-tion furnished by E to treat the royalty payment to asingle foreign entity (E) as derived by different resi-dents of tax treaty countries as a result of the claimspresented under different treaties. W may, at its op-tion, grant dual treatment, that is, a reduced rate ofzero percent under the U.S.-Z treaty on the portionof the royalty payment that H claims to derive as aresident of country Z and a reduced rate of 5 percentunder the U.S.-Y treaty for the balance. However,under paragraph (b)(2)(iii) of this section, W may, atits option, treat E as the only relevant person deriv-ing the royalty and grant benefits under the U.S.-Ytreaty only.

Example 3. (i) Facts. E is a business organiza-tion formed under the laws of country X. Country Xhas an income tax treaty with the United States. Ehas two interest holders, H1, organized in country Y,and H2, organized in country Z. E receives from W,a U.S. withholding agent, U.S. source royalties andinterest that is eligible for the portfolio interest ex-ception under sections 871(h) and 881(c), providedW receives the appropriate beneficial owner state-ment required under section 871(h)(5). E is classi-fied as a corporation under U.S. tax law principles.

Country X, E’s country of organization, treats E asan entity that is not fiscally transparent with respectto items of income under the regulations under sec-tion 894. Under the U.S.-X income tax treaty, royal-ties are subject to 5 percent rate of withholding.Country Y, H1’s country of organization, treats E asfiscally transparent with respect to items of incomeunder section 894 and H1 as not fiscally transparentwith respect to items of income. Under the countryY-U.S. income tax treaty, royalties are exempt fromU.S. tax. Country Z, H2’s country of organization,treats E as not fiscally transparent under section 894with respect to items of income. E provides W witha flow-through beneficial owner withholding certifi-cate with which it associates a beneficial ownerwithholding certificate from H1. H1’s withholdingcertificate states that H1 is a resident of country Y,derives the royalty income under section 894, meetsthe applicable limitations on benefits provisions ofthe U.S.-Y treaty, and is the beneficial owner of theincome. The withholding statement attached to E’sflow-through withholding certificate allocates one-half of the royalty payment to H1. E also providesW with a beneficial owner withholding certificatefor the interest income and the remaining one-half ofthe royalty income. The withholding certificatestates that E is a resident of country X, derives theroyalty income under section 894, meets the limita-tion on benefits provisions of the U.S.-X treaty, andis the beneficial owner of the income.

(ii) Analysis. Absent actual knowledge or reasonto know that the claims are incorrect, W may treatone-half of the royalty derived by E as subject to a 5percent withholding rate and one-half of the royaltyas derived by H1 and subject to no withholding.Further, it may treat all of the interest as being paidto E and as qualifying for the portfolio interest ex-ception. W can, at its option, treat the entire royaltyas paid to E and subject it to withholding at a 5 per-cent rate of withholding. In that case, H1 would beentitled to claim a refund with respect to its one-halfof the royalty.

(3) Certified TIN. The IRS may issueguidance requiring a foreign person claim-ing treaty benefits and for whom a TIN isrequired to establish with the IRS, at thetime the TIN is requested or after the TIN isissued, that the person is a resident in atreaty country and meets other conditions(such as limitation on benefits provisions)of the treaty. See §601.601(d)(2) of thischapter.* * * * *

(c) Exemption from requirement to fur-nish a taxpayer identifying number andspecial documentary evidence rules forcertain income—(1) General rule. In thecase of income described in paragraph(c)(2) of this section, a withholding agentmay rely on a beneficial owner withhold-ing certificate described in paragraph(b)(1) of this section without regard to therequirement that the withholding certifi-cate include the beneficial owner’s tax-payer identifying number. In the case of

payments of income described in para-graph (c)(2) of this section made outsidethe United States (as defined in§1.6049–5(e)) with respect to an offshoreaccount (as defined in §1.6049–5(c)(1)), awithholding agent may, as an alternativeto a withholding certificate described inparagraph (b)(1) of this section, rely on acertificate of residence described in para-graph (c)(3) of this section or documen-tary evidence described in paragraph(c)(4) of this section, relating to the bene-ficial owner, that the withholding agenthas reviewed and maintains in its recordsin accordance with §1.1441–1(e)(4)(iii).In the case of a payment to a person otherthan an individual, the certificate of resi-dence or documentary evidence must beaccompanied by the statements describedin paragraphs (c)(5)(i) and (ii) of this sec-tion regarding limitation on benefits andwhether the amount paid is derived bysuch person or by one of its interest hold-ers. The withholding agent maintains thereviewed documents by retaining eitherthe documents viewed or a photocopythereof and noting in its records the dateon which, and by whom, the documentswere received and reviewed. This para-graph (c)(1) shall not apply to amountsthat are exempt from withholding basedon a claim that the income is effectivelyconnected with the conduct of a trade orbusiness in the United States.

(2) Income to which special rulesapply. The income to which paragraph(c)(1) of this section applies is dividendsand interest from stocks and debt obliga-tions that are actively traded, dividendsfrom any redeemable security issued byan investment company registered underthe Investment Company Act of 1940 (15U.S.C. 80a–1), dividends, interest, or roy-alties from units of beneficial interest in aunit investment trust that are (or wereupon issuance) publicly offered and areregistered with the Securities and Ex-change Commission under the SecuritiesAct of 1933 (15 U.S.C. 77a) and amountspaid with respect to loans of securities de-scribed in this paragraph (c)(2). For pur-poses of this paragraph (c)(2), a stock ordebt obligation is actively traded if it isactively traded within the meaning of sec-tion 1092(d) and §1.1092(d)–1 when doc-umentation is provided.

(3) Certificate of residence. A certifi-cate of residence referred to in paragraph

2000–23 I.R.B. 1207 June 5, 2000

(c)(1) of this section is a certification is-sued by an appropriate tax official of thetreaty country of which the taxpayerclaims to be a resident that the taxpayerhas filed its most recent income tax returnas a resident of that country (within themeaning of the applicable tax treaty). Thecertificate of residence must have been is-sued by such official within three yearsprior to its being presented to the with-holding agent, or such other period as theIRS may prescribe in published guidance(see §601.601(d)(2) of this chapter). See§1.1441–1(e)(4)(ii)(A) for the period dur-ing which a withholding agent may relyon a certificate of residence. The compe-tent authorities may agree to a differentprocedure for certifying residence, inwhich case such procedure shall governfor payments made to a person claimingto be a resident of the country with whichsuch an agreement is in effect.

(4) Documentary evidence establishingresidence in the treaty country—(i) Indi-viduals. For an individual, the documen-tary evidence referred to in paragraph(c)(1) of this section is any documentationthat includes the individuals name, ad-dress, and photograph, is an official docu-ment issued by an authorized governmen-tal body (i.e., a government or agencythereof, or a municipality), and has beenissued no more than three years prior topresentation to the withholding agent. Adocument older than three years may berelied upon as proof of residence only if itis accompanied by additional evidence ofthe person’s residence in the treaty coun-try (e.g., a bank statement, utility bills, ormedical bills). Documentary evidencemust be in the form of original documentsor certified copies thereof.

(ii) Persons other than individuals. Fora person other than an individual, the doc-umentary evidence referred to in para-graph (c)(1) of this section is any docu-mentation that includes the name of theentity and the address of its principal of-fice in the treaty country, and is an officialdocument issued by an authorized gov-ernmental body (e.g., a government oragency thereof, or a municipality).

(5) Statements regarding entitlement totreaty benefits—(i) Statement regardingconditions under a limitation on benefitsprovision. In addition to the documentaryevidence described in (c)(4)(ii) of thissection, a taxpayer that is not an individ-

ual must provide a statement that it meetsone or more of the conditions set forth inthe limitation on benefits article (if any, orin a similar provision) contained in theapplicable tax treaty.

(ii) Statement regarding whether thetaxpayer derives the income. A taxpayerthat is not an individual must also pro-vide, in addition to the documentary evi-dence and the statement described inparagraph (c)(5)(i) of this section, a state-ment that any income for which it intendsto claim benefits under an applicable in-come tax treaty is income that will prop-erly be treated as derived by itself as aresident of the applicable treaty jurisdic-tion within the meaning of section 894and the regulations thereunder. This re-quirement does not apply if the taxpayerfurnishes a certificate of residence thatcertifies that fact.* * * * *

(e) Competent authority. The proce-dures described in this section may bemodified to the extent the U.S. competentauthority may agree with the competentauthority of a country with which theUnited States has an income tax treaty ineffect.* * * * *


1. Revising paragraphs (a), (b)(2)and (b)(3).

2. Adding paragraphs (b)(4)through (b)(11).

The revisions and additions read as fol-lows:§1.1441–7 General provisions relating towithholding agents.

(a) Withholding agent defined—(1) Ingeneral. For purposes of chapter 3 of theInternal Revenue Code and the regulationsunder such chapter, the term withholdingagent means any person, U.S. or foreign,that has the control, receipt, custody, dis-posal, or payment of an item of income ofa foreign person subject to withholding, in-cluding (but not limited to) a foreign inter-mediary described in §1.1441–1(e)(3)(i), aforeign partnership, or a U.S. branch de-scribed in §1.1441–1(b)(2)(iv)(A) or (E).See §§1.1441–1(b)(2) and (3) and1.1441–5(c), (d), and (e), for rules to deter-mine whether a payment is consideredmade to a foreign person. Any person whomeets the definition of a withholding agentis required to deposit any tax withheld

under §1.1461–1(a) and to make the re-turns prescribed by §1.1461–1(b) and (c),except as otherwise may be required by aqualified intermediary withholding agree-ment, a withholding foreign partnershipagreement, or a withholding foreign trustagreement. When several persons qualifyas withholding agents with respect to a sin-gle payment, only one tax is required to bewithheld and deposited. See §1.1461–1.A person who, as a nominee described in§1.6031(c)–1T, has furnished to a partner-ship all of the information required to befurnished under §1.6031(c)–1T(a) shall notbe treated as a withholding agent if it hasnotified the partnership that it is treatingthe provision of information to the partner-ship as a discharge of its obligations as awithholding agent.

(2) Examples. The following examplesillustrate the rules of paragraph (a)(1) ofthis section:

Example 1. USB is a broker organized in theUnited States. USB pays U.S. source dividends andinterest, which are amounts subject to withholdingunder §1.1441-2(a), to FC, a foreign corporation thathas an investment account with USB. USB is awithholding agent as defined in paragraph (a)(1) ofthis section.

Example 2. USB is a bank organized in theUnited States. FB is a bank organized in country X.X has an omnibus account with USB through whichFB invests in debt and equity instruments that payamounts subject to withholding as defined in§1.1441–2(a). FB is a nonqualified intermediary, asdefined in §1.1441–1(c)(14). Both USB and FB arewithholding agents as defined in paragraph (a)(1) ofthis section.

Example 3. The facts are the same as in Example2, except that FB is a qualified intermediary. BothUSB and FB are withholding agents as defined inparagraph (a)(1) of this section.

Example 4. FB is a bank organized in country X.FB has a branch in the United States. FB’s branchhas customers that are foreign persons who receiveamounts subject to withholding, as defined in§1.1441–2(a). FB is a withholding agent underparagraph (a)(1) of this section and is required towithhold and report payments of amounts subject towithholding in accordance with chapter 3 of the In-ternal Revenue Code.

Example 5. X is a foreign corporation. X paysdividends to shareholders who are foreign persons.Under section 861(a)(2)(B), a portion of the divi-dends are from sources within the United States andconstitute amounts subject to withholding within themeaning of §1.1441–2(a). The dividends are notsubject to tax under section 884(a). See 884(e)(3).X is a withholding agent under paragraph (a)(1) ofthis section.

(b) * * *(2) Reason to know. A withholding

agent shall be considered to have reasonto know if its knowledge of relevant factsor of statements contained in the with-

June 5, 2000 1208 2000–23 I.R.B.

holding certificates or other documenta-tion is such that a reasonably prudent per-son in the position of the withholdingagent would question the claims made.

(3) Financial institutions—limits onreason to know. For purposes of thisparagraph (b)(3) and paragraphs (b)(4)through (b)(10) of this section, the termswithholding certificate, documentary evi-dence, and documentation are defined in§1.1441–1(c)(16), (17) and (18). Exceptas otherwise provided in paragraphs(b)(4) through (b)(9) of this section, awithholding agent that is a financial insti-tution (including a regulated investmentcompany) that has a direct account rela-tionship with a beneficial owner (a directaccount holder) has a reason to know,with respect to amounts described in§1.1441–6(c)(2), that documentation pro-vided by the direct account holder is unre-liable or incorrect only if one or more ofthe circumstances described in paragraphs(b)(4) through (b)(9) of this section exist.If a direct account holder has provideddocumentation that is unreliable or incor-rect under the rules of paragraph (b)(4)through (b)(9) of this section, the with-holding agent may require new documen-tation. Alternatively, the withholdingagent may rely on the documentationoriginally provided if the rules of para-graphs (b)(4) through (b)(9) of this sec-tion permit such reliance based on addi-tional statements and documentation.Paragraph (b)(10) of this section provideslimits on reason to know for financial in-stitutions that receive beneficial ownerdocumentation from persons (indirect ac-count holders) that have an account rela-tionship with, or an ownership interest in,a direct account holder. For rules regard-ing reliance on Form W-9, see§31.3406(g)–3(e)(2) of this chapter.

(4) Rules applicable to withholdingcertificates—(i) In general. A withhold-ing agent has reason to know that a bene-ficial owner withholding certificate pro-vided by a direct account holder inconnection with a payment of an amountdescribed in §1.1441–6(c)(2) is unreliableor incorrect if the withholding certificateis incomplete with respect to any item onthe certificate that is relevant to the claimsmade by the direct account holder, thewithholding certificate contains any infor-mation that is inconsistent with the directaccount holder’s claim, the withholding

agent has other account information thatis inconsistent with the direct accountholder’s claim, or the withholding certifi-cate lacks information necessary to estab-lish entitlement to a reduced rate of with-holding. A withholding agent shall alsotreat a withholding certificate as unreli-able or incorrect if the name of the personon the withholding certificate indicatesthat the person is a corporation, partner-ship, trust, estate, or an individual, and theperson’s claim of classification (e.g. indi-vidual, partnership, corporation) is notconsistent with such indication and a dif-ference in classification would result in adifferent rate of withholding or a differ-ence in the person or persons to whom thepayment is reported under §1.1461–1(c)or chapter 61 of the Internal RevenueCode. For purposes of establishing a di-rect account holder’s status as a foreignperson or resident of a treaty country awithholding certificate shall be consid-ered unreliable or inconsistent with an ac-count holder’s claims only if it is not reli-able under the rules of paragraph (b)(5)and (6) of this section. A withholdingagent that relies on an agent to review andmaintain a withholding certificate is con-sidered to know or have reason to knowthe facts within the knowledge of theagent.

(ii) Examples. The rules of paragraph(b)(4) of this section are illustrated by thefollowing examples:

Example 1. F, a foreign person that has a directaccount relationship with USB, a bank that is a U.S.person, provides USB with a beneficial owner with-holding certificate for the purpose of claiming a re-duced rate of withholding on U.S. source dividends.F resides in a treaty country that has a limitation onbenefits provision in its income tax treaty with theUnited States. The withholding certificate, however,does not contain a statement regarding limitationson benefits or deriving the income under section 894as required by §1.1441–6(b)(1). USB cannot rely onthe withholding certificate to grant a reduced rate ofwithholding because it is incomplete with respect tothe claim made by F.

Example 2. F, a foreign person that has a directaccount relationship with USB, a broker that is aU.S. person, provides USB with a withholding cer-tificate for the purpose of claiming the portfolio in-terest exception under section 881(c), which appliesto foreign corporations. F indicates on its withhold-ing certificate, however, that it is a partnership.USB may not treat F as a beneficial owner of the in-terest for purposes of the portfolio interest exceptionbecause F has indicated on its withholding certifi-cate that it is a foreign partnership, and thereforeunder §1.1441–1(c)(6)(ii) it is not the beneficialowner of the interest payment.

(5) Withholding certificate—establish-

ment of foreign status. A withholdingagent has reason to know that a beneficialowner withholding certificate (as definedin §1.1441–1(e)(2)) provided by a directaccount holder in connection with a pay-ment of an amount described in§1.1441–6(c)(2) is unreliable or incorrectfor purposes of establishing the accountholder’s status as a foreign person if thecertificate is described in paragraph(b)(5)(i) or (ii) of this section.

(i) A withholding certificate is unreli-able or incorrect if the withholding certifi-cate has a permanent residence address(as defined in §1.1441–1(e)(2)(ii)) in theUnited States, the withholding certificatehas a mailing address in the United States,the withholding agent has a residence ormailing address as part of its account in-formation that is an address in the UnitedStates, or the direct account holder noti-fies the withholding agent of a new resi-dence or mailing address in the UnitedStates (whether or not provided on a with-holding certificate). A withholding agentmay, however, rely on the beneficialowner withholding certificate as estab-lishing the account holder’s foreign statusif it may do so under the provisions ofparagraph (b)(5)(i)(A) or (B) of this sec-tion.

(A) A withholding agent may treat a di-rect account holder as a foreign person ifthe beneficial owner withholding certifi-cate has been provided by an individualand—

(1) The withholding agent has in itspossession or obtains documentary evi-dence (which does not contain a U.S. ad-dress) that is no more than three years old,the documentary evidence supports theclaim of foreign status, and the direct ac-count holder provides the withholdingagent with a reasonable explanation, inwriting, supporting the account holder’sforeign status; or

(2) The account is maintained at an of-fice of the withholding agent outside theUnited States and the withholding agent isrequired to report annually a payment tothe direct account holder on a tax infor-mation statement that is filed with the taxauthority of the country in which the of-fice is located and that country has an in-come tax treaty in effect with the UnitedStates.

(B) A withholding agent may treat anaccount holder as a foreign person if the

2000–23 I.R.B. 1209 June 5, 2000

beneficial owner withholding certificatehas been provided by an entity that thewithholding agent does not know, or doesnot have reason to know, is a flow-through entity and—

(1) The withholding agent has in itspossession, or obtains, documentationthat substantiates that the entity is actuallyorganized or created under the laws of aforeign country; or


(ii) A beneficial owner withholding cer-tificate is unreliable or incorrect if it isprovided with respect to an offshore ac-count (as defined in §1.6049–5(c)(1)) andthe direct account holder has standing in-structions directing the withholding agentto pay amounts from its account to an ad-dress or an account maintained in theUnited States. The withholding agentmay treat the direct account holder as aforeign person, however, if the direct ac-count holder provides a reasonable expla-nation in writing that supports its foreignstatus.

(6) Withholding certificate—claim ofreduced rate of withholding under treaty.A withholding agent has reason to knowthat a withholding certificate (other thanForm W-9) provided by a direct accountholder in connection with a payment of anamount described in §1.1441–6(c)(2) isunreliable or incorrect for purposes of es-tablishing that the direct account holder isa resident of a country with which theUnited States has an income tax treaty if itis described in paragraphs (b)(6)(i)through (iii) of this section.

(i) A beneficial owner withholding cer-tificate is unreliable or incorrect if thepermanent residence address on the bene-ficial owner withholding certificate is notin the country whose treaty is invoked, orthe direct account holder notifies thewithholding agent of a new permanentresidence address that is not in the treatycountry. A withholding agent may, how-ever, treat a direct account holder as enti-tled to a reduced rate of withholding

under an income tax treaty if the direct ac-count holder provides a reasonable expla-nation for the permanent residence ad-dress outside the treaty country (e.g., theaddress is the address of a branch of thebeneficial owner located outside thetreaty country in which the entity is a resi-dent) or the withholding agent has in itspossession, or obtains, documentary evi-dence that establishes residency in atreaty country.

(ii) A beneficial owner withholding cer-tificate is unreliable or incorrect if thepermanent residence address on the with-holding certificate is in the applicabletreaty country but the withholding certifi-cate contains a mailing address outsidethe treaty country or the withholdingagent has a mailing address as part of itsaccount information that is outside thetreaty country. A mailing address that is aP.O. Box, in-care-of address, or address ata financial institution (if the financial in-stitution is not a beneficial owner) shallnot preclude a withholding agent fromtreating the direct account holder as a res-ident of a treaty country if such address isin the treaty country. If a withholdingagent has a mailing address (whether ornot contained on the withholding certifi-cate) outside the applicable treaty coun-try, the withholding agent may neverthe-less treat a direct account holder as aresident of an applicable treaty countryif—

(A) The withholding agent has in itspossession, or obtains, additional docu-mentation supporting the direct accountholder’s claim of residence in the applica-ble treaty country (and the additional doc-umentation does not contain an addressoutside the treaty country);

(B) The withholding agent has in itspossession, or obtains, documentationthat establishes that the direct accountholder is an entity organized in a treatycountry (or an entity managed and con-trolled in a treaty country, if the applica-ble treaty so requires);

(C) The withholding agent knows thatthe address outside the applicable treatycountry (other than a P.O. box, or in-care-of address) is a branch of a bank or insur-ance company that is a resident of the ap-plicable treaty country; or

(D) The withholding agent obtains awritten statement from the direct accountholder that reasonably establishes entitle-

ment to treaty benefits.(iii) A beneficial owner withholding

certificate is unreliable or incorrect to es-tablish entitlement to a reduced rate ofwithholding under an income tax treaty ifthe direct account holder has standing in-structions for the withholding agent topay amounts from its account to an ad-dress or an account outside the treatycountry unless the direct account holderprovides a reasonable explanation, inwriting, establishing the direct accountholder’s residence in the applicable treatycountry.

(7) Documentary evidence. A with-holding agent shall not treat documentaryevidence provided by a direct accountholder as valid if the documentary evi-dence does not reasonably establish theidentity of the person presenting the docu-mentary evidence. For example, docu-mentary evidence is not valid if it is pro-vided in person by a direct account holderthat is a natural person and the photo-graph or signature on the documentaryevidence, if any, does not match the ap-pearance or signature of the person pre-senting the document. A withholdingagent shall not rely on documentary evi-dence to reduce the rate of withholdingthat would otherwise apply under the pre-sumption rules of §§1.1441–1(b)(3),1.1441–5(d) and (e)(6), and 1.6049–5(d)if the documentary evidence contains in-formation that is inconsistent with the di-rect account holder’s claim of a reducedrate of withholding, the withholding agenthas other account information that is in-consistent with the direct account holder’sclaim, or the documentary evidence lacksinformation necessary to establish entitle-ment to a reduced rate of withholding.For example, if a direct account holderprovides documentary evidence to claimtreaty benefits and the documentary evi-dence establishes the direct accountholder’s status as a foreign person and aresident of a treaty country, but the ac-count holder fails to provide the treatystatements required by §1.1441–6(c)(5),the documentary evidence does not estab-lish the direct account holder’s entitle-ment to a reduced rate of withholding.For purposes of establishing a direct ac-count holder’s status as a foreign personor resident of a country with which theUnited States has an income tax treatywith respect to income described in

June 5, 2000 1210 2000–23 I.R.B.

§1.1441–6(c)(2), documentary evidenceshall be considered unreliable or incorrectonly if it is not reliable under the rules ofparagraph (b)(8) and (9) of this section.

(8) Documentary evidence—establish-ment of foreign status. A withholdingagent has reason to know that documen-tary evidence provided in connection witha payment of an amount described in§1.1441–6(c)(2) is unreliable or incorrectfor purposes of establishing the direct ac-count holder’s status as a foreign person ifthe documentary evidence is described inparagraphs (b)(8)(i), (ii), (iii) or (iv) ofthis section.

(i) A withholding agent shall not treatdocumentary evidence provided by an ac-count holder after December 31, 2000, asvalid for purposes of establishing the di-rect account holder’s foreign status if theonly mailing or residence address that isavailable to the withholding agent is anaddress at a financial institution (unlessthe financial institution is a beneficialowner of the income), an in-care-of ad-dress, or a P.O. box. In this case, thewithholding agent must obtain additionaldocumentation that is sufficient to estab-lish the direct account holder’s status as aforeign person. A withholding agent shallnot treat documentary evidence providedby an account holder before January 1,2001, as valid for purposes of establishinga direct account holder’s status as a for-eign person if it has actual knowledge thatthe direct account holder is a U.S. personor if it has a mailing or residence addressfor the direct account holder in the UnitedStates. If a withholding agent has an ad-dress for the direct account holder in theUnited States, the withholding agent maynevertheless treat the direct accountholder as a foreign person if it can so treatthe direct account holder under the rulesof paragraph (b)(8)(ii) of this section.

(ii) Documentary evidence is unreliableor incorrect to establish a direct accountholder’s status as a foreign person if thewithholding agent has a mailing or resi-dence address (whether or not on the doc-umentation) for the direct account holderin the United States or if the direct ac-count holder notifies the withholdingagent of a new address in the UnitedStates. A withholding agent may, how-ever, rely on documentary evidence as es-tablishing the direct account holder’s for-eign status if it may do so under the

provisions of paragraph (b)(8)(ii)(A) or(B) of this section.

(A) A withholding agent may treat a di-rect account holder that is an individual asa foreign person even if it has a mailing orresidence address for the direct accountholder in the United States if the with-holding agent—

(1) Has in its possession or obtains ad-ditional documentary evidence (whichdoes not contain a U.S. address) support-ing the claim of foreign status and a rea-sonable explanation in writing supportingthe account holder’s foreign status;

(2) Has in its possession or obtains avalid beneficial owner withholding cer-tificate on Form W-8 and the Form W-8contains a permanent residence addressoutside the United States and a mailingaddress outside the United States (or if amailing address is inside the United Statesthe direct account holder provides a rea-sonable explanation in writing supportingthe direct account holder’s foreign status);or


(B) A withholding agent may treat a di-rect account holder that is an entity (otherthan a flow-through entity) as a foreignperson even if it has a mailing or resi-dence address for the direct accountholder in the United States if the with-holding agent—

(1) Has in its possession, or obtains,documentation that substantiates that theentity is actually organized or createdunder the laws of a foreign country;

(2) Obtains a valid beneficial ownerwithholding certificate on Form W-8 andthe Form W-8 contains a permanent resi-dence address outside the United Statesand a mailing address outside the UnitedStates (or if a mailing address is inside theUnited States the direct account holderprovides additional documentary evi-dence sufficient to establish the direct ac-count holder’s foreign status); or

(3) The account is maintained at an of-fice of the withholding agent outside the

United States and the withholding agent isrequired to report annually a payment tothe direct account holder on a tax infor-mation statement that is filed with the taxauthority of the country in which the of-fice is located and that country has an in-come tax treaty in effect with the UnitedStates.

(iii) Documentary evidence is unreli-able or incorrect if the direct accountholder has standing instructions directingthe withholding agent to pay amountsfrom its account to an address or an ac-count maintained in the United States.The withholding agent may treat the di-rect account holder as a foreign person,however, if the account holder provides areasonable explanation in writing thatsupports its foreign status.

(9) Documentary evidence—claim ofreduced rate of withholding under treaty.A withholding agent has reason to knowthat documentary evidence provided inconnection with a payment of an amountdescribed in §1.1441–6(c)(2) is unreliableor incorrect for purposes of establishingthat a direct account holder is a resident ofa country with which the United Stateshas an income tax treaty if it is describedin paragraph (b)(9)(i) or (ii) of this sec-tion.

(i) Documentary evidence is unreliableor incorrect if the withholding agent has amailing or residence address for the directaccount holder (whether or not on thedocumentary evidence) that is outside theapplicable treaty country, or the only ad-dress that the withholding agent has(whether in or outside of the applicabletreaty country) is a P.O. box, an in-care-ofaddress, or the address of a financial insti-tution (if the financial institution is not thebeneficial owner). If a withholding agenthas a mailing or residence address for thedirect account holder outside the applica-ble treaty country, the withholding agentmay nevertheless treat a direct accountholder as a resident of an applicable treatycountry if the withholding agent—

(A) Has in its possession, or obtains,additional documentary evidence support-ing the direct account holder’s claim ofresidence in the applicable treaty country(and the documentary evidence does notcontain an address outside the applicabletreaty country, a P.O. box, an in-care-ofaddress, or the address of a financial insti-tution);

2000–23 I.R.B. 1211 June 5, 2000

(B) Has in its possession, or obtains,documentary evidence that establishes thedirect account holder is an entity orga-nized in a treaty country (or an entitymanaged and controlled in a treaty coun-try, if the applicable treaty so requires); or

(C) Obtains a valid beneficial ownerwithholding certificate on Form W-8 thatcontains a permanent residence addressand a mailing address in the applicabletreaty country.

(ii) Documentary evidence is unreliableor incorrect if the direct account holderhas standing instructions directing thewithholding agent to pay amounts fromits account to an address or an accountmaintained outside the treaty country un-less the direct account holder provides areasonable explanation, in writing, estab-lishing the direct account holder’s resi-dence in the applicable treaty country.

(10) Limits on reason to know—indi-rect account holders. A financial institu-tion that receives documentation from apayee through a nonqualified intermedi-ary, a flow-through entity, or a U.S.branch described in §1.1441–1(b)(2)(iv)(other than a U.S. branch that is treated asa U.S. person) with respect to a paymentof an amount described in§1.1441–6(c)(2) has reason to know thatthe documentation is unreliable or incor-rect if a reasonably prudent person in theposition of a withholding agent wouldquestion the claims made. This standardrequires, but is not limited to, a withhold-ing agent’s compliance with the rules ofparagraphs (b)(10)(i) through (iii).

(i) The withholding agent must reviewthe withholding statement described in§1.1441–1(e)(3)(iv) and may not rely oninformation in the statement to the extentthe information does not support theclaims made for any payee. For this pur-pose, a withholding agent may not treat apayee as a foreign person if an address inthe United States is provided for suchpayee and may not treat a person as a res-ident of a country with which the UnitedStates has an income tax treaty if the ad-dress for that person is outside the applic-able treaty country. Notwithstanding aU.S. address or an address outside a treatycountry, the withholding agent may treat apayee as a foreign person or a foreign per-son as a resident of a treaty country if areasonable explanation is provided, inwriting, by the nonqualified intermediary,

flow-through entity, or U.S. branch sup-porting the payee’s foreign status or theforeign person’s residency in a treatycountry.

(ii) The withholding agent must revieweach withholding certificate in accor-dance with the requirements of para-graphs (b)(5) and (6) of this section andverify that the information on the with-holding certificate is consistent with theinformation on the withholding statementrequired under §1.1441–1(e)(3)(iv). Ifthere is a discrepancy between the with-holding certificate and the withholdingstatement, the withholding agent maychoose to rely on the withholding certifi-cate, if valid, and instruct the nonqualifiedintermediary, flow-through entity, or U.S.branch to correct the withholding state-ment or apply the presumption rules of§§1.1441–1(b), 1.1441–5(d) and (e)(6),and 1.6049–5(d) to the payment allocableto the payee who provided the withhold-ing certificate relates. A withholdingagent that receives a withholding certifi-cate before December 31, 2001, is not re-quired to review the information on with-holding certificates or determine if it isconsistent with the information on thewithholding statement until December 31,2001. A withholding agent may withholdand report in accordance with a withhold-ing statement until December 31, 2001,unless it has actually performed the verifi-cation procedures required by this para-graph (b)(10)(ii) and determined that thewithholding statement is inaccurate withrespect to a particular payee.

(iii) The withholding agent must re-view the documentary evidence providedby the nonqualified intermediary, flow-through entity, or U.S. branch to deter-mine that there is no obvious indicationthat the payee is a U.S. non-exempt recip-ient or that the documentary evidencedoes not establish the identity of the per-son who provided the documentation(e.g., the documentary evidence does notappear to be an identification document).

(11) Additional guidance. The IRSmay prescribe other circumstances forwhich a withholding certificate or docu-mentary evidence is unreliable or incor-rect in addition to the circumstances de-scribed in paragraph (b) of this section toestablish an account holder’s status as aforeign person or a beneficial owner enti-tled to a reduced rate of withholding in

published guidance (see §601.601(d)(2)of this chapter).* * * * *

Par. 10. Effective January 1, 2001,§1.1441–9 is amended by revising para-graph (b)(2) to read as follows:§1.1441–9 Exemption from withholdingon exempt income of a foreign tax-exemptorganization, including foreign privatefoundations.* * * * *

(b) * * *(2) Withholding certificate. A with-

holding certificate under this paragraph(b)(2) is valid only if it is a Form W-8 andif, in addition to other applicable require-ments, the Form W-8 includes the tax-payer identifying number of the organiza-tion whose name is on the certificate, andit certifies that the Internal Revenue Ser-vice (IRS) has issued a favorable determi-nation letter (and the date thereof) that iscurrently in effect, what portion, if any, ofthe amounts paid constitute income in-cludible under section 512 in computingthe organization’s unrelated business tax-able income, and, if the organization isdescribed in section 501(c)(3), whether itis a private foundation described in sec-tion 509. Notwithstanding the precedingsentence, if the organization cannot cer-tify that it has been issued a favorable de-termination letter that is still in effect, itswithholding certificate is neverthelessvalid under this paragraph (b)(2) if the or-ganization attaches to the withholdingcertificate an opinion that is acceptable tothe withholding agent from a U.S. counsel(or any other person as the IRS may pre-scribe in published guidance (see§601.601(d)(2) of this chapter)) conclud-ing that the organization is described insection 501(c). If the determination letteror opinion of counsel to which the with-holding certificate refers concludes thatthe organization is described in section501(c)(3), and the certificate further certi-fies that the organization is not a privatefoundation described in section 509, anaffidavit of the organization setting forthsufficient facts concerning the operationsand support of the organization for the In-ternal Revenue Service (IRS) to deter-mine that such organization would belikely to qualify as an organization de-scribed in section 509(a)(1), (2), (3), or(4) must be attached to the withholdingcertificate. An organization that provides

June 5, 2000 1212 2000–23 I.R.B.

an opinion of U.S. counsel or an affidavitmay provide the same opinion or affidavitto more than one withholding agent pro-vided that the opinion is acceptable toeach withholding agent who receives it inconjunction with a withholding certifi-cate. Any such opinion of counsel or affi-davit must be renewed whenever there isa change in facts or circumstances that arerelevant to determine the organization’sstatus under section 501(c) or, if relevant,that the organization is or is not a privatefoundation described in section 509.* * * * *


1. Removing the last sentence ofparagraph (a)(1).

2. Removing paragraphs (b)(2) and(b)(3) and redesignating paragraph (b)(4)as new paragraph (b)(2).

3. Revising paragraphs (c)(1),(c)(2), (c)(3), and (c)(4).

4. Removing paragraphs (c)(5),(c)(6), and (c)(7), and redesignating para-graph (c)(8) as new paragraph (c)(5).

The revisions read as follows:§1.1461–1 Payment and returns of taxwithhold.* * * * *

(c) Information returns—(1) Filing re-quirement—(i) In general. A withholdingagent (other than an individual who is notacting in the course of a trade or businesswith respect to a payment) must make aninformation return on Form 1042-S (orsuch other form as the IRS may prescribe)to report the amounts subject to reporting,as defined in paragraph (c)(2) of this sec-tion, that were paid during the precedingcalendar year. Notwithstanding the pre-ceding sentence, any person that with-holds or is required to withhold anamount under sections 1441, 1442, or1443 must file a Form 1042-S for the pay-ment withheld upon whether or not thatperson is engaged in a trade or businessand whether or not the payment is anamount subject to reporting. A Form1042-S shall be prepared for each recipi-ent of an amount subject to reporting.The Form 1042-S shall be prepared insuch manner as the form and accompany-ing instructions prescribe. One copy ofthe Form 1042-S shall be filed with theIRS on or before March 15 of the calendaryear following the year in which theamount subject to reporting was paid. It

shall be filed with a transmittal form asprovided in the instructions to the Form1042-S and to the transmittal form. With-holding certificates, documentary evi-dence, or other statements or documenta-tion provided to a withholding agent arenot required to be attached to the form.Another copy of the Form 1042-S must befurnished to the recipient for whom theform is prepared (or any other person, asrequired under this paragraph (c) or theinstructions to the form) on or beforeMarch 15 of the calendar year followingthe year in which the amount subject toreporting was paid. The withholdingagent must retain a copy of each Form1042-S for the statute of limitations on as-sessment and collection applicable to theForm 1042 to which the Form 1042-S re-lates.

(ii) Recipient—(A) Defined. For pur-poses of this section, the term recipientmeans—

(1) A beneficial owner as defined inparagraph (c)(6) of this section, includinga foreign estate or a foreign complextrust, as defined in §1.1441–1(c)(25);

(2) A qualified intermediary as definedin §1.1441–1(e)(5)(ii);

(3) A withholding foreign partnershipas defined in §1.1441–5(c)(2) or a with-holding foreign trust under§1.1441–5(e)(5)(v);

(4) An authorized foreign agent as de-fined in §1.1441–7(c);

(5) A U.S. branch that is treated as aU.S. person under §1.1441–1(b)-(2)(iv)(A);

(6) A nonwithholding foreign partner-ship or a foreign simple trust as defined in§1.1441–1(c)(24), but only to the extentthe income is (or is treated as) effectivelyconnected with the conduct of a trade orbusiness in the United States by such en-tity;

(7) A payee, as defined in§1.1441–1(b)(2) that is presumed to be aforeign person under the presumptionrules of §1.1441–1(b)(3); 1.1441–5(d) or(e)(6), or 1.6049–5(d); and

(8) Any other person as required onForm 1042-S or the instructions to theform.

(B) Persons that are not recipients. Arecipient does not include—

(1) A nonqualified intermediary;(2) A payment to a wholly-owned en-

tity that is disregarded under

§301.7701–2(c)(2) of this chapter as anentity separate from its owner;

(3) A flow-through entity, as defined in§1.1441–1(c)(23) (to the extent it is re-ceiving amounts subject to reporting otherthan income effectively connected withthe conduct of a trade or business in theUnited States); and

(4) A U.S. branch described in§1.1441–1(b)(2)(iv) that is not treated asa U.S. person under that section.

(2) Amounts subject to reporting—(i)In general. Subject to the exceptions de-scribed in paragraph (c)(2)(ii) of this sec-tion, amounts subject to reporting onForm 1042–S are amounts paid to a for-eign payee (including persons presumedto be foreign) that are amounts subject towithholding as defined in §1.1441–2(a).Amounts subject to reporting includeamounts subject to withholding even if noamount is deducted and withheld from thepayment because of a treaty or InternalRevenue Code exception to taxation orbecause an amount withheld was reim-bursed to the payee under the adjustmentprocedures of §1.1461–2. In addition,amounts subject to reporting include anyamounts paid to a foreign payee on whicha withholding agent withheld an amount(either under chapter 3 of the InternalRevenue Code or section 3406) whetheror not the amount is subject to withhold-ing. Amounts subject to reporting in-clude, but are not limited to, the followingitems—

(A) The entire amount of a corporatedistribution (whether actual or deemed)irrespective of any estimate of the portionof the distribution that represents a tax-able dividend;

(B) Interest, including the portion of anotional principal contract payment that ischaracterized as interest. Interest shallalso be reported on Form 1042-S if it isbank deposit interest paid to nonresidentalien individuals as required under§1.6049–8;

(C) Rents;(D) Royalties;(E) Compensation for dependent and

independent personal services performedin the United States;

(F) Annuities;(G) Pension distributions and other de-

ferred income;(H) Gambling winnings that are not ex-

empt from tax under section 871(j);

2000–23 I.R.B. 1213 June 5, 2000

(I) Income from the cancellation of in-debtedness unless the withholding agentis unrelated to the debtor and does nothave knowledge of the facts that give riseto the payment (see §1.1441–2(d));

(J) Amounts that are (or are presumedto be) effectively connected with the con-duct of a trade or business in the UnitedStates (including deposit interest as de-fined in sections 871(i)(2)(A) and 881(d))even if no withholding certificate is re-quired to be furnished by the payee orbeneficial owner. In the case of amountspaid on a notional principal contract de-scribed in §1.1441–4(a)(3) that are pre-sumed to be effectively connected withthe conduct of a trade or business in theUnited States, the amount required to bereported is limited to the amount of cashpaid from the notional principal contract;

(K) Scholarship, fellowship, or grantincome and compensation for personalservices that is not excludible from grossincome under section 117 (whether or notthe taxable scholarship, fellowship, grantincome, or compensation for personal ser-vices is exempt from tax under an incometax treaty) paid to foreign students,trainees, teachers, or researchers;

(L) Amounts paid to foreign govern-ments, international organizations, or theBank for International Settlements,whether or not documentation must beprovided;

(M) Interest (including original issue dis-count) paid with respect to foreign-targetedregistered obligations described in§1.871–14(e)(2) to the extent the documen-tation requirements described in§1.871–14(e)(3) and (4) are required to besatisfied (taking into account the provisionsof §1.871–14(e)(4)(ii), if applicable); and

(N) Original issue discount paid on theredemption of an OID obligation. Theamount to be reported is the amount ofOID includible in the gross income of theholder of the obligation, if known, or, ifnot known, the total amount of originalissue discount determined as if the holderheld the obligation from its original is-suance. A withholding agent may deter-mine the total amount of OID by using themost recently published ”List of OriginalIssue Discount Instruments,” (Publication1212, available from the IRS Forms Dis-tribution Centers).

(ii) Exceptions to reporting. Theamounts listed in this paragraph (c)(2)(ii)

are not required to be reported on Form1042-S—

(A) Interest (including original issuediscount) that is deposit interest undersections 871(i)(2)(A) and 881(d) and thatis not effectively connected with the con-duct of a trade or business in the UnitedStates, unless reporting is required under§1.6049–8 (regarding payments to certainforeign residents) or is interest that is ef-fectively connected with the conduct of atrade or business in the United States;

(B) Interest or original issue discounton certain short-term obligations, de-scribed in section 871(g)(1)(B) or881(a)(3);

(C) Interest paid on obligations sold be-tween interest payment dates and the por-tion of the purchase price of an OIDobligation that is sold or exchanged in atransaction other than a redemption, un-less the sale or exchange is part of a plan,the principal purpose of which is to avoidtax and the withholding agent has actualknowledge or reason to know of such plan(see §1.1441–2(a)(5) and (6));

(D) Any item required to be reported ona Form W-2, including an item required tobe shown on Form W-2 solely by reasonof §1.6041–2 (relating to return of infor-mation for payments to employees) or§1.6052–1 (relating to information re-garding payment of wages in the form ofgroup-term life insurance);

(E) Any item required to be reported onForm 1099, and such other forms as areprescribed pursuant to the information re-porting provisions of sections 6041through 6050P and the regulations underthose sections;

(F) Amounts paid on a notional princi-pal contract described in§1.1441–4(a)(3)(i) that are not effectivelyconnected with the conduct of a trade orbusiness in the United States (or nottreated as effectively connected pursuantto §1.1441–4(a)(3)(ii));

(G) Amounts required to be reported onForm 8288 (U.S. Withholding Tax Returnfor Dispositions by Foreign Persons ofU.S. Real Property Interests) or Form8804 (Annual Return for PartnershipWithholding Tax (section 1446)). A with-holding agent that must report a distribu-tion partly on a Form 8288 or 8804 andpartly on a Form 1042-S may elect to re-port the entire amount on a Form 8288 or8804;

(H) Interest on a registered obligationthat is targeted to foreign markets andqualifies as portfolio interest to the extentit is paid to a registered owner that is a fi-nancial institution or member of a clear-ing organization that has provided theproper withholding certificates (see§§1.1441–1(b)(4)(i) and 1.1441–2(a));

(I) Interest on a foreign targeted bearerobligation (see §§1.1441–1(b)(4)(i) and1.1441–2(a));

(J) Gain described in section 301(c)(3);and

(K) Amounts described in§1.1441–1(b)(4)(xviii) (dealing with certainamounts paid by the U.S. government).

(3) Required information. The informa-tion required to be furnished under this para-graph (c)(3) shall be based upon the infor-mation provided by or on behalf of therecipient of an amount subject to reporting(as corrected and supplemented based on thewithholding agent’s actual knowledge) orthe presumption rules of §§1.1441–1(b)(3),1.1441– 4(a); 1.1441–5(d) and (e);1.1441–9(b)(3) or 1.6049–5(d). The Form1042–S must include the following informa-tion, if applicable—

(i) The name, address, and taxpayeridentifying number of the withholdingagent;

(ii) A description of each category ofincome paid based on the income codesprovided on the form (e.g., interest, divi-dends, royalties, etc.) and the aggregateamount in each category expressed inU.S. dollars;

(iii) The rate of withholding applied orthe basis for exempting the payment fromwithholding (based on exemption codesprovided on the form);

(iv) The name and address of the recip-ient;

(v) The name and address of any non-qualified intermediary, flow–through en-tity, or U.S. branch as described in§1.1441–1(b)(2)(iv) (other than a branchthat is treated as a U.S. person) to whichthe payment was made;

(vi) The taxpayer identifying numberof the recipient if required under§1.1441–1(e)(4)(vii) or if actually knownto the withholding agent making the re-turn;

(vii) The taxpayer identifying numberof a nonqualified intermediary or flow-through entity (to the extent it is not a re-cipient) or other flow-through entity to

June 5, 2000 1214 2000–23 I.R.B.

the extent it is known to the withholdingagent;

(viii) The country (based on the coun-try codes provided on the form) of the re-cipient and of any nonqualified intermedi-ary or flow-through entity the name ofwhich appears on the form; and

(ix) Such information as the form orthe instructions may require in additionto, or in lieu of, information requiredunder this paragraph (c)(3).

(4) Method of reporting—(i) Paymentsby U.S. withholding agents to recipients.A withholding agent that is a U.S. person(other than a foreign branch of a U.S. per-son that is a qualified intermediary as de-fined in §1.1441–1(e)(5)(ii)) and thatmakes payments of amounts subject to re-porting on Form 1042-S must file a sepa-rate Form 1042-S for each recipient whoreceives such amount. For purposes ofthis paragraph (c)(4), a U.S. person in-cludes a U.S. branch described in§1.1441–1(e)(2)(iv)(A) or (E) that agreesto be treated as a U.S. person. Except asmay otherwise be required on Form 1042-S or the instructions to the form, onlypayments for which the income code, ex-emption code, withholding rate and recip-ient code are the same may be reported ona single Form 1042-S. See paragraph(c)(4)(ii) of this section for reporting ofpayments made to a person that is not arecipient.

(A) Payments to beneficial owners. Ifa U.S. withholding agent makes a pay-ment directly to a beneficial owner it mustcomplete Form 1042-S treating the bene-ficial owner as the recipient. Under thegrace period rule of §1.1441–1(b)(3)(iv),a U.S. withholding agent may, under cer-tain circumstances, treat a payee as a for-eign person while the withholding agentawaits a valid withholding certificate. AU.S. withholding agent who relies on thegrace period rule to treat a payee as a for-eign person must file a Form 1042-S toreport all payments on Form 1042-S dur-ing the period that person was presumedto be foreign even if that person is laterdetermined to be a U.S. person based onappropriate documentation or is presumedto be a U.S. person after the grace periodends. In the case of joint owners, a with-holding agent may provide a single Form1042-S made out to the owner whose sta-tus the U.S. withholding agent relied uponto determine the applicable rate of with-

holding. If, however, any one of the own-ers requests its own Form 1042-S, thewithholding agent must furnish a Form1042-S to the person who requests it. Ifmore than one Form 1042-S is issued fora single payment, the aggregate amountpaid and tax withheld that is reported onall Forms 1042-S cannot exceed the totalamounts paid to joint owners and the taxwithheld thereon.

(B) Payments to a qualified intermedi-ary, a withholding foreign partnership, ora withholding foreign trust. A U.S. with-holding agent that makes payments to aqualified intermediary (whether or not thequalified intermediary assumes primarywithholding responsibility), a withhold-ing foreign partnership, or a withholdingforeign trust shall complete Forms 1042-Streating the qualified intermediary orwithholding foreign partnership as the re-cipient. The U.S. withholding agent mustcomplete a separate Form 1042-S for eachwithholding rate pool. A withholding ratepool is a payment of a single type of in-come (determined by the income codes onForm 1042-S) that is subject to a singlerate of withholding. A qualified interme-diary that does not assume primary with-holding responsibility on all payments itreceives provides information regardingthe proportions of income subject to aparticular withholding rate to the with-holding agent on a withholding statementassociated with a qualified intermediarywithholding certificate. A qualified inter-mediary may provide a U.S. withholdingagent with information regarding with-holding rate pools for U.S. non-exemptrecipients (as defined under§1.1441–1(c)(21)). Amounts paid withrespect to such withholding rate poolsmust be reported on Form 1099 com-pleted for each U.S. non-exempt recipientto the extent they are subject to Form1099 reporting. These amounts must notbe reported on Form 1042-S. In addition,the qualified intermediary may providethe U.S. withholding agent informationregarding withholding rate pools for U.S.persons that are exempt recipients as de-fined under §1.1441–1(c)(20). If such in-formation is provided, a U.S. withholdingagent should not report such withholdingrate pools on Form 1042-S.

(C) Amounts paid to U.S. branchestreated as U.S. persons. A U.S. withhold-ing agent making a payment to a U.S.

branch of a foreign person described in§1.1441–1(b)(2)(iv) shall complete Form1042-S as follows—

(1) If the branch has provided the U.S.withholding agent with a withholding cer-tificate that evidences its agreement withthe withholding agent to be treated as aU.S. person, the U.S. withholding agentfiles Forms 1042-S treating the U.S.branch as the recipient;

(2) If the branch has provided the U.S.withholding agent with a withholding cer-tificate that transmits information regard-ing beneficial owners, qualified interme-diaries, withholding foreign partnerships,or other recipients, the U.S. withholdingagent must complete a separate Form1042-S for each recipient whose docu-mentation is associated with the U.S.branch’s withholding certificate; or

(3) If the U.S. withholding agent can-not reliably associate a payment with avalid withholding certificate from theU.S. branch, it shall treat the U.S. branchas the recipient and report the income aseffectively connected with the conduct ofa trade or business in the United States.

(D) Amounts paid to an authorized for-eign agent. If a U.S. withholding agentmakes a payment to an authorized foreignagent, the withholding agent files Forms1042-S treating the authorized foreignagent as the recipient, provided that theauthorized foreign agent reports the pay-ments on Forms 1042-S to each recipientto which it makes payments. If the autho-rized foreign agent fails to report theamounts paid on Forms 1042-S for eachrecipient to which the payment is made,the U.S. withholding agent remains re-sponsible for such reporting.

(E) Dual Claims. A U.S. withholdingagent may make a payment to a foreignentity that is simultaneously claiming areduced rate of tax on its own behalf for aportion of the payment and a reduced rateon behalf of persons in their capacity asinterest holders in that entity on the re-maining portion. See §1.1441–6(b)-(2)(iii). If the claims are consistent andthe withholding agent accepts the multi-ple claims, the withholding agent mustfile a separate Form 1042-S for those pay-ments for which the entity is treated as thebeneficial owner and Forms 1042-S foreach of the interest holder in the entity forwhich the interest holder is treated as therecipient. For those payments for which

2000–23 I.R.B. 1215 June 5, 2000

the interest holder in an entity is treated asthe recipient, the U.S. withholding agentshall prepare the Form 1042-S in the samemanner as a payment made to a nonquali-fied intermediary or flow-through entityas set forth in paragraph (c)(4)(ii) of thissection. If the claims are consistent butthe withholding agent has not chosen toaccept the multiple claims, or if theclaims are inconsistent, the withholdingagent must file a separate Form 1042-Sfor the person or persons it has chosen totreat as the recipients.

(ii) Payments made by U.S. withhold-ing agents to persons that are not recipi-ents—(A) Amounts paid to a nonqualifiedintermediary, a flow-through entity, andcertain U.S. branches. If a U.S. with-holding agent makes a payment to a non-qualified intermediary, a flow-through en-tity, or a U.S. branch described in§1.1441–1(b)(2)(iv) (other than a branchthat agrees to be treated as a U.S. person),it must complete a separate Form 1042-Sfor each recipient to the extent the with-holding agent can reliably associate apayment with valid documentation(within the meaning of§1.1441–1(b)(2)(vii)) from the recipientwhich is associated with the withholdingcertificate provided by the nonqualifiedintermediary, flow-through entity, or U.S.branch. If a payment is made throughtiers of nonqualified intermediaries orflow-through entities, the withholdingagent must nevertheless complete Form1042-S for the recipients to the extent itcan reliably associate the payment withdocumentation from the recipients. Awithholding agent that is completing aForm 1042-S for a recipient that receivesa payment through a nonqualified inter-mediary, a flow-through entity, or a U.S.branch must include on the Form 1042-Sthe name of the nonqualified intermediaryor flow-through entity from which the re-cipient directly receives the payment. If aU.S. withholding agent cannot reliably as-sociate the payment, or any portion of thepayment, with valid documentation froma recipient either because no such docu-mentation has been provided or becausethe nonqualified intermediary, flow-through entity, or U.S. branch has failedto provide sufficient allocation informa-tion so that the withholding agent can as-sociate the payment, or any portionthereof, with valid documentation, then

the withholding agent must report thepayments as made to an unknown recipi-ent in accordance with the appropriatepresumption rules for that payment.Thus, if under the presumption rules thepayment is presumed to be made to a for-eign person, the withholding agent mustgenerally withhold 30 percent of the pay-ment and report the payment on Form1042-S made out to an unknown recipientand shall also include the name of thenonqualified intermediary or flow-through entity that received the paymenton behalf of the unknown recipient. If,however, the recipient is presumed to be aU.S. non-exempt recipient (as defined in§1.1441–1(c)(21)), the withholding agentmust withhold on the payment as requiredunder section 3406 and report the pay-ment as made to an unknown recipient onthe appropriate Form 1099 as requiredunder chapter 61 of the Internal RevenueCode.

(B) Disregarded entities. If a U.S. with-holding agent makes a payment to a disre-garded entity but receives a valid with-holding certificate or other documentaryevidence from a foreign person that is thesingle owner of a disregarded entity, thewithholding agent must file a Form 1042-S treating the foreign single owner as therecipient. The taxpayer identifying num-ber on the Form 1042-S, if required, mustbe the foreign single owner’s TIN.

(iii) Reporting by qualified intermedi-aries, withholding foreign partnerships,and withholding foreign trusts. A quali-fied intermediary, a withholding foreignpartnership, and a withholding foreigntrust shall report payments on Form 1042-S as provided in their agreements with theIRS and the instructions to the form.

(iv) Reporting by a nonqualified inter-mediary, flow-through entity, and certainU.S. branches. A nonqualified intermedi-ary, flow-through entity, or U.S. branchdescribed in §1.1441–1(e)(2)(iv) (otherthan a U.S. branch that is treated as aU.S. person) is a withholding agent andmust file Forms 1042-S for amounts paidto recipients in the same manner as a U.S.withholding agent. A Form 1042-S willnot be required, however, if another with-holding agent has reported the sameamount to the same recipient for whichthe nonqualified intermediary, flow-through entity, or U.S. branch would berequired to file a return and the entire

amount that should be withheld fromsuch payment has been withheld. A non-qualified intermediary, flow-through en-tity, or U.S. branch must report paymentsmade to recipients to the extent it hasfailed to provide the appropriate docu-mentation to another withholding agenttogether with the information requiredfor that withholding agent to reliably as-sociate the payment with the recipientdocumentation or to the extent it knows,or has reason to know, that less than therequired amount has been withheld. Anonqualified intermediary or flow-through entity that is required to report apayment on Form 1042-S must followthe same rules as apply to a U.S. with-holding agent under paragraph (c)(4)(i)and (ii) of this section.

(v) Pro rata reporting for allocationfailures. If a nonqualified intermediary,flow- through entity, or U.S. branch de-scribed in §1.1441–1(b)(2)(iv) (other thana branch treated as a U.S. person) thatuses the alternative procedures of§1.1441–1(e)(3)(iv)(D) fails to provideinformation sufficient to allocate theamount subject to reporting paid to awithholding rate pool to the payees identi-fied for that pool, then the withholdingagent shall report the payment in accor-dance with the rule provided in§1.1441–1(e)(3)(iv)(D)(6).

(vi) Other withholding agents. Anyperson that is a withholding agent not de-scribed in paragraph (c)(4)(i), (iii), or (iv)of this section (e.g., a foreign person thatis not a qualified intermediary, flow-through entity, or U.S. branch) shall fileForm 1042-S in the same manner as aU.S. withholding agent and in accordancewith the instructions to the form.* * * * *

Par. 11. Effective January 1, 2001,§1.6041–1 is amended by revising para-graph (d)(5) to read as follows:§ 1.6041–1 Return of information as topayments of $600 or more.* * * * *

(d) * * *(5) Notional principal contracts. Ex-

cept as provided in paragraphs (b)(5)(i)and (ii) of this section, amounts paid afterDecember 31, 2000, with respect to no-tional principal contracts referred to in§1.863–7 or 1.988–2(e) to persons whoare not described in §1.6049–4(c)(1)(ii)are required to be reported in returns of

June 5, 2000 1216 2000–23 I.R.B.

information under this section. Theamount required to be reported under thisparagraph (d)(5) is limited to the amountof cash paid from the notional principalcontract as described in §1.446–3(d). Anon-periodic payment is reportable for theyear in which an actual payment is made.Any amount of interest determined underthe provisions of §1.446–3(g)(4) (dealingwith interest in the case of a significantnon-periodic payment) is reportable underthis paragraph (d)(5) and not under sec-tion 6049 (see §1.6049–5(b)(15)). See§1.6041–4(a)(4) for reporting exceptionsregarding payments to foreign persons.See, however, §1.1461–1(c)(1) for report-ing amounts described under this para-graph (d)(5) that are paid to foreign per-sons. The provisions of §1.6049–5(d)shall apply for determining whether apayment with respect to a notional princi-pal contract is made to a foreign person.See §1.6049–4(a) for a definition ofpayor. For purposes of this paragraph(d)(5), a payor includes a middleman de-fined in §1.6049–4(f)(4).

(i) An amount paid with respect to a no-tional principal contract is not required tobe reported if the payment is made out-side the United States (as defined in§1.6049–5(e)) by a non-U.S. payor or anon-U.S. middleman.

(ii) An amount paid with respect to anotional principal contract is not requiredto be reported if the payment is made out-side the United States (as defined in§1.6049–5(e)) by a payor that has no ac-tual knowledge that the payee is a U.S.person, and the payor is—

(A) A U.S. payor or U.S. middlemanthat is not a U.S. person (such as a con-trolled foreign corporation defined in sec-tion 957(a) or certain foreign corporationsor foreign partnerships engaged in a U.S.trade or business); or

(B) A foreign branch of a U.S. bank.See §1.6049–5(c)(5) for a definition of aU.S. payor, a U.S. middleman, a non-U.S.payor, and a non-U.S. middleman. * * * * *

Par. 12. Effective January 1, 2001,§1.6041–4 is amended by

1. Revising paragraph (a)(3).2. Adding paragraph (a)(6).The revision and addition read as fol-

lows:§1.6041–4 Foreign-related items andother exceptions.

(a) * * *(3) Returns of information are not re-

quired for amounts paid by a foreign in-termediary described in §1.1441–1(c)(13)that it has received in its capacity as an in-termediary and that are associated with avalid withholding certificate described in§1.1441–1(e)(3)(ii) or (iii) and paymentsmade by a U.S. branch of a foreign bankor of a foreign insurance company de-scribed in §1.1441–1(b)(2)(iv) (other thana U.S. branch that is treated as a U.S. per-son) that are associated with a valid with-holding certificate described in§1.1441–1(e)(3)(v), which certificate theintermediary or branch has furnished tothe payor or middleman from whom it hasreceived the payment, unless, and to theextent, the intermediary or branch knowsthat the payments are required to be re-ported under §1.6041–1 and were not soreported. For example, if a foreign inter-mediary or U.S. branch described in§1.1441–1(b)(2)(iv) fails to provide infor-mation regarding U.S. persons that are notexempt from reporting under§1.6041–3(q) to the person from whomthe intermediary or U.S. branch receivesthe payment, the foreign intermediary orU.S. branch must report the payment onan information return. The exception ofthis paragraph (a)(3) shall not apply to aqualified intermediary that assumes re-porting responsibility under chapter 61 ofthe Internal Revenue Code.* * * * * *

(6) For rules concerning direct sellers,see §1.6041A–1(d)(3)(i)(C).* * * * *

Par. 13. Effective January 1, 2001,§1.6041A–1 is amended by:

1. Revising paragraph (d)(3)(i)(B).2. Adding paragraph (d)(3)(i)(C).The revision and addition read as fol-

lows:§1.6041A–1 Returns regarding paymentsof remuneration for services and certaindirect sales.* * * * *

(d) * * *(3) * * * (i) * * *(B) Returns of information are not re-

quired for payments of remuneration forservices from sources outside the UnitedStates (determined under the provisionsof part I, subchapter N, chapter 1 of theInternal Revenue Code and the regula-tions under those provisions) if payments

are made outside the United States by anon-U.S. payor or non U.S. middleman.For a definition of non U.S. payor or non-U.S. middleman, see §1.6049–5(c)(5).For circumstances in which a payment isconsidered to be made outside the UnitedStates, see §1.6049–5(e).

(C) Returns of information are not re-quired under sections 6041 or 6041A foramounts paid outside of the United States(within the meaning of §1.6049–5(e)) asremuneration for services as a direct seller(within the meaning of section 3508) per-formed outside of the United States or forsales described in section 6041A(b) madeoutside of the United States of consumerproducts for resale outside of the UnitedStates.* * * * *

Par. 14. Effective January 1, 2001,§1.6042–3 is amended by revising para-graph (b)(1)(vi) to read as follows:§1.6042–3 Dividends subject to report-ing.* * * * *

(b) * * * (1) * * *(vi) Payments made by a foreign interme-

diary described in §1.1441–1(c)(13) ofamounts that it has received in its capacity asan intermediary and that are associated witha valid withholding certificate described in§1.1441–1(e)(3)(ii) or (iii) and paymentsmade by a U.S. branch of a foreign bank orof a foreign insurance company described in§1.1441–1(b)(2)(iv) (other than a U.S.branch that is treated as a U.S. person) thatare associated with a valid withholding cer-tificate described in §1.1441–1(e)(3)(v),which certificate the intermediary or branchhas furnished to the payor or middlemanfrom whom it has received the payment, un-less, and to the extent, the intermediary orbranch knows that the payments are requiredto be reported under §1.6042–2 and were notso reported. For example, if a foreign inter-mediary or U.S. branch described in§1.1441–1(b)(2)(iv) fails to provide infor-mation regarding U.S. persons that are notexempt from reporting under§1.6049–4(c)(1)(ii) to the person fromwhom the intermediary or U.S. branch re-ceives the payment, the amount paid by theforeign intermediary or U.S. branch to suchperson is a dividend. The exception of thisparagraph (b)(1)(vi) shall not apply to aqualified intermediary that assumes report-ing responsibility under chapter 61 of the In-ternal Revenue Code.

2000–23 I.R.B. 1217 June 5, 2000

* * * * *Par. 15. Effective January 1, 2001,

§1.6045–1 is amended by:1. Removing the last sentence of

paragraph (g)(1)(i) and adding two newsentences in its place.

2. Revising paragraph (g)(3)(iv).3. Revising paragraph (g)(4), Ex-

ample 7.4. Adding Examples 8 and 9 to

paragraph (g)(4).The additions and revisions read as fol-

lows:§1.6045–1 Returns of information of bro-kers and barter exchanges.* * * * *

(g) * * * (1) * * *(i) * * * For purposes of this paragraph

(g)(1)(i), a broker that is required to ob-tain, or chooses to obtain, a beneficialowner withholding certificate describedin §1.1441–1(e)(2)(i) from an individualmay rely on the withholding certificateonly to the extent the certificate includesa certification that the beneficial ownerhas not been, and at the time the certifi-cate is furnished, reasonably expects notto be present in the United States for a pe-riod aggregating 183 days or more duringeach calendar year to which the certificatepertains. The certification is not requiredif a broker receives documentary evi-dence under §1.6049–5(c)(1) or (4).* * * * *

(3) * * *(iv) Special rules where the customer is

a foreign intermediary or certain U.S.branches. A foreign intermediary, as de-fined in §1.1441–1(c)(13), is an exemptforeign person, except when the brokerhas actual knowledge or reason to know(within the meaning of §1.6049–5(c)(3))that the person for whom the intermediaryacts is a U.S. person that is not exemptfrom reporting under §5f.6045–1(c)(3) ofthis chapter or the broker is required topresume under §1.6049–5(d)(3) that thepayee is a U.S. person that is not an ex-empt recipient. If an intermediary, as de-fined in §1.1441–1(c)(13), or a U.S.branch described in §1.1441–1(b)(2)(iv)(other than a U.S. branch that is treated asa U.S. person) receives a payment from apayor or middleman, which payment thepayor or middleman can associate with avalid withholding certificate described in§1.1441–1(e)(3)(ii), (iii), or (v) furnishedby such intermediary or U.S. branch, then

the intermediary or U.S. branch is not re-quired to report such payment when it, inturn, pays the amount to the person whosename is on the certificate furnished by theintermediary or U.S. branch to the payoror middleman, unless, and to the extent,the intermediary or U.S. branch knowsthat the payment is required to be reportedunder this section and was not so re-ported. For example, if a foreign interme-diary or U.S. branch fails to provide infor-mation regarding U.S. persons that are notexempt from reporting under§5f.6045–1(c)(3) of this chapter to theperson from whom the intermediary orU.S. branch receives the payment, the for-eign intermediary or U.S. branch must re-port the payment on an information re-turn. The exception of this paragraph(g)(3)(iv) shall not apply to a qualified in-termediary that assumes reporting respon-sibility under chapter 61 of the InternalRevenue Code.

(4) * * *Example 7. Customer A, an individual, owns

U.S. corporate bonds issued in registered form afterJuly 18, 1984 and carrying a stated rate of interest.The bonds are held through an account with foreignbank, X, and are held in street name. X is a wholly-owned subsidiary of a U.S. company and is not aqualified intermediary within the meaning of§1.1441–1(e)(5)(ii). X has no documentation re-garding A. A instructs X to sell the bonds. In orderto effect the sale, X acts through its agent in theUnited States, Y. Y sells the bonds and remits thesales proceeds to X. X credits A’s account in the for-eign country. X does not provide documentation toY.

(i) Y’s obligations to withhold and report. Ytreats X as the customer, and not A, because Y can-not treat X as an intermediary because it has re-ceived no documentation from X. Y is not requiredto report the sales proceeds under the multiple bro-ker exception under §5f.6045–1(c)(3)(ii) of thischapter, because X is an exempt recipient. Further,Y is not required to report the amount of accrued in-terest paid to X on Form 1042–S under§1.1461–1(c)(2)(ii) because accrued interest is notan amount subject to reporting unless the withhold-ing agent knows that the obligation is being soldwith a primary purpose of avoiding tax.

(ii) X’s obligations to withhold and report. Al-though X has effected, within the meaning of para-graph (a)(1) of this section, the sale of a security atan office outside the United States under paragraph(g)(3)(iii) of this section, X is treated as a broker,under paragraph (a)(1) of this section, because as awholly-owned subsidiary of a U.S. corporation, X isa U.S. payor . See §1.6049–5(c)(5). Under the pre-sumptions described in §1.6049–5(d)(2), X mustpresume that, with respect to the sales proceeds, A isa U.S. person who is not an exempt recipient.Therefore the payment of sales proceeds to A by X isreportable on a Form 1099 under paragraph (c)(2) ofthis section. X has no obligation to backup withhold

on the payment based on the exemption under§31.3406(g)–1(e) of this chapter, unless X has actualknowledge that A is a U.S. person that is not an ex-empt recipient. X is also required to separately re-port the accrued interest (see paragraph (d)(3) of thissection) on Form 1099 under section 6049 becauseA is also presumed to be a U.S. person who is not anexempt recipient under the presumption rule in§1.6049–5(d)(2) and §1.1441–1(b)(3)(iii) since ac-crued interest is not an amount subject to reportingand therefore the presumption of foreign status foroffshore accounts under §1.1441–1(b)(3)(iii)(D)does not apply.

Example 8. The facts are the same as in Example7, except that instead of U.S. corporate bonds thatcarry stated interest, A owns original issue discountinstruments described in section 871(g)(1)(B)(i)(i.e., obligations payable 183 days or less from thedate of original issue). In addition, the sale is in atransaction other than a redemption.

(i) Y’s obligations to withhold and report. Y is notrequired to report the sales proceeds under the multi-ple broker exception under §5f.6045–1(c)(3)(ii) of thischapter, because X is an exempt recipient.

(ii) X’s obligations to withhold and report. Al-though X has effected, within the meaning of para-graph (a)(1) of this section, the sale of a security atan office outside the United States under paragraph(g)(3)(iii) of this section, X is treated as a broker,under paragraph (a)(1) of this section, because as awholly-owned subsidiary of a U.S. corporation, X isa U.S. payor. See §1.6049–5(c)(5). Under the pre-sumptions described in §1.6049–5(d)(2), X mustpresume that, with respect to the sales proceeds, A isa U.S. person who is not an exempt recipient.Therefore the payment of sales proceeds to A by X isreportable on a Form 1099 under paragraph (c)(2) ofthis section. X has no obligation to backup withholdon the payment based on the exemption under§31.3406(g)–1(e) of this chapter, unless X has actualknowledge that A is a U.S. person that is not an ex-empt recipient. X is not required to separately reportthe amount of accrued original issue discount. Seeparagraph (d)(3) of this section.

Example 9. The facts are the same as in Example8, except that X is a foreign corporation that is not aU.S. payor under §1.6049–5(c).

(i) Y’s obligations to withhold and report. Y is notrequired to report the sales proceeds under the multi-ple broker exception under §5f.6045–1(c)(3)(ii) of thischapter, because X is the person responsible for pay-ing the proceeds from the sale to A.

(ii) X’s obligations to withhold and report. Al-though A is presumed to be a U.S. payee under thepresumptions of §1.6049–5(d)(2), X is not consid-ered to be a broker under paragraph (a)(1) of thissection because it is a not a U.S. payor under§1.6049–5(c)(5). Therefore X is not required to re-port the sale under paragraph (c)(2) of this section.

* * * * *Par. 16. Effective January 1, 2001,

§1.6049–4 is amended by revising the in-troductory text of paragraph (c)(1)(ii) toread as follows:§1.6049–4 Return of information as to in-terest paid and original issue discount in-cludible in gross income after December31, 1982.

June 5, 2000 1218 2000–23 I.R.B.

* * * * *(c) * * * (1) * * *(ii) Exempt recipient defined. The term

exempt recipient means any person de-scribed in paragraphs (c)(1)(ii)(A) through(Q) of this section. An exempt recipient isgenerally exempt from information report-ing without filing a certificate claiming ex-empt status unless the provisions of thisparagraph (c)(1)(ii) require a payee to file acertificate. A payor may, in any case, re-quire a payee that is a U.S. person not oth-erwise required to file a certificate underthis paragraph (c)(1)(ii) to file a certificatein order to qualify as an exempt recipient.See §31.3406(h)–3(a)(1)(iii) and (c)(2) ofthis chapter for the certificate that a payeethat is a U.S. person must provide when apayor requires the certificate to treat thepayee as an exempt recipient under thisparagraph (c)(1)(ii). A payor may treat apayee as an exempt recipient based upon aproperly completed form as described in§31.3406(h)–3(e)(2) of this chapter, its ac-tual knowledge that the payee is a persondescribed in this paragraph (c)(1)(ii), or theindicators described in this paragraph(c)(1)(ii).* * * * *


1. Adding a sentence at the end ofparagraph (b)(10)(ii).

2. Adding a sentence at the end ofthe introductory text language of para-graph (b)(11).

3. Revising paragraph (b)(14).4. Adding a sentence at the end of

paragraph (c)(1).5. Revising paragraph (c)(4).6. In paragraph (c)(6), removing

Example 3 and redesignating Examples 4and 5 as Examples 3 and 4, respectively;in newly designated Example 3, revisethe language “The facts are the same as inExample 3” to read “The facts are thesame as in Example 2”; in addition, innewly designated Example 4, revise thelanguage “The facts are the same as in Ex-ample 4” to read “The facts are the sameas in Example 3”.

7. Revising the first sentence ofparagraph (d)(1) introductory text.

8. Revising paragraphs (d)(2)(i)and (d)(2)(ii), (d)(3), and (d)(4).

9. Removing paragraph (d)(5).The additions and revisions read as fol-

lows:

§1.6049–5 Interest and original issuediscount subject to reporting after De-cember 31, 1982.* * * * *

(b) * * *(10) * * *(ii) * * * The exemption from reporting

described in this paragraph (b)(10) shallnot apply if the payor has actual knowl-edge that the payee is a U.S. person whois not an exempt recipient.

(11) * * * The exemption from report-ing described in this paragraph (b)(11)shall not apply if the payor has actualknowledge that the payee is a U.S. personwho is not an exempt recipient.* * * * *

(14) Payments made by a foreign inter-mediary described in §1.1441–1(e)(3)(i)of amounts that it has received in its ca-pacity as an intermediary and that are as-sociated with a valid withholding certifi-cate described in §1.1441–1(e)(3)(ii) or(iii) and payments made by a U.S. branchof a foreign bank or of a foreign insurancecompany described in §1.1441–1(b)-(2)(iv) (other than a U.S. branch that istreated as a U.S. person) that are associ-ated with a valid withholding certificatedescribed in §1.1441–1(e)(3)(v), whichcertificate the intermediary or branch hasfurnished to the payor or middleman fromwhom it has received the payment, unless,and to the extent, the intermediary orbranch knows that the payments are re-quired to be reported under §1.6049–4and were not so reported. For example, ifa foreign intermediary or U.S. branch de-scribed in §1.1441–1(b)(2)(iv) fails toprovide information regarding U.S. per-sons that are not exempt from reportingunder §1.6049–4(c)(1)(ii) to the personfrom whom the intermediary or U.S.branch receives the payment, the amountpaid by the foreign intermediary or U.S.branch to such person is interest or origi-nal issue discount. The exception of thisparagraph (b)(14) shall not apply to aqualified intermediary that assumes re-porting responsibility under chapter 61 ofthe Internal Revenue Code.* * * * *

(c) * * * (1) * * * A payor may alsorely on documentary evidence associatedwith a flow-through withholding certifi-cate for payments treated as made to for-eign partners of a nonwithholding foreignpartnership, as defined in §1.1441–1-

(c)(28), the foreign beneficiaries of a for-eign simple trust, as defined in§1.1441–1(c)(24), or foreign owners of aforeign grantor trust, as defined in§1.1441–1(c)(26), even though the part-nership or trust account is maintained inthe United States.* * * * *

(4) Special documentation rules forcertain payments. This paragraph (c)(4)modifies the provisions of this paragraph(c) for payments to offshore accountsmaintained at a bank or other financial in-stitution of amounts that are not subject towithholding under chapter 3 of the Inter-nal Revenue Code, other than amountsdescribed in paragraph (d)(3)(iii) of thissection (dealing with U.S. short-term OIDand U.S. bank deposit interest). Amountsare not subject to withholding under chap-ter 3 of the Internal Revenue Code if theyare not included in the definition ofamounts subject to withholding under§1.1441–2(a) (e.g., deposit interest withforeign branches of U.S. banks, foreignsource income, or broker proceeds).

(i) Special rule when non-renewabledocumentary evidence is customary. If itis customary in the country in which abranch or office of a bank or other finan-cial institution is located to obtain docu-mentary evidence described in paragraph(c)(1) of this section, but it is not custom-ary for such documentary evidence to berenewed, then a payor may, in lieu of ob-taining a withholding certificate, requestsuch documentary evidence for an ac-count maintained at such branch or office.The bank or other financial institutionmay rely on such documentary evidenceto treat a person as a foreign person with-out renewing such documentary evidencein accordance with paragraph (c)(2) ofthis section and §1.1441–1(e)(4)(ii) if itmay rely on the documentary evidence assufficient to establish the person’s foreignstatus under §1.1441–7(b)(7) and (8). If,however, the bank or other financial insti-tution may, under §1.1441–7(b)(8) treat apayee as a foreign person even though ithas a residence or mailing address for thepayee in the United States, or has stand-ing instructions to pay amounts from itsaccount to an address in the United Statesor an account maintained in the UnitedStates, then the payor shall rely on thedocumentary evidence only for a periodof three full calendar years after the calen-

2000–23 I.R.B. 1219 June 5, 2000

dar year in which the documentary evi-dence is provided to the payor or, if ear-lier, until the payor is aware of a changeof circumstances that affects the validityof the documentation as establishing thepayee’s status as a foreign person.

(ii) Statement in lieu of documentaryevidence. If under the local laws, regula-tions, or practices applicable to a type ofaccount or transaction it is not customaryto obtain documentary evidence describedin paragraph (c)(1) of this section, thebank or other financial institution may, in-stead of obtaining a beneficial ownerwithholding certificate described in§1.1441–1(e)(2)(i) or documentary evi-dence described in paragraph (c)(1) ofthis section, establish a payee’s foreignstatus based on the statement described inthis paragraph (4)(ii) (or such substitutestatement as the Internal Revenue Servicemay prescribe) made on an account open-ing form. The statement shall be validonly if the mailing and residence ad-dresses of the payee are outside theUnited States and there are not other indi-cia of U.S. status. If reliance is not per-mitted because there are indicia of U.S.status then the payor must obtain eitherdocumentary evidence described in para-graph (c)(1) of this section or a Form W-8described in §1.1441–1(e)(2)(i) to treatthe customer as a foreign payee. In such acase, the form or documentary evidencemust be renewed every three years in ac-cordance with the renewal procedures setforth in §1.1441–1(e)(4)(ii)(A) for as longas indicia of U.S. status continue to bepresent. The statement referred to in thisparagraph (c)(4)(i) of this section mustappear near the signature line and mustread as follows:

By opening this account and signingbelow, the account owner representsand warrants that he/she/it is not a U.S.person for purposes of U.S. Federalincome tax and that he/she/it is not act-ing for, or on behalf of, a U.S. person.A false statement or misrepresentationof tax status by a U.S. person couldlead to penalties under U.S. law. Ifyour tax status changes and youbecome a U.S. citizen or a resident, youmust notify us within 30 days.

(iii) Continuous validity of declarationof foreign status subject to due diligenceby financial institution. A declaration of

foreign status described in paragraph(c)(4)(ii) of this section does not expireunless the bank or financial institution be-comes aware of circumstances indicatingthat the customer may be a U.S. person.

(iv) Exception for existing accounts.The rules of paragraphs (c)(4)(i) and (iii)of this section shall apply to accountsopened on or after January 1, 2001. Foraccounts opened before 2001, a bank orother financial institution may rely on therules contained in §§35a.9999–3(ii) Q&A34 and 35a.9999–4T Q&A 1 and 5 of thischapter in effect prior to January 1, 2001(see 26 CFR Parts 30–39 revised as ofApril 1, 2000). * * * * *

(d) * * * (1) Identifying the payee. Theprovisions of §§1.1441–1(b)(2), 1.1441–5(c)(1), (e)(2) and (3) shall apply (by ap-plying the term payor instead of the termwithholding agent) to identify the payeefor purposes of this section (and othersections of the regulations under thischapter to which this paragraph (d)(1) ap-plies), except to the extent provided inthis paragraph (d)(1) in the case of a pay-ment of amounts that are not subject towithholding under chapter 3 of the Inter-nal Revenue Code. * * ** * * * *

(2) Presumptions of classification andU.S. or foreign status in the absence ofdocumentation—(i) In general. Except asotherwise provided in this paragraph(d)(2)(i), for purposes of this section (andother sections of regulations under thischapter to which this paragraph (d)(2) ap-plies), the provisions of§1.1441–1(b)(3)(i), (ii), (iii), (vii), (viii),and (ix) and 1.1441–5(d) and (e)(6) shallapply (by applying the term payor insteadof the term withholding agent) to deter-mine the classification (e.g., individual,corporation, partnership, trust), status(i.e., a U.S. or a foreign person), and otherrelevant characteristics (e.g., beneficialowner or intermediary) of a payee if apayment cannot be reliably associatedwith valid documentation under§1.1441–1(b)(2)(vii) irrespective ofwhether the payments are subject to with-holding under chapter 3 of the InternalRevenue Code. The provisions of§1.1441–1(b)(3)(iii)(D) and (vii)(B) shallnot apply, however, to payments ofamounts that are not subject to withhold-ing. In addition, §1.1441–5(d)(2) shall

not apply to treat a partnership as a for-eign partnership with respect to amountsthat are not subject to withholding unlessthe payor has actual knowledge of thepayee’s employer identification numberand that number begins with the two dig-its “98.” The rules of§1.1441–1(b)(2)(vii) shall apply for pur-poses of determining when a payment canreliably be associated with documenta-tion, by applying the term payor insteadof the term withholding agent. For thispurpose, the documentary evidence orstatement described in paragraph (c)(4) ofthis section can be treated as documenta-tion with which a payment can be associ-ated.

(ii) Grace period in the case of indiciaof a foreign payee. When the conditionsof this paragraph (d)(2)(ii) are satisfied,the 30–day grace period provisions undersection 3406(e) shall not apply and theprovisions of this paragraph (d)(2)(ii)shall apply instead. A payor that, at anytime during the grace period described inthis paragraph (d)(2)(ii), credits an ac-count with payments described in§1.1441–6(c)(2) that are reportable undersections 6042, 6045, 6049, or 6050Nmay, instead of treating the account asowned by a U.S. person and applyingbackup withholding under section 3406,if applicable, choose to treat the accountas owned by a foreign person if, at the be-ginning of the grace period, the addressthat the payor has in its records for the ac-count holder is in a foreign country, thepayor has been furnished the informationcontained in a withholding certificate de-scribed in §1.1441–1(e)(2)(i) or (3)(i) (byway of a facsimile copy of the certificateor other non-qualified electronic trans-mission of the information required to bestated on the certificate), or the payorholds a withholding certificate that is nolonger reliable other than because the va-lidity period as described in §1.1441-1(e)(4)(ii)(A) has expired. In the case ofa newly opened account, the grace periodbegins on the date that the payor firstcredits the account. In the case of an ex-isting account for which the payor holds aForm W-8 or documentary evidence offoreign status, the grace period begins onthe date that the payor first credits the ac-count after the existing documentationheld with regard to the account can nolonger be relied upon (other than because

June 5, 2000 1220 2000–23 I.R.B.

the validity period described in§1.1441–1(e)(4)(ii)(A) has expired). Anew account shall be treated as an exist-ing account if the account holder alreadyholds an account at the branch location atwhich the new account is opened. It shallalso be treated as an existing account if anaccount is held at another branch locationif the institution maintains a coordinatedaccount information system described in§1.1441–1(e)(4)(ix). The grace periodterminates on the earlier of the close ofthe 90th day from the date on which thegrace period begins or the date that thedocumentation is provided. The grace pe-riod also terminates when the remainingbalance in the account (due to with-drawals or otherwise) is equal to or lessthan 31 percent of the total amounts cred-ited since the beginning of the grace pe-riod that would be subject to backup with-holding if the provisions of this paragraph(d)(2)(ii) did not apply. At the end of thegrace period, the payor shall treat theamounts credited to the account duringthe grace period as paid to a U.S. or for-eign payee depending upon whether doc-umentation has been furnished and the na-ture of any such documentation furnishedupon which the payor may rely to treat theaccount as owned by a U.S. or foreignpayee. If the documentation has not beenreceived on or before the date of expira-tion of the grace period, the payor mayalso apply the presumptions described inthis paragraph (d) to amounts credited tothe account after the date on which thegrace period expires (until such time asthe payor can reliably associate the docu-mentation with amounts credited). See§31.6413(a)–3(a)(1)(iv) of this chapterfor treating backup withheld amountsunder section 3406 as erroneously with-held when the documentation establishingforeign status is furnished prior to the endof the calendar year in which backupwithholding occurs. If the provisions ofthis paragraph (d)(2)(ii) apply, the provi-sions of §31.3406(d)–3 of this chaptershall not apply. For purposes of this para-graph (d)(2)(ii), an account holder’s rein-vestment of gross proceeds of a sale intoother instruments constitutes a with-drawal and a non-qualified electronictransmission of information on a with-holding certificate is a transmission that isnot in accordance with the provisions of§1.1441–1(e)(4)(iv). See §1.1092(d)–1

for a definition of the term actively tradedfor purposes of this paragraph (d)(2)(ii). * * * * *

(3) Payments to foreign intermediariesor flow-through entities—(i) Payments ofamounts subject to withholding underchapter 3 of the Internal Revenue Code.In the case of payments of amounts thatthe payor may treat as made to a foreignintermediary or flow-through entity in ac-cordance with §§1.1441–1(b)(3)(ii)(C)and (b)(3)(v)(A), 1.1441–5(c) or (e) andthat are subject to withholding under§1.1441–2(a), the provisions of§§1.1441–1(b)(2)(v) and 1.1441–5(c)(1),(e)(2), and (3) shall apply (by applyingthe term payor instead of the term with-holding agent) to identify the payee. If apayment of an amount subject to with-holding cannot be reliably associated withvalid documentation from a payee in ac-cordance with §1.1441–1(b)(2)(vii) thepresumption rules of §1.1441–1(b)(3)(v)and §1.1441–5(d) and (e)(6) shall applyto determine the payees status for pur-poses of this section (and other sections ofregulations under this chapter to whichthis paragraph (d)(3) applies).

(ii) Payments of amounts not subject towithholding under chapter 3 of the Inter-nal Revenue Code. Except as provided inparagraph (d)(3)(iii) of this section,amounts that are not subject to withhold-ing under chapter 3 of the Internal Rev-enue Code that the payor may treat aspaid to a foreign intermediary or flow-through entity shall be treated as made toan exempt recipient described in§1.6049–4(c) except to the extent that thepayor has actual knowledge that any per-son for whom the intermediary or flow-through entity is collecting the payment isa U.S. person who is not an exempt recip-ient. In the case of such actual knowl-edge, the payor shall treat the paymentthat it knows is allocable to such U.S. per-son as a payment to a U.S. payee who isnot an exempt recipient.

(iii) Special rule for payments of cer-tain short-term original issue discountand bank deposit interest—(A) Generalrule. A payment of U.S. source depositinterest described in section 871(i)(2)(A)or 881(d)(3) or interest or original issuediscount on the redemption of an obliga-tion with a maturity from the date of issueof 183 days or less (short-term OID) de-scribed in section 871(g)(1)(B) or 881(e)

that the payor may treat as paid to a for-eign intermediary or flow-through entityin accordance with the provisions of§1.1441–1(b)(3)(ii)(C) or (v)(A) shall betreated as paid to an undocumented U.S.payee that is not an exempt recipientunder paragraph §1.6049–4(c) unless thepayor has documentation from the payeesof the payment and the payment is allo-cated to foreign payees, as a group, and toeach U.S. non-exempt recipient payee.See §1.1441–1(e)(3)(iv)(C)(2).

(B) Payee may be an intermediary. If apayment is made to a person described in§1.6049–4(c)(1)(ii) that has not providedan intermediary withholding certificateunder §1.1441–1(e)(3)(i) but the payorknows or has reason to know that thepayee may be an intermediary, the payormust apply the rules of paragraph(d)(3)(iii)(A) of this section. A payor hasreason to know that such a person may bean intermediary if that person has pro-vided documentation under§1.1441–3(b)(ii)(C) or (v)(A) for anotheraccount with the same payor.

(iv) Short-term deposits and repur-chase transactions. The provisions ofparagraph (d)(3)(ii) of this section and notparagraph (d)(3)(iii) of this section shallapply to deposits with banks and other fi-nancial institutions that remain on depositfor a period of two weeks or less, toamounts of original issue discount arisingfrom a sale and repurchase transactionthat is completed within a period of twoweeks or less, or to amounts described inparagraphs (b)(7), (10) and (11) of thissection (relating to certain obligations is-sued in bearer form).

(4) Examples. The rules of paragraphs(d)(1) through (3) of this section are illus-trated by the following examples:

Example 1. (i) Facts. USP is a U.S. payor as de-fined in paragraph (c)(5) of this section. USP pays in-terest from sources within the United States to an ac-count maintained in the United States by X. Theinterest is not deposit interest described in sections871(i)(2)(A) or 881(d). USP does not have a with-holding certificate from X as defined in§1.1441–1(c)(16). Moreover, USP cannot treat X asan exempt recipient, as defined in §1.6049–4(c)(1)(ii),without documentation and there is no indication thatX is an individual, trust, or estate.

(ii) Analysis. The U.S. source interest is anamount subject to withholding as defined in§1.1441–2(a). Under paragraph (d)(1) of this sec-tion, USP must apply the provisions of§§1.1441–1(b)(2) and 1.1441–5(c) and (e) to deter-mine the payee of the interest. Under§1.1441–1(b)(2)(i), X, the person to whom the pay-

2000–23 I.R.B. 1221 June 5, 2000

ment is made, is considered to be the payee, unlessX is determined to be a flow-through entity, inwhich case the rules of §1.1441–5 apply to deter-mine the payee. Under paragraph (d)(2)(i) of thissection, the rules of §1.1441–1(b)(3)(ii) apply to de-termine the classification of a payee as an individ-ual, trust, estate, corporation, or partnership. Under§1.1441–1(b)(3)(ii)(B), X is presumed to be a part-nership, since X does not appear to be an individual,trust or estate, and X cannot be presumed to be anexempt recipient in the absence of documentation.Paragraph (d)(2)(i) of this section requires USP toapply the provisions of §§1.1441–1(b)(3)(iii) and1.1441–5(d) to determine whether X is presumed tobe a U.S. or foreign partnership. Under§§1.1441–1(b)(3)(iii) and 1.1441–5(d)(2), X is pre-sumed to be a U.S. partnership in absence of any in-dicia of foreign partnership status. The U.S. sourceinterest paid to X is reportable under section 6049on Form 1099 and the interest is subject to backupwithholding under section 3406 because X has notprovided its TIN on a valid Form W-9.

Example 2. (i) Facts. The facts are the same asin Example 1, except that the interest paid by USP isfrom sources outside the United States.

(ii) Analysis. Interest from sources outside theUnited States is not an amount subject to withhold-ing, as defined in §1.1441–2(a). Under paragraph(d)(1) of this section, USP must apply the provisionsof §§1.1441–1(b)(2) and 1.1441–5(c) and (e) to de-termine the payee. Under §1.1441–1(b)(2)(i), X, theperson to whom the payment is made, is consideredto be the payee, unless X is determined to be a flow-through entity, in which case the rules of §1.1441-5(c) or (e) apply to determine the payee. Underparagraph (d)(2)(i) of this section, the rules of§1.1441–1(b)(3)(ii) apply to determine the classifi-cation of a payee as an individual, trust, estate, cor-poration, or partnership. These rules apply irrespec-tive of whether the payment is an amount subject towithholding. Under §1.1441–1(b)(3)(ii)(B), X ispresumed to be a partnership, since X does not ap-pear to be an individual, trust or estate, and X cannotbe presumed to be an exempt recipient in the ab-sence of documentation. Paragraph (d)(2)(i) of thissection requires USP to apply the provisions of§§1.1441–1(b)(3)(iii) and 1.1441–5(d) to determinewhether, X is presumed to be a U.S. or foreign part-nership. Under §§1.1441–1(b)(3)(iii) and1.1441–5(d)(2), X is presumed to be a U.S. partner-ship in absence of any indicia of foreign partnershipstatus. The foreign source interest is a payment sub-ject to reporting on Form 1099 under §1.6049–5(a).Further, because X is a non-exempt recipient thathas failed to provide its TIN on a valid Form W-9,the foreign source interest is subject to backup with-holding under section 3406.

Example 3. (i) Facts. USP is a U.S. payor as de-fined in paragraph (c)(5) of this section. USP makesa payment of U.S. source interest outside the UnitedStates to an offshore account of X. See paragraphs(c)(1) for a definition of offshore account and (e) fora payment outside the United States. USP does nothave a withholding certificate from X as defined in§1.1441–1(c)(16) nor does it have documentary evi-dence as described in §1.1441–1(e)(1)(ii)(A)(2) and1.6049–5(c)(1).

(ii) Analysis. The interest is an amount subject towithholding as defined in §1.1441– 2(a). Underparagraph (d)(1) of this section, USP must apply the

provisions of §1.1441–1(b)(2) and §1.1441–5(c) and(e) to determine the payee. Under§1.1441–1(b)(2)(i), X, the person to whom the pay-ment is made, is considered to be the payee, unlessX is determined to be a flow-through entity, inwhich case the rules of §1.1441–5(c) or (e) apply todetermine the payee. Under paragraph (d)(2)(i) ofthis section, the rules of §1.1441–1(b)(3)(ii) apply todetermine the classification of a payee as an individ-ual, trust, estate, corporation, or partnership. Under§1.1441–1(b)(3)(ii)(B), X is presumed to be a part-nership, since X does not appear to be an individual,trust or estate, and X cannot be presumed to be anexempt recipient in the absence of documentation.Paragraph (d)(2)(i) of this section requires USP toapply the provisions of §§1.1441–1(b)(3)(iii) and1.1441–5(d) to determine whether, X is presumed tobe a U.S. or foreign partnership. Under§§1.1441–1(b)(3)(iii)(D) and 1.1441–5(d)(2), X ispresumed to be a foreign partnership. Therefore,under paragraph (d)(1) of this section and§1.1441–5(c)(1)(i)(E), the payees of the interest arepresumed to be the partners of X. Under§1.1441–5(d)(3), the partners are presumed to beundocumented foreign persons. Therefore, USPmust withhold 30 percent of the interest paymentunder §1.1441–1(b)(1) and report the payment onForm 1042–S in accordance with §1.1461–1(c).

Example 4. (i) Facts. The facts are the same as inExample 3, except that the interest is paid by F, anon-U.S. payor.

(ii) Analysis. The analysis and result are thesame as in Example 3. F is a withholding agentunder §1.1441–7 and its status as a non-U.S. payorunder paragraph (c)(5) of this section is irrelevant.

Example 5. (i) Facts. USP is a U.S. payor as de-fined in paragraph (c)(5) of this section. USP makes apayment outside the United States of interest fromsources outside the United States to an offshore ac-count of X. USP does not have a withholding certifi-cate from X as defined in §1.1441–1(c)(16) nor does ithave documentary evidence as described in§§1.1441–1(e)(1)(ii)(A)(2) and 1.6049–5(c)(1). USPdoes not have actual knowledge of an employer identi-fication number for X. X does not appear to be an in-dividual, trust, or estate and cannot be treated as an ex-empt recipient, as defined in §1.6049–4(c)(1)(ii) in theabsence of documentation.

(ii) Analysis. The interest is not an amount sub-ject to withholding as defined in §1.1441–2(a).Under paragraph (d)(1) of this section, USP mustapply the rules of §§1.1441–1(b)(2) and 1.1441–5(c)and (e) to determine the payee of the interest. Under§1.1441–1(b)(2)(i), X, the person to whom the pay-ment is made, is considered to be the payee, unless Xis determined to be a flow–through entity, in whichcase the rules of §1.1441–5(c) or (e) apply to deter-mine the payee. Under paragraph (d)(2)(i) of thissection, §1.1441–1(b)(3)(ii) applies to determine X’sclassification as an individual, trust, estate, corpora-tion or partnership. Under §1.1441–1(b)(3)(ii)(B), Xis treated as a partnership, since it does not appear tobe an individual, trust, or estate and cannot be treatedas an exempt recipient without documentation. Para-graph (d)(2)(i) of this section requires USP to applythe provisions of §§1.1441-1(b)(3)(iii) and 1.1441-5(d) to determine whether, X is presumed to be aU.S. or foreign partnership. Paragraph (d)(2)(i) alsostates that the presumptions of foreign status for pay-ments made to offshore accounts contained in

§§1.1441-1(b)(3)(iii)(D) and 1.1441-5(d)(2) do notapply to amounts that are not subject to withholding.Therefore, under §§1.1441-1(b)(3)(iii) and 1.1441-5(d)(2), X is presumed to be a U.S. partnership be-cause it does not have actual knowledge that X’s em-ployer identification number begins with the digits“98.” Therefore, USP must treat X as a U.S. personthat is not an exempt recipient and report the pay-ment on Form 1099 under section 6049. Under§31.3406(g)–1(e) of this chapter, however, USP isnot required to backup withhold on the payment un-less it has actual knowledge that X is a U.S. personthat is not an exempt recipient.

Example 6. (i) Facts. The facts are the same asin Example 5, except that the interest is paid by F, anon-U.S. payor, as defined under paragraph (c)(5) ofthis section.

(ii) Analysis. The analysis is the same as underExample 5. However, because F is a non-U.S. payorpaying foreign source interest outside the UnitedStates, paragraph (b)(6) of this section exempts thepayment from reporting under section 6049.

Example 7. (i) Facts. USP, a U.S. payor as de-fined in paragraph (c)(5) of this section, makes apayment of U.S. source interest to NQI, a foreigncorporation and a nonqualified intermediary as de-fined in §1.1441–1(c)(14). The interest is not de-posit interest as defined in sections 871(i)(2)(A) and881(d). The interest is paid inside the United Statesto an account maintained in the United States. NQIhas provided USP with a nonqualified intermediarywithholding certificate, as described in§1.1441–1(e)(3)(iii), but has not attached any docu-mentation from the persons on whose behalf it actsor a withholding statement as described in§1.1441–1(e)(3)(iv).

(ii) Analysis. U.S. source interest is an amount sub-ject to withholding under §1.1441– 2(a). USP may treatthe payment as made to a foreign intermediary under§1.1441–1(b)(3)(v)(A) because USP has received anonqualified intermediary withholding certificate fromNQI. Under paragraph (d)(3)(i) of this section, USPmust apply §1.1441–1(b)(2)(v) to determine the payeesof the payment. Under §1.1441–1(b)(2)(v)(A), USPmust treat the persons on whose behalf NQI is acting asthe payees. Paragraph (d)(3)(i) of this section also re-quires USP to apply the presumption rules of§1.1441–1(b)(3)(v) if it cannot reliably associate thepayment with valid documentation from a payee. See§1.1441–1(b)(2)(vii). Under §1.1441–1(b)(3)(v)(B),the interest is treated as paid to an unknown foreignpayee because it cannot be reliably associated with doc-umentation under §1.1441–1(b)(2)(vii). Therefore, thepayment is not subject to reporting on Form 1099 underparagraph (b)(12) of this section because the payment ispresumed made to a foreign person. The payment issubject to withholding, however, under §1.1441–1(b) ata rate of 30 percent and is subject to reporting on Form1042–S under §1.1461–1(c).

Example 8. (i) Facts. The facts are the same asin Example 7, except that the interest is paid outsidethe United States, as defined in paragraph (e) of thissection to an offshore account, as defined in para-graph (c)(1) of this section.

(ii) Analysis. The analysis and results are thesame as in Example 7. The rules of§1.1441–1(b)(3)(v) apply irrespective of where theaccount is maintained or the payment made.

Example 9. (i) Facts. The facts are the same asin Example 8, except that the interest is paid by F, a

June 5, 2000 1222 2000–23 I.R.B.

non–U.S. payor, as defined in paragraph (c)(5) ofthis section.

(ii) Analysis. The analysis and results are the sameas in Example 7.

Example 10. (i) USP, a U.S. payor as defined inparagraph (c)(5) of this section, makes a payment offoreign source interest to NQI, a foreign corporationand a nonqualified intermediary as defined in§1.1441–1(c)(14). NQI has provided USP with a non-qualified intermediary withholding certificate, as de-scribed in §1.1441–1(e)(3)(iii), but has not attachedany documentation from the persons on whose behalfit acts or a withholding statement as described in§1.1441–1(e)(3)(iv).

(ii) Analysis. Foreign source interest is not anamount subject to withholding under chapter 3 of theInternal Revenue Code. See §1.1441–2(a). Underparagraph (d)(3)(ii)(A) of this section, amounts thatare not subject to withholding under chapter 3 of theInternal Revenue Code that a payor may treat as paidto a foreign intermediary are treated as made to an ex-empt recipient described in §1.6049–4(c). Therefore,the foreign source interest is not subject to reportingon Form 1099.

Example 11. (i) Facts. USP is a U.S. payor as de-fined in paragraph (c)(5) of this section. USP paysU.S. source original issue discount from the redemp-tion of an obligation described in section 871(g)(1)(B)to NQI, a foreign corporation that is a nonqualified in-termediary as defined in §1.1441–1(c)(14). The re-demption proceeds are paid to an account NQI haswith USP in the United States. NQI provides a non-qualified intermediary withholding certificate as de-scribed in §1.1441–1(e)(3)(iii) but does not attach anypayee documentation or a withholding statement de-scribed in §1.1441–1(e)(3)(iv).

(ii) Analysis. Under paragraph (d)(3)(ii)(A) of thissection, USP must treat the payment as made to an un-documented U.S. payee that is not an exempt recipientand report the payment on Form 1099. Further, be-cause the payment is made inside the United States,the exception to backup withholding for offshore ac-counts contained in §31.3406(g)–1(e) of this chapterdoes not apply and the payment is subject to backup

withholding.Example 12. (i) Facts. P, a payor, makes a pay-

ment to NQI of U.S. source interest on debt obliga-tions issued prior to July 18, 1984. Therefore, the in-terest does not qualify as portfolio interest undersection 871(h) or 881(d). NQI is a nonqualified for-eign intermediary, as defined in §1.1441–1(c)(14), andhas furnished P a valid nonqualified intermediarywithholding certificate described in§1.1441–1(e)(3)(iii) to which it has attached a validForm W-9 for A, and two valid beneficial ownerForms W-8, one for B and one for C. A is not an ex-empt recipient under §1.6049–4(c). NQI furnishes awithholding statement, described in§1.1441–1(e)(3)(iv), in which it allocates 20 percentof the U.S. source interest to A, but does not allocatethe remaining 80 percent of the interest between B andC. B’s withholding certificate indicates that B is a for-eign pension fund, exempt from U.S. tax under theU.S. income tax treaty with Country T. C’s withhold-ing certificate indicates that C is a foreign corporationnot entitled to a reduced rate of withholding.

(ii) Analysis. Under paragraph (d)(3)(i) of this sec-tion, P applies the rules of §1.1441– 1(b)(2)(v) to de-termine the payees of the interest. Under that section,the payees are the persons on whose behalf NQIacts—A, B and C. Because P can reliably associate 20percent of the payment with valid documentation pro-vided by A, P must treat 20 percent of the interest aspaid to A, a U.S. person not exempt from reporting,and report the payment on Form 1099. P cannot reli-ably associate the remaining 80 percent of the pay-ment with valid documentation under§1.1441–1(b)(2)(vii) and, therefore, under paragraph(d)(3)(i) of this section must apply the presumptionrules of §1.1441–1(b)(3)(v). Under that section, theinterest is presumed paid to an unknown foreignpayee. Under paragraph (b)(12) of this section, P isnot required to report the interest presumed paid to aforeign person on Form 1099. Under §1.1441–1(b),80 percent of the interest is subject to 30 percent with-holding, however, and the interest is reportable onForm 1042–S under §1.1461–1(c).

Example 13. (i) Facts. The facts are the same as in

Example 12, except that P can reliably associate 30percent of the payment of interest to B, but cannot reli-ably associate the remaining 70 percent with A or C.

(ii) Analysis. Under paragraph (d)(3)(i) of this sec-tion, P applies the rules of §1.1441– 1(b)(2)(v) to de-termine the payees of the interest. Under that section,the payees are the persons on whose behalf NQIacts—A, B and C. Because P can reliably associate 30percent of the payment with B, a foreign pensionsfund exempt from withholding under an income taxtreaty, P may treat that payment as paid to B and notsubject to reporting on Form 1099 under paragraph(b)(12) of this section. P cannot reliably associate theremaining 70 percent of the payment with valid docu-mentation under §1.1441–1(b)(2)(vii) and, therefore,under paragraph (d)(3)(i) of this section must applythe presumption rules of §1.1441–1(b)(3)(v). Underthat section, the interest is presumed paid to an un-known foreign payee. Under paragraph (b)(12) of thissection, P is not required to report the interest pre-sumed paid to a foreign person on Form 1099. Under§1.1441–1(b), 80 percent of the interest is subject to30 percent withholding, however, and the interest isreportable on Form 1042–S under §1.1461–1(c).

Example 14. (i) Facts. The facts are the same as inExample 12, except that P also makes a payment offoreign source interest to NQI.

(ii) Analysis. Under paragraph (d)(3)(ii)(A), P maytreat the foreign source interest as paid to an exemptrecipient as defined in §1.6049–4(c) and not subject toreporting on Form 1099 even though some or all of theforeign source interest may in fact be owned by A, theU.S. person that is not exempt from reporting.

* * * * *

Parts 1 and 31 [Amended]

Par. 18. Effective January 1, 2001, inthe list below, for each section indicatedin the left column remove the language inthe middle column and add the languagein the right column:

2000–23 I.R.B. 1223 June 5, 2000

Section Remove Add

1.1441–1(b)(1), first to a beneficial owner to a payee that is asentence that is a U.S. person U.S. person

1.1441–1(b)(2)(iii)(A), 1.1441–6(b)(4) 1.1441–6(b)(2)last sentence

1.1441–1(b)(2)(iii)(B), 1.1441–6(b)(4) 1.1441–6(b)(2)third sentence

1.1441–1(b)(2)(vi), second 1.6049–5(c)(4) 1.6049–5(c)(1)sentence

1.1441–1(b)(4)(iii), last §1.6049–5(c)(4) §1.6049–5(c)(1)sentence

1.1441–1(b)(4)(v), third §1.6049–5(c)(4) §1.6049–5(c)sentence

1.1441–1(b)(4)(xviii), third is required is not requiredsentence

1.1441–1(b)(7)(i)(A) §1.1441–4(a)(2)(i) §1.1441–4(a)(2)(ii)or (3) or (3)(i)

1.1441–1(b)(7)(iii), first §1.1441–4(a)(2)(i) §1.1441–4(a)(2)(ii)sentence or (3) or (3)(i)

1.14441–1(b)(9), second a withholding certificate an intermediary orsentence flow–through withholding

certificate

1.1441–1(b)(9), second a U.S. beneficial owner a U.S. payeesentence

1.1441–1(e)(1)(ii)(A)(2) with respect to an to an offshore accountoffshore account

1.1441–1(e)(2)(i), fifth See §1.1441–6(b)(4)(ii) See §1.1441–6(b)(2)sentence

1.1441–1(e)(2)(ii), sixth See §1.1441–6(b)(4)(i) See §1.1441–6(b)sentence

1.1441–1(e)(4)(viii), introductory §1.1441–6(b)(2)(ii) §1.1441–6(c)(2)text, second sentence

1.1441–1(e)(4)(viii), third §1.1441–6(b)(4)(ii) §1.1441–6(b)(1)sentence

1.1441–3(c)(2)(i), introductory estimate of earnings estimates under thistext, second sentence and profits, paragraph (c)(2),

1.1441–4(a)(3)(ii) payment to a foreign payment shallfinancial institution (within the meaning of§1.165–12(c)(1)(iv)) shall

1.1441–4(a)(3)(ii) counterparty payee

1.1441–7(b)(1), first is incorrect. is unreliable or incorrect.sentence

1.1441–7(b)(1), third contained in, or attached contained in, or associated sentence to, a withholding with, a withholding

certificate certificate

1.1441–7(b)(1), third are not correct and are incorrect or unreliablesentence and

1.1461–1(b)(2), first Form 1042X Form 1042sentence

1.6045–1(j), first the end of the second February 28 of thesentence calendar month following calendar

following the close of yearthe calendar year ofsuch reporting period

1.6049–4(c)(1)(ii)(A), meets the meets one of thesecond sentence

31.3406(h)–3(a), the payee certifies a payee that is a U.S.introductory text, person certifies

first sentence

June 5, 2000 1224 2000–23 I.R.B.





of the Treasury.

(Filed by the Office of the Federal Register on May15, 2000, 8:45 a.m., and published in the issue of theFederal Register for May 22, 2000, 65 F.R. 32151)

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof June 2000. See Rev. Rul. 2000–28, page 1157 .

Section 7872.—Treatment ofLoans With Below-MarketInterest Rates


2000–23 I.R.B. 1225 June 5, 2000

Notice of Proposed Rulemakingand Notice of Public Hearing

Certain CorporateReorganizations InvolvingDisregarded Entities

REG–106186–98


ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document containsproposed regulations that provide guid-ance to corporations and their sharehold-ers about whether certain transactionsqualify as corporate reorganizations. Theproposed regulations apply to certainmergers under state or Federal law be-tween two entities, one of which is a cor-poration and the other of which, for Fed-eral tax purposes, is disregarded as anentity separate from its owner (for exam-ple, a qualified REIT subsidiary, a quali-fied subchapter S subsidiary, or a limitedliability company with a single corporateowner that does not elect to be treated as aseparate corporation). This documentalso provides a notice of public hearingon these proposed regulations.

DATES: Written or electronic commentsmust be received by August 14, 2000.Requests to speak (with outlines of oralcomments to be discussed) at the publichearing scheduled for August 8, 2000,must be received by July 18, 2000.

ADDRESSES: Send submissions toCC:DOM:CORP:R (REG–106186–98),room 5226, Internal Revenue Service,P.O. Box 7604, Ben Franklin Station,Washington, DC 20044. Submissionsmay be hand delivered Monday throughFriday between the hours of 8 am and 5pm to: CC:DOM:CORP:R(REG–106186–98), Courier’s desk, Inter-nal Revenue Service, 1111 ConstitutionAvenue, NW., Washington, DC 20044.Alternatively, taxpayers may submit com-ments electronically via the Internet byselecting the “Tax Regs” option on theIRS Home Page, or by submitting com-ments directly to the IRS Internet site athttp://www.irs.gov/tax_regs/reglist.html.

The public hearing will be held in room4718, Internal Revenue Building, 1111Constitution Avenue, NW., Washington,DC.

FOR FURTHER INFORMATION CON-TACT: Concerning the proposed regula-tions, Reginald Mombrun, (202) 622-7750, concerning submissions ofcomments, the hearing, and/or to beplaced on the building access list to attendthe hearing, Guy Traynor, (202) 622-7180(not toll-free numbers).


Background

This document contains proposedamendments to the Income Tax Regula-tions (26 CFR Part 1) that provide guid-ance as to whether certain mergers understate or Federal law between two entities,one of which is a corporation and theother of which, for Federal tax purposes,is disregarded as an entity separate fromits owner can be statutory mergers quali-fying as reorganizations under section368(a)(1)(A) of the Internal RevenueCode of 1986 (Code). The Code providesgeneral nonrecognition treatment for reor-ganizations specifically described in sec-tion 368(a). Section 368(a)(1)(A) pro-vides that the term reorganization means“a statutory merger or consolidation.”Section 1.368–2(b)(1) provides that astatutory merger must be accomplishedunder the “corporation laws of the UnitedStates or a State or territory or the Districtof Columbia.” In addition to meeting therequirements of section 368(a), a mergertransaction must meet other reorganiza-tion requirements such as the requirementthat the persons engaged in the transac-tion each qualify as “a party to a reorgani-zation” under section 368(b), the continu-ity of interest requirement of §1.368–1(e),and the continuity of business enterpriserequirement of §1.368–1(d).

Certain entities that are respected understate law are disregarded for Federal taxpurposes. These entities include a qualifiedREIT subsidiary, a qualified subchapter Ssubsidiary (QSub), and an entity that is dis-regarded under §301.7701–3 as an entityseparate from its owner. Section 856(i)(2)provides that a corporation that is wholly

owned by a real estate investment trust(REIT) is a qualified REIT subsidiary. Sec-tion 1361(b)(3)(B) provides that a QSub isan eligible domestic corporation, whollyowned by an S corporation, for which the Scorporation makes a QSub election. Under§301.7701–3, a business entity that is notclassified as a corporation per se (see§301.7701–2(b)((1), (3), (4), (5), (6), (7) or(8); for example, a limited liability com-pany) can elect to be treated as a corpora-tion or, if it has a single owner, can chooseto be disregarded. (These entities here-inafter are collectively referred to as Disre-garded Entities, and the corporation thatowns the Disregarded Entity is referred toas the Owner.) For Federal tax purposes,all of the assets, liabilities, and items of in-come, deduction, and credit of a Disre-garded Entity are treated as those of itsOwner.

Because qualified REIT subsidiariesand QSubs are corporations under statelaw, state merger laws generally permitthem to merge with other corporations. Inaddition, many state merger laws permitmergers between limited liability compa-nies and corporations.

Commentators have raised questions asto whether the merger under state or Fed-eral law of a Disregarded Entity into anacquiring corporation or of a target corpo-ration into a Disregarded Entity can qual-ify as a reorganization under section368(a)(1)(A). These regulations addressthis issue.

Explanation of Provisions

The proposed regulations provide guid-ance on the tax treatment of the followingtwo transactions: (1) the merger of a Dis-regarded Entity into an acquiring corpora-tion, and (2) the merger of a target corpo-ration into a Disregarded Entity. Underthe Federal tax laws, the merger understate or Federal law of a Disregarded En-tity into an acquiring corporation in whichthe Owner exchanges its interest in theDisregarded Entity for stock in the acquir-ing corporation and the Disregarded En-tity ceases to exist as a result of the trans-action by operation of the state or Federalmerger law (hereinafter, the merger of aDisregarded Entity into an acquiring cor-poration) is treated as if the Owner trans-

June 5, 2000 1226 2000–23 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous

ferred the assets of the Disregarded Entityto the acquiring corporation. Conversely,the merger under state or Federal law of atarget corporation into a Disregarded En-tity in which the shareholders of the targetcorporation exchange their target corpora-tion stock for stock in the Owner and theDisregarded Entity does not lose its statusas a Disregarded Entity as a result of thetransaction (hereinafter, the merger of atarget corporation into a Disregarded En-tity) is treated as if the Owner acquired allof the assets of the target corporation.

The proposed regulations reflect Trea-sury’s and the IRS’ view that neithermerger is a statutory merger qualifying asa reorganization under section368(a)(1)(A). Compliance with a corpo-rate law merger statute does not by itselfqualify a transaction as a “statutorymerger” for purposes of section368(a)(1)(A). See Roebling v. Commis-sioner, 143 F.2d 810, 812 (3d Cir. 1944),cert. denied, 323 U.S. 773 (1944). Theproposed regulations contain the require-ments that must be satisfied for a state orFederal law merger or consolidation toqualify as a reorganization under section368(a)(1)(A). In addition, the proposedregulations remove the word “corpora-tion” from the requirement that, in orderto qualify as a reorganization under sec-tion 368(a)(1)(A), a merger or consolida-tion must be effected pursuant to the cor-poration law of the relevant jurisdiction.This change is necessary to conform theregulations to the IRS’ long-standing po-sition that a merger or consolidation mayqualify as a reorganization under section368(a)(1)(A) even if it is undertaken pur-suant to laws other than the corporationlaw of the relevant jurisdiction. See Rev.Rul. 84-104 (1984–2 C.B. 94) (a “consol-idation” pursuant to the National BankingAct, 12 U.S.C. 215, is treated as a mergerfor Federal tax purposes).

The Merger of a Disregarded Entity intoan Acquiring Corporation

Consistent with the views of all thecommentators, Treasury and the IRS be-lieve that the merger of a Disregarded En-tity into an acquiring corporation is not astatutory merger qualifying as a reorgani-zation under section 368(a)(1)(A) becausethe Owner’s assets (other than those heldin the Disregarded Entity) are not trans-ferred to the acquiring corporation and the

Owner does not cease to exist as a resultof the state or Federal law merger transac-tion. “A merger ordinarily is an absorp-tion by one corporation of the propertiesand franchises of another whose stock ithas acquired. The merged corporationceases to exist, and the merging corpora-tion alone survives.” Cortland SpecialtyCo. v. Commissioner of Internal Revenue,60 F. 2d 937, 939 (2d Cir. 1932), cert. de-nied, 288 U.S. 599 (1933). The merger ofa Disregarded Entity into an acquiringcorporation, in which the Owner’s assetsand liabilities are divided between theOwner and the acquiring corporation afterthe transaction, is a divisive transaction,not a transaction in which the assets of theOwner and the acquiring corporation arecombined. Congress intended that sec-tion 355 be the sole means under whichdivisive transactions will be afforded tax-free status and, thus, specifically requiredthe liquidation of the acquired corporationin reorganizations under both sections368(a)(1)(C) and 368(a)(1)(D) in order toprevent these reorganizations from beingused in divisive transactions that did notsatisfy section 355. See S. Rep. No.1622, 83rd Cong., 2d Sess. 274 (1954); S.Rpt. No. 169, 98th Cong., 2d Sess. 204(1984) and Rev. Rul. 2000–5 (2000–5I.R.B. 436).

Accordingly, consistent with existinglaw, the proposed regulations provide thatfor a merger to qualify as a reorganizationunder section 368(a)(1)(A), it must, byoperation of the merger statute of the rele-vant jurisdiction, result in one corporationacquiring the assets of the merging corpo-ration and the merging corporation ceas-ing to exist. Thus, the merger of a Disre-garded Entity into an acquiringcorporation cannot qualify as a reorgani-zation under section 368(a)(1)(A). How-ever, the transaction may be treated as areorganization under section368(a)(1)(C), (D), or (F) if all applicablerequirements are met (including the liqui-dation of the Owner). The transactionalso may be described in section 351.

The Merger of a Target Corporation intoa Disregarded Entity

There has been a split in views as towhether the merger of a target corporationinto a Disregarded Entity is a statutorymerger qualifying as a reorganizationunder section 368(a)(1)(A). Some com-

mentators argue that, because the Disre-garded Entity is disregarded for Federaltax purposes, the transaction should betreated for Federal tax purposes as amerger into the Owner. Thus, they argue,as long as the Owner is a corporation, allother relevant reorganization require-ments are satisfied, and the target corpo-ration could have merged into the Ownerin a transaction that qualifies as a reorga-nization under section 368(a)(1)(A), themerger should qualify as a reorganizationunder section 368(a)(1)(A). According tothese commentators, treating such amerger as a statutory merger into theOwner qualifying as a reorganizationunder section 368(a)(1)(A) does not inap-propriately facilitate avoidance of any re-organization requirement under section368. Accordingly, the commentatorsargue there is no sound policy for not per-mitting the merger of a target corporationinto a Disregarded Entity to be treated asa statutory merger into the Owner qualify-ing as a reorganization under section368(a)(1)(A).

Other commentators argue that, as atechnical matter, the better interpretationof the applicable provisions of the Codeand regulations is that the merger of a tar-get corporation into a Disregarded Entityis not a statutory merger of the target cor-poration into the Owner qualifying as areorganization under section368(a)(1)(A). Congress added the word“statutory” in 1934 so that the definition“will conform more closely to the generalrequirements of [state or Federal] corpo-ration law.” See H.R. Rep. No. 704, 73rd

Cong., 2nd Sess. 14 (1934). Treasury andthe IRS believe that it is inappropriate totreat the state or Federal law merger of atarget corporation into a Disregarded En-tity instead as a statutory merger of thetarget corporation into the Owner, be-cause the Owner, the only potential partyto a reorganization under section 368(b),is not a party to the state or Federal lawmerger transaction. A reorganizationunder section 368(a)(1)(A) is a combina-tion of the assets and liabilities of twocorporations through a merger under stateor Federal law. A merger of a target cor-poration into a Disregarded Entity differsfrom a merger of a target corporation intothe Owner because the target corporationand the Owner have combined their assetsand liabilities only under the Federal tax

2000–23 I.R.B. 1227 June 5, 2000

rules concerning Disregarded Entities,and not under state or Federal merger law,the law on which Congress relied in en-acting section 368(a)(1)(A).

Accordingly, the proposed regulationsprovide that the merger of a target corpo-ration into a Disregarded Entity is not astatutory merger of the target corporationinto the Owner qualifying as a reorganiza-tion under section 368(a)(1)(A). Such atransaction may qualify as a reorganiza-tion under section 368(a)(1)(C), section368(a)(1)(D), or section 368(a)(1)(F) ifall relevant requirements are met. Such atransaction also may qualify for non-recognition of gain under section 351.

Proposed Effective Date

These regulations as proposed apply toany transaction occurring on or after thedate these regulations are published asfinal regulations in the Federal Register.

Comments Requested

Several states permit the merger of adomestic corporation into a foreign cor-poration under state law. Treasury andthe IRS are studying whether this transac-tion qualifies as a reorganization undersection 368(a)(1)(A) and request com-ments on this issue.

Special Analysis

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866. Therefore, a regula-tory assessment is not required. It hasalso been determined that section 553(b)of the Administrative Procedure Act (5U.S.C chapter 5) does not apply to theseregulations, and, because the regulationsdo not impose a collection of informationon small entities, the Regulatory Flexibil-ity Act (5 U.S.C. chapter 6) does notapply. Pursuant to section 7805(f) of theCode, this notice of proposed rulemakingwill be submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comment on its impact onsmall business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written com-ments (a signed original and eight copies)

that are submitted timely to the IRS. Al-ternatively, taxpayers may submit com-ments electronically via the Internet byselecting the “Tax Regs” option on theIRS Home Page, or by submitting com-ments directly to the IRS Internet site athttp://www.irs.gov/tax_regs/reglist.html.The IRS and Treasury Department requestcomments on the clarity of the proposedrules and how they can be made easier tounderstand. All comments will be avail-able for public inspection and copying.

A public hearing has been scheduledfor August 8, 2000, beginning at 10:00AM in Room 4718, Internal RevenueBuilding, 1111 Constitution Avenue, NW.,Washington, DC. Due to building secu-rity procedures, visitors must enter at the10th Street entrance, located betweenConstitution and Pennsylvania Avenues,NW. In addition, all visitors must presentphoto identification to enter the building.Because of access restrictions, visitorswill not be admitted beyond the immedi-ate entrance area more than 15 minutesbefore the hearing starts. For informationabout having your name placed on thebuilding access list to attend the hearing,see the “For Further Information Contact”portion of this preamble.

The rules of 26 CFR 601.601(a)(3) applyto the hearing. Persons who wish to presentoral comments must submit written com-ments and an outline of the topics to be dis-cussed and the time to be devoted to eachtopic (a signed original and eight (8)copies) by July 18, 2000. A period of 10minutes will be allotted to each person formaking comments. An agenda showing thescheduling of the speakers will be preparedafter the deadline for reviewing outlines haspassed. Copies of the agenda will be avail-able free of charge at the hearing.


The principal author of these regula-tions is Reginald Mombrun of the officeof the Assistant Chief Counsel (Corpo-rate), IRS. However, other personnelfrom the IRS and the Treasury Depart-ment participated in their development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR Part 1 is pro-posed to be amended as follows:

PART 1— INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.368–2 is amended by

revising paragraph (b)(1) to read as fol-lows:§1.368–2 Definition of terms.* * * * *

(b) (1) In order to qualify as a reorgani-zation under section 368(a)(1)(A), thetransaction must be a merger or consolida-tion involving two corporations effectedpursuant to the laws of the United States ora State or territory, or the District of Colum-bia. In addition, by operation of such amerger law, the transaction must result inone corporation acquiring the assets of themerging corporation and the merging cor-poration ceasing to exist. Similarly, by op-eration of such a consolidation law, thetransaction must result in one newlyformed corporation acquiring the assets ofboth consolidating corporations, and bothconsolidating corporations ceasing to exist.Thus, the merger under state or Federal lawof an entity that is disregarded as an entityseparate from its owner for Federal tax pur-poses into an acquiring corporation inwhich the owner exchanges its interest inthe disregarded entity for stock in the ac-quiring corporation and the disregarded en-tity ceases to exist as a result of the transac-tion by operation of the state or Federalmerger law is not a statutory merger quali-fying as a reorganization under section368(a)(1)(A). Moreover, the merger of atarget corporation into an entity that is dis-regarded as an entity separate from itsowner for Federal tax purposes that doesnot lose its status as a disregarded entity asa result of the transaction is not a statutorymerger qualifying as a reorganization undersection 368(a)(1)(A). Examples of entitiesthat are disregarded as entities separatefrom their owners include a qualified REITsubsidiary (within the meaning of section856(i)(2)), a qualified subchapter S sub-sidiary (within the meaning of section1361(b)(3)(B)), and a business entity that isnot classified as a corporation and that has asingle owner (as provided in§301.7701–2(c)(2) of this chapter). Thepreceding five sentences apply to any trans-action occurring on or after [Date TheseRegulations Are Published As Final Regu-lations In The Federal Register].

June 5, 2000 1228 2000–23 I.R.B.

* * * * *


Internal Revenue.

(Filed by the Office of the Federal Register on May11, 2000, 2:30 p.m., and published in the issue of theFederal Register for May 16, 2000, 65 F.R. 31115)

Notice of Proposed Rulemakingand Notice of Public Hearing

Dollar-Value LIFO Regulations;Inventory Price IndexComputation Method

REG–107644–98


ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document containsproposed regulations under section 472 ofthe Internal Revenue Code that relate toaccounting for inventories under the last-in, first-out (LIFO) method. The pro-posed regulations provide guidance re-garding methods of valuing dollar-valueLIFO pools and affect persons who electto use the dollar-value LIFO and inven-tory price index computation (IPIC)methods. This document also providesnotice of a public hearing on these pro-posed regulations.

DATES: Written and electronic com-ments must be received by August 17,2000. Requests to speak (with outlines oforal comments) at a public hearing sched-uled for September 15, 2000 at 10 a.m.,must be received by August 25, 2000.

ADDRESSES: Send submissions to:CC:DOM:CORP:R (REG–107644–98),room 5226, Internal Revenue Service, POB7604, Ben Franklin Station, Washington,DC 20044. Submissions may be hand de-livered Monday through Friday betweenthe hours of 8 a.m. and 5 p.m. to:CC:DOM:CORP:R (REG–107644–98),Courier’s Desk, Internal Revenue Service,1111 Constitution Avenue, NW., Washing-ton, DC. Alternatively, taxpayers may sub-mit comments electronically via the Inter-net by selecting the “Tax Regs” option onthe IRS Home Page, or by submitting com-ments directly to the IRS Internet site at

http://www.irs.ustreas.gov/tax_regs/regslist.html. The public hearing will be held inroom 4718, Internal Revenue Building,1111 Constitution Avenue, NW., Washing-ton, DC.

FOR FURTHER INFORMATION CON-TACT: Concerning the proposed regula-tions, Jeffery G. Mitchell, (202)622-4970;concerning submissions of comments, thehearing, and/or to be placed on the build-ing access list to attend the hearing, GuyTraynor of the Regulations Unit at (202)622-7180 (not toll-free calls).


Background

This document contains proposedamendments to the Income Tax Regula-tions (26 CFR part 1) that relate to thelast-in, first-out (LIFO) inventory ac-counting method under section 472 of theInternal Revenue Code (Code). TheLIFO method of accounting for goodstreats inventories on hand at the end ofthe year as consisting first of inventoryon hand at the beginning of the year andthen of inventories acquired during theyear.

Under §1.472–8, a taxpayer is permit-ted to use the dollar-value LIFO methodof accounting for inventories, which ac-counts for inventories in terms of dollarsof cost rather than specific goods. Thedollar-value LIFO method measures in-creases or decreases in inventory quanti-ties by comparing the total cost of thequantity of goods on hand at the begin-ning and end of the taxable year in termsof equivalent-value dollars, i.e., base-year cost. The current-year dollar cost ofbeginning and ending inventory may beconverted into a base-year dollar costusing price indexes. Then, the quantity ofbase-year cost in beginning and endinginventory can be compared and the in-crease (increment) or decrease (liquida-tion) can be measured.

Section 472(f) directs the Secretary toprescribe regulations that permit the useof suitable published governmental priceindexes for purposes of the LIFO method.The IRS and Treasury Department pre-scribed the inventory price index compu-tation (IPIC) method in §1.472–8(e)(3)(TD 7814, 47 FR 11271, 1982–1 C.B.84), pursuant to authority contained insections 472 and 7805. Under the IPIC

method, inventory price indexes are com-puted with reference to consumer or pro-ducer price indexes published by theUnited States Bureau of Labor Statistics(BLS). The IPIC method was intended tosimplify the use of the dollar-value LIFOmethod so that the LIFO method could beused by more taxpayers and would be eas-ier to use by taxpayers already using thedollar-value LIFO method.

Explanation of Provisions

This document contains proposedamendments to the IPIC method providedin §1.472–8(e)(3) of computing the LIFOvalue of a dollar-value inventory pool thatare intended to simplify and clarify cer-tain aspects of the IPIC method as well asto modify the computational methodologyso that the IPIC method produces a moreaccurate and suitable inventory priceindex. In addition, the proposed regula-tions provide rules for computing theLIFO value of a dollar-value pool when ataxpayer receives LIFO inventories incertain nonrecognition transactions.

1. Elimination of Requirement to Use 10Percent Categories and BLS Weights

Section 1.472–8(e)(3)(iii) of the regu-lations provides detailed rules for assign-ing inventory items to index categoriespublished by the BLS in the “CPI De-tailed Report” or the “PPI Detailed Re-port” for purposes of computing an inven-tory price index. Items are first assignedto the most detailed index category listedin the appropriate table of the “CPI De-tailed Report” or the “PPI Detailed Re-port” that contains those items. If thetotal current-year cost of the items in asingle detailed index category equals orexceeds 10 percent of the total inventoryvalue, the taxpayer must use the pub-lished index for that selected index cate-gory for all items that are included in thatdetailed index category. If the total cur-rent-year cost of items in a single detailedindex category is less than 10 percent ofthe total inventory value, the taxpayermust investigate successively less de-tailed index categories until it reaches anindex category that meets the 10 percentthreshold. The taxpayer, however, mayonly use the published index for a less de-tailed selected index category if it has atleast one item that would have been in-cluded in each of the most detailed index

2000–23 I.R.B. 1229 June 5, 2000

categories subsumed by the selected cate-gory. For example, a taxpayer may onlyuse the published index for the “Freshfruits” category from the “CPI DetailedReport” if its inventory includes at leastone apple, banana, orange, citrus fruitother than orange, and other fresh fruit. Ifthe taxpayer’s inventory does not containat least one item in each of the most de-tailed index categories within the selectedindex category, the taxpayer must com-pute an appropriate index for the selectedindex category. An appropriate index forthe selected index category is a weightedaverage of the published indexes for themost detailed index categories that in-clude at least one of the taxpayer’s inven-tory items. The weights to be used incomputing the appropriate index are theBLS weights listed for the detailed indexcategories. In computing an index for apool, however, a taxpayer must weightthe appropriate indexes for the selectedindex categories comprising the pool ac-cording to the taxpayer’s actual inventoryweights for those selected index cate-gories.

The proposed regulations eliminate therequirement to use 10 percent categoriesand BLS weights to determine an appro-priate index for two reasons. First, theweight assigned to an index category bythe BLS may vary dramatically from thetaxpayer’s actual inventory weight forthat category. Consequently, the indexcomputed for those items using BLSweights will not accurately reflect the tax-payer’s inflation experience. Second, therequirement to use 10 percent categoriesand BLS weights was intended to sim-plify the index computation procedure forthose taxpayers that did not keep detailedinventory records. In practice, however,this requirement adds complexity to theindex computation for most taxpayers.Moreover, even the most detailed BLSindex categories are fairly broad and, withcurrent inventory recordkeeping proce-dures and practices, most taxpayers havesufficiently detailed books and records toclassify their inventory items according tothe most detailed BLS index categories.

The proposed regulations require a tax-payer to classify its inventory items intothe most detailed index category listed inthe “CPI Detailed Report” or the “PPI De-tailed Report.” For purposes of comput-ing a weighted average pool index, the

weight assigned to each selected indexcategory will be the relative current-yearcost of the items in that category. TheIRS and Treasury Department requestwritten comments regarding rules for ex-cluding index categories that containitems with a de minimis amount of rela-tive current-year cost from the pool indexcomputation.

2. Weighted Harmonic Mean for Comput-ing Pool Index

A pool index computed using the dol-lar-value LIFO method should reflect aweighted average of the inflation rates ofthe items contained in the ending inven-tory. Under LIFO methods that computean internal index, the index computationprocedure automatically produces an ap-propriately weighted pool index. How-ever, when a taxpayer computes a LIFOinventory pool index using externallygenerated inflation rates, the taxpayermust weight the inflation rates to computean appropriate composite index for thepool.

Section 1.472–8(e)(3)(iii)(B) states thatthe appropriate indexes are weighted ac-cording to the relative current-year costs ofthe items in each selected index category.However, the regulations do not set forthhow to compute a weighted average of theappropriate indexes using the amount ofrelative current-year costs in each selectedindex category. The IRS provided an ex-ample of IPIC weighting methodology inRev. Proc. 84–57 (1984–2 C.B. 496). Theexample computes a weighted average poolindex based on a weighted arithmetic meanof the appropriate indexes. (WeightedArithmetic Mean = [Sum of (Weight x Ap-propriate Index)] / Sum of Weights). Theexample provided in Rev. Proc. 98–49(1998–37 I.R.B. 9), also used a weightedarithmetic mean to compute a weighted av-erage percent change for a selected indexcategory.

The IRS and Treasury Department havedetermined that a weighted arithmeticmean is mathematically inappropriate foraveraging inflation indexes based on cur-rent-year costs. The mathematically cor-rect method of averaging inflation in-dexes using relative current-year costs is aweighted harmonic mean. (WeightedHarmonic Mean = Sum of Weights / Sumof [Weight / Appropriate Index]). There-fore, the proposed regulations make the

weighted harmonic mean the only accept-able method of computing a weighted av-erage pool index using relative current-year costs of items in ending inventory.

3. Double-extension or Link-ChainMethod of Index Computation

The current regulations do not indicatewhether the inventory price index shouldbe computed using a link-chain or double-extension methodology. Section1.472–8(e)(3)(ii) merely states that “[a]ninventory price index computed [underthe IPIC method] shall be a stated per-centage of the percent change in the se-lected consumer or producer price indexor indexes for a specific category or cate-gories of goods.”

In practice, some taxpayers have used alink-chain methodology, and others adouble-extension methodology. The pro-posed regulations specifically permit ei-ther method. The proposed regulationsalso explain how to compute an indexunder each method and provide examples.

4. Selecting Indexes as of an AppropriateMonth

Section 1.472–8(e)(3)(iii)(C) states thata taxpayer not using the retail inventorymethod must select indexes “as of themonth or months” most appropriate to itsmethod of determining current-year cost,or make a one-time binding election of anappropriate representative month. TheIRS has ruled that a month is an appropri-ate representative month if there is anexus between the selected month, thetaxpayer’s method of determining cur-rent-year cost, and the taxpayers’ histori-cal experience of inventory purchases.Rev. Rul. 89–29 (1989–1 C.B. 168). Inpractice, there has been confusion aboutthe meaning of the phrase “month ormonths most appropriate to the taxpayer’smethod of determining current-year cost.”

The proposed regulations clarify that,for each dollar-value pool, a taxpayershould either annually determine themonth most appropriate to its method ofdetermining the current-year cost of thepool (appropriate month) or make a one-time election of a representative appropri-ate month (representative month) for thepool. The principles of Rev. Rul. 89–29continue to apply for purposes of deter-mining whether a particular month is ap-propriate or representative. An appropri-

June 5, 2000 1230 2000–23 I.R.B.

ate index is computed by comparing thepublished cumulative index for the appro-priate or representative month to the pub-lished cumulative index for the appropri-ate or representative month used for theimmediately preceding year (in the caseof a taxpayer using the link-chain IPICmethod) or the published cumulativeindex for the month preceding the firstday of the base year (in the case of a tax-payer using the double-extension IPICmethod). The proposed regulations alsoclarify that a taxpayer electing to use arepresentative month must use an appro-priate month, rather than the representa-tive month, to compute an appropriateindex in certain circumstances, such as ashort taxable year.

5. Taxpayers Eligible to Use “DepartmentStore Inventory Price Indexes”

The current regulations prohibit the useof the IPIC method by a taxpayer that iseligible to use inventory price indexesprepared by the BLS for the purpose ofvaluing the LIFO inventories of a specificindustry. Specifically, §1.472–8(e)(3)(i)provides that a taxpayer eligible to use theretail price indexes prepared by the BLSand published in “Department Store In-ventory Price Indexes” may not use theIPIC method.

Some retailers may carry goods tradi-tionally carried by department stores andother goods that are not traditionally car-ried by department stores. Such taxpay-ers may qualify as department stores, but“Department Store Inventory Price In-dexes” may not provide indexes that areapplicable for some of the taxpayers’ de-partments. Whenever one or more depart-ments of a department store do not fit intoany one of the 23 major groups estab-lished by the BLS or into the special com-binations listed in Rev. Proc. 86–46(1986–2 C.B. 739), the taxpayer may useeither an index that represents an averagefor the whole of the remainder of theLIFO inventory or the store total indexpublished by the BLS. However, the ex-press terms of the current regulations pro-hibit taxpayers eligible to value theirLIFO inventories using “DepartmentStore Inventory Price Indexes” fromusing the IPIC method to compute anindex for any dollar-value pool.

The proposed regulations eliminate theeligibility restrictions applicable to the

IPIC method. Generally, any taxpayermay adopt the IPIC method as long as ituses that method for all goods accountedfor under the dollar-value LIFO method.However, a taxpayer eligible to use “De-partment Store Inventory Price Indexes”may elect to use those indexes for LIFOinventory items that fall within any of the23 major groups listed in “DepartmentStore Inventory Price Indexes” and theIPIC method for the remainder of itsLIFO inventory items, or may elect to usethe IPIC method for all of its LIFO inven-tories. The proposed regulations do not,however, affect the ability of an eligibletaxpayer to use “Department Store Inven-tory Price Indexes” to value its LIFO in-ventories in accordance with §1.472–1(k)and Rev. Proc. 86–46.

6. Selection from “CPI Detailed Report”or “PPI Detailed Report”

Section 1.472–8(e)(3)(iii)(C) states thata retailer may select indexes from the“CPI Detailed Report” or the “PPI De-tailed Report,” but if equally appropriateindexes may be selected from either, a re-tailer using the retail inventory methodmust select from the “CPI Detailed Re-port” and a retailer not using the retail in-ventory method must select from the “PPIDetailed Report.”

The proposed regulations eliminate theneed for a retailer to determine whetherthe “CPI Detailed Report” and “PPI De-tailed Report” contain equally appropriateindexes. The proposed regulations re-quire retailers using the retail inventorymethod to select indexes from the “CPIDetailed Report.” All other taxpayersmust select indexes from the “PPI De-tailed Report.”

7. Elimination of Requirement to ConvertPublished Indexes into Retail Price In-dexes or Cost Price Indexes

Section 1.472–8(e)(3)(iii)(C) providesthat if a retailer using the retail inventorymethod selects an index from the “PPIDetailed Report,” the selected index mustbe converted into a retail price index, andthat if a retailer not using the retail inven-tory method selects an index from the“CPI Detailed Report,” the selected indexmust be converted into a cost price index.The regulations further provide that man-ufacturers, processors, wholesalers, job-bers, and distributors must convert se-

lected indexes into cost price indexes.This conversion requirement in the cur-

rent regulations was intended to more ac-curately represent the taxpayer’s inflationexperience relative to the selected priceindex. However, due to the inability ofmany taxpayers to determine gross profitpercentages at the detailed index categorylevel and the fact that gross profit percent-ages for many taxpayers are relativelyconstant, this conversion requirementmay not actually increase the accuracy ofthe indexes used in the inventory priceindex computation. The IRS and Trea-sury Department have concluded that theadministrative burden of converting pub-lished indexes into retail price or costprice indexes outweighs any benefits ofincreased accuracy from the procedure.Thus, the proposed regulations eliminatethe requirement to convert publishedprice indexes into either retail price in-dexes or cost price indexes.

8. Relocation and Clarification of SpecialPooling Rules

Section 1.472–8(e)(3)(iv) provides spe-cial, elective pooling rules for retailers,wholesalers, jobbers, and distributors thatuse the IPIC method. Such taxpayers arepermitted to establish an inventory poolfor any group of goods included in one ofthe eleven general categories of consumergoods described in the “CPI Detailed Re-port.” Although wholesalers, jobbers anddistributors are allowed to pool goods ac-cording to categories found in the “CPIDetailed Report,” they must select in-dexes from the “PPI Detailed Report”pursuant to §1.472–8(e)(3)(iii)(C). Thecurrent regulations provide no special,elective pooling rules for manufacturersthat use the IPIC method. However, Rev.Proc. 84–57 provides that an inventorypool or pools may be established for anygroup of goods included within one of the15 general categories of producer goodsdescribed in Table 6 of the “PPI DetailedReport.”

The proposed regulations provide spe-cial, elective pooling rules for LIFO in-ventories accounted for under the IPICmethod. Specifically, retailers using theretail inventory method may establish aninventory pool for any group of goods ac-counted for under the IPIC method in-cluded within one of the general expendi-ture categories (i.e., major groups) in

2000–23 I.R.B. 1231 June 5, 2000

Table 3 of the “CPI Detailed Report.”Retailers not using the retail method,wholesalers, jobbers, distributors, proces-sors, and manufacturers may establish aninventory pool for any group of goods ac-counted for under the IPIC method in-cluded within one of the 2-digit commod-ity codes (i.e., major commodity groups)in Table 6 of the “PPI Detailed Report.”The special, elective pooling rules pro-vided in the proposed regulations corre-spond with the pooling rules found in sec-tion 474(b) so that a taxpayer may changefrom the simplified dollar-value LIFOmethod of section 474 to the IPIC methodwithout changing its pooling structure. Inaddition, the special, elective poolingrules for taxpayers using the IPIC methodare relocated with the general poolingrules applicable to all taxpayers in§1.472–8(b) and (c).

9. Clarification of the Definition of “Eli-gible Small Business”

Section 1.472–8(e)(3)(ii) permits an el-igible small business, as defined undersection 474(b) of the Internal RevenueCode of 1954, to compute an inventoryprice index for its pool(s) using 100 per-cent of the percent change in the selectedindexes. All other taxpayers must com-pute an inventory price index for theirpools using 80 percent of the percentchange in the selected indexes. At thetime the regulations were published, sec-tion 474(b) defined an eligible small busi-ness as a taxpayer with average annualgross receipts that did not exceed$2,000,000 for the 3-taxable-year periodending with the taxable year.

Section 474 was amended by the TaxReform Act of 1986. Public Law 99-514,100 Stat. 2348. An eligible small busi-ness is now defined by section 474(c) as ataxpayer with average annual gross re-ceipts that do not exceed $5,000,000 forthe 3 preceding taxable years. The pro-posed regulations clarify that the IPICmethod definition of “eligible small busi-ness” mirrors the definition in current sec-tion 474.

10. New Base Year for IPIC MethodChanges

Section 1.472–8(e)(vi) requires a tax-payer that changes to the IPIC methodfrom another dollar-value LIFO methodto treat the year of change as the base year

in determining the LIFO value of the in-ventory pool(s) for the year of change andlater taxable years. The taxpayer is alsorequired to restate indexes of existing lay-ers of increment in terms of new base-year cost. This procedure is generallyknown as updating the base year.

The proposed regulations clarify thatthe base year updating procedure appliesin the case of a voluntary change to theIPIC method, but is discretionary in thecase of an involuntary change to the IPICmethod. If an examining agent deter-mines that a taxpayer’s dollar-value LIFOmethod does not clearly reflect income,the agent may require the taxpayer tochange to the double-extension IPICmethod on a cut-off basis with or withoutan updated base year. If the examiningagent chooses not to update the base year,the examining agent will ascertain theamount of any increment in terms of base-year cost for the year of change by com-paring the total base-year cost of the be-ginning inventory determined under thetaxpayer’s dollar-value LIFO method andthe total base-year cost of the ending in-ventory determined under the double-ex-tension IPIC method. Any increment sodetermined will be valued using the indexcomputed under the double-extensionIPIC method.

11. Inventories Received in a Nonrecogni-tion Transaction

Under current law, the treatment ofLIFO inventories received in a nonrecog-nition transaction depends upon whetherthe transaction qualifies as a corporate re-organization to which section 381 applies.Section 381(c)(5) provides that inventoryaccounting methods generally carry over,uninterrupted, to a transferee in a transac-tion described in section 381(a).

However, inventory accounting meth-ods generally do not carry over to a trans-feree in other nonrecognition transactionssuch as transfers to a controlled corpora-tion under section 351, divisive “D” reor-ganizations under section 368(a)(1)(D),or contributions to a partnership undersection 721 (non-section 381 transfers).Textile Apron Company, Inc. v. Commis-sioner, 21 T.C. 146 (1953), acq., 1954–1C.B. 7. But see §1.263A–7(c)(4);1.1502–17. If a transferee that has neverowned inventories or that has accountedfor inventories using a method other than

LIFO wants to use the LIFO method toaccount for inventories received in a non-section 381 transfer, it must elect theLIFO method for the year of transfer. Theinventories received in the transfer aretreated as opening inventory and theircost is determined using the average costmethod as provided in section 472(b)(3).Rev. Rul. 70–564 (1970–2 C.B. 109). Atransferee that previously elected to usethe LIFO method may account for theLIFO inventories received in a non-sec-tion 381 transfer using its preexistingLIFO method. The LIFO layers of thetransferor retain the transferor’s originalacquisition dates and costs and are inte-grated into the transferee’s existing LIFOlayers. Commissioner v. Joseph E. Sea-gram & Sons, Inc., 394 F.2d 738 (1968),rev’g, 46 T.C. 698 (1966); Rev. Rul.70–565 (1970–2 C.B. 110).

An election to use the dollar-valueLIFO method for LIFO inventories re-ceived in a non-section 381 transfer, how-ever, may not continue the LIFO reserveof the transferor. If the mix of goods inthe inventory changes significantly afterthe transfer, the mechanics of the dollar-value LIFO method may produce an in-crement in the first taxable year that ef-fectively eliminates the LIFO reserveestablished by the transferor. This occursbecause the transferee’s base year is theyear in which it elects LIFO.

A taxpayer using the dollar-value LIFOmethod determines whether there is an in-crease or decrease in the quantity of in-ventory by comparing the base-year costof the ending inventory to the base-yearcost of the beginning inventory. When in-ventory is received in a non-section 381transfer, the transferee’s basis is deter-mined by reference to the transferor’sbasis in the inventory. The transferee’sbase-year cost, however, is not deter-mined by reference to the transferor’sbase-year cost. The transferee’s base-yearcost of inventory received in a non-sec-tion 381 transfer is equal to the trans-feree’s cost of the inventory, which isgenerally the carryover basis of the inven-tory. Since the transferor’s basis was es-tablished by reference to the actual cost ofthe goods in years prior to the transfer, thecarryover basis of the inventory may beconsiderably lower than what it wouldcost to purchase or produce the goods inthe current year. If a new item enters the

June 5, 2000 1232 2000–23 I.R.B.

transferee’s inventory, §1.472–8(e)(2)(iii)only permits the transferee to reconstructthe base-year unit cost of that item back tothe year in which it elected LIFO. If thetransferee elected LIFO in the year inwhich the non-section 381 transfer oc-curred, the base-year unit cost of the newitem will not be comparable to the base-year unit cost of the items that were re-ceived in the transfer and comprised theopening inventory. The disparity in thebase-year unit costs may produce an in-crement in terms of base-year cost thatwould not have occurred but for the lowbase-year unit cost of the inventory re-ceived in the transfer.

While the current regulations contain aprovision requiring a taxpayer thatchanges to the IPIC method from anotherLIFO method to treat the year of changeas the base year in determining the LIFOvalue of the inventory pool(s) for the yearof change and later taxable years, the pro-vision does not apply to an initial adop-tion of LIFO by a transferee. When atransferee elects the LIFO and IPIC meth-ods for LIFO inventories received in anon-section 381 transfer, the transfereewill have an increment in the year inwhich the inventories are received evenwithout a significant change in the mix ofgoods in the transferee’s ending inven-tory. The IPIC method invariably pro-duces an increment because the indexused to convert the current-year cost ofthe ending inventory to base-year costwill reflect only one year of inflationwhile the difference between the current-year cost and the carryover basis of theopening inventory reflects more than oneyear of inflation.

The IRS and Treasury Department havedetermined that recapture of the LIFO re-serve established by the transferor’s use ofthe dollar-value LIFO method solely byvirtue of the mechanical application of thedollar-value LIFO method after a non-sec-tion 381 transfer is inappropriate, given thebusiness continuity principles governingthe tax treatment of the underlying transac-tion. Accordingly, the proposed regula-tions provide that if a transferee uses thedollar-value LIFO method for inventoriesthat were received in a nonrecognitiontransaction to which section 381 does notapply and that were accounted for usingthe dollar-value LIFO method by the trans-feror, the transferee must use the year of

transfer as the base year and the trans-feror’s current-year cost of the inventoryreceived as the new base-year cost of suchinventory for purposes of determining fu-ture increments and liquidations. The pro-posed regulations do not affect a newlyformed transferee’s ability to elect new ac-counting methods or the holdings of Rev.Rul. 70–564 and Rev. Rul. 70–565. How-ever, the new base year rule does not applyto a non-section 381 transaction if thetransaction was made with the principalpurpose of availing the transferee of amethod of accounting that would be un-available to the transferor (or would be un-available without securing consent fromthe Commissioner). In determining theprincipal purpose of a transfer, considera-tion will be given to all of the facts and cir-cumstances. However, if a transferor ac-quired inventory in a bargain purchasewithin the five taxable years preceding theyear of the transfer and accounted for thatinventory using a dollar-value LIFOmethod that did not treat the bargain pur-chase inventory and physically identicalinventory acquired at market prices as sep-arate items, the transfer will be deemedmade with the principal purpose of avail-ing the transferee of a method of account-ing that would be unavailable to the trans-feror (or would be unavailable withoutsecuring consent from the Commissioner).

Proposed Effective Date

These regulations are proposed to beeffective for taxable years beginning onor after the date they are published in theFederal Register as final regulations.

Effect on Other Documents

Rev. Proc. 84–57 will become obsoleteas of the date these regulations are pub-lished in the Federal Register as finalregulations. In addition, Rev. Proc. 98–49is modified with respect to the require-ments to use 10 percent categories andBLS weights, to compute a weighted av-erage using a weighted arithmetic mean,and to convert selected indexes to cost, asof the date these regulations are publishedin the Federal Register as final regula-tions.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-

cant regulatory action as defined in Exec-utive Order 12866. Therefore, a regula-tory assessment is not required. It alsohas been determined that section 553(b)of the Administrative Procedure Act (5U.S.C. chapter 5) does not apply to theseregulations, and because the regulationsdo not impose a collection of informationon small entities, the Regulatory Flexibil-ity Act (5 U.S.C. chapter 6) does notapply. Pursuant to section 7805(f) of theInternal Revenue Code, this notice of pro-posed rulemaking will be submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written com-ments (a signed original and eight (8)copies) and electronic comments that aresubmitted timely to the IRS. The IRS andTreasury Department request commentson the clarity of the proposed rules andhow they can be made easier to under-stand. All comments will be available forpublic inspection and copying.

A public hearing has been scheduledfor September 15, 2000, at 10 a.m., inroom 4718, Internal Revenue Building,1111 Constitution Avenue, NW., Wash-ington, DC. Due to building security pro-cedures, visitors must enter at the 10thStreet entrance, located between Consti-tution and Pennsylvania Avenues, NW. Inaddition, all visitors must present photoidentification to enter the building. Be-cause of access restrictions, visitors willnot be admitted beyond the immediate en-trance area more than 15 minutes beforethe hearing starts. For information abouthaving your name placed on the buildingaccess list to attend the hearing, see the“FOR FURTHER INFORMATIONCONTACT” section of this preamble.

The rules of 26 CFR 601.601(a)(3)apply to the hearing.

Persons who wish to present oral com-ments at the hearing must submit writtenor electronic comments by August 17,2000, and submit an outline of the topicsto be discussed and the time to be devotedto each topic (a signed original and eight(8) copies) by August 25, 2000.

A period of 10 minutes will be allo-cated to each person for making com-

2000–23 I.R.B. 1233 June 5, 2000

ments.An agenda showing the scheduling of

the speakers will be prepared after thedeadline for receiving outlines haspassed. Copies of the agenda will beavailable free of charge at the hearing.


The principal author of these regula-tions is Jeffery G. Mitchell of the Officeof Assistant Chief Counsel (Income Taxand Accounting). However, other person-nel from the IRS and Treasury Depart-ment participated in their development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is pro-posed to be amended as follows:


Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *§1.472–8 also issued under 26 U.S.C.472. * * *

Par. 2. Section 1.472–8 is amended asfollows:

1. Paragraph (b)(4) is added.2. The text of paragraph (c) following

the paragraph heading is redesignated asparagraph (c)(1) and a paragraph headingfor newly designated (c)(1) is added.

3. Paragraph (c)(2) is added.4. Paragraphs (e)(3) and (h) are revised.The revisions and additions read as fol-

lows:§1.472–8 Dollar-value method of pricingLIFO inventories.* * * * *

(b) * * *(4) Inventory price index pools. A manu-

facturer or processor that elects to use theinventory price index computation methoddescribed in paragraph (e)(3) of this sectionto value its dollar-value pools may establishan inventory pool for any group of goodsincluded within one of the 2-digit commod-ity codes (i.e., major commodity groups) inTable 6 (Producer price indexes for com-modity groups, subgroups, product classes,and individual items) of the “PPI DetailedReport” published by the United States Bu-reau of Labor Statistics (available fromNew Orders, Superintendent of Docu-

ments, P.O. Box 371954, Pittsburgh, PA15250–7954). Inventory pools that com-prise less than 5 percent of the total inven-tory value may be combined to form a sin-gle miscellaneous inventory pool. If theresulting miscellaneous inventory pool it-self comprises less than 5 percent of thetotal inventory value, that pool may becombined only with the largest inventorypool.

(c) * * *(1) In general. * * * (2) Inventory price index pools. A re-

tailer using the retail inventory methodthat elects to use the inventory price indexcomputation method described in para-graph (e)(3) of this section (the IPICmethod) may establish an inventory poolfor any group of goods accounted forunder the IPIC method included withinone of the general expenditure categories(i.e., major groups) in Table 3 (ConsumerPrice Index for all Urban Consumers(CPI-U): U.S. city average, detailed ex-penditure categories) of the “CPI DetailedReport” published by the United StatesBureau of Labor Statistics (available fromNew Orders, Superintendent of Docu-ments, P.O. Box 371954, Pittsburgh, PA15250-7954). A retailer not using the re-tail inventory method, wholesaler, jobber,or distributor electing to use the IPICmethod may establish an inventory poolfor any group of goods accounted forunder the IPIC method included withinone of the 2-digit commodity codes (i.e.,major commodity groups) in Table 6(Producer price indexes for commoditygroups, subgroups, product classes, andindividual items) of the “PPI Detailed Re-port” published by the United States Bu-reau of Labor Statistics. Inventory poolsthat comprise less than 5 percent of thetotal inventory value may be combined toform a single miscellaneous inventorypool. If the resulting miscellaneous in-ventory pool itself comprises less than 5percent of the total inventory value, thatpool may be combined only with thelargest inventory pool.* * * * *

(e) * * *(3) Inventory price index computation

method—(i) In general. The inventoryprice index computation method providedby this paragraph (e)(3) (the IPICmethod) is a method of determining theLIFO value of a dollar-value inventorypool with reference to indexes published

by the United States Bureau of Labor Sta-tistics (BLS). An inventory price indexcomputed using the IPIC method will beaccepted by the Commissioner as an ap-propriate method of computing an index,and the use of that inventory price indexto compute the LIFO value of a dollar-value inventory pool will be accepted asaccurate, reliable, and suitable. The ap-propriateness of a taxpayer’s computationof an inventory price index, including theselection of the consumer or producerprice indexes and the propriety of allcomputations incidental to the use ofthose consumer or producer price in-dexes, will be determined in connectionwith the examination of the taxpayer’s in-come tax return. A taxpayer using theIPIC method may elect to establish inven-tory pools in accordance with the specialrules in paragraphs (b)(4) and (c)(2) ofthis section or the general rules for estab-lishing inventory pools in paragraphs (b)and (c) of this section. Taxpayers eligibleto use the IPIC method are described inparagraph (e)(3)(ii) of this section. Themanner in which an inventory price indexis computed using the IPIC method is de-scribed in paragraph (e)(3)(iii) of this sec-tion. Rules relating to the adoption of, orchange to, the IPIC method are in para-graph (e)(3)(iv) of this section.

(ii) Eligibility. Any taxpayer electingto use the dollar- value LIFO method mayelect to compute an inventory price indexin accordance with the IPIC method. Ex-cept as provided in this paragraph(e)(3)(ii), a taxpayer using the IPICmethod must use that method in determin-ing the value of all goods for which thetaxpayer has elected to use the dollar-value LIFO method. A taxpayer that usesthe retail price indexes prepared by theBLS and published in “Department StoreInventory Price Indexes” (available fromthe BLS by calling (202)606-6325 andentering document code 2415) may electto use the IPIC method for inventoryitems that do not fall within any of themajor groups listed in “Department StoreInventory Price Indexes.”

(iii) Computation of an inventory priceindex—(A) In general. An inventoryprice index computed using the IPICmethod is used to convert the current-yearcost of the inventory in a dollar-value in-ventory pool to base-year cost for pur-poses of determining whether an incre-

June 5, 2000 1234 2000–23 I.R.B.

ment or liquidation in terms of base-yearcost exists and to value the increment, ifany, at current-year cost. A taxpayer mustcompute a separate inventory price indexfor each dollar-value inventory pool. Thecomputation of an index for each pool in-volves the following four steps which aredescribed in more detail in this paragraph(e)(3)(iii): first, selection of a BLS tableand an appropriate month, second, selec-tion of an index category, third computa-tion of an appropriate index for each se-lected index category, and fourth,computation of a pool index. A taxpayermay compute an inventory price index foreach dollar-value inventory pool underthe IPIC method using a double-extensionmethod (the double-extension IPICmethod) or a link-chain method (the link-chain IPIC method) without regard towhether the use of a double-extensionmethod is impractical or unsuitable. Seeparagraphs (e)(3)(iii)(D) and (E) of thissection. The use of the double-extensionIPIC method or the link-chain IPICmethod is a method of accounting, andwhichever method is adopted must be ap-plied consistently to all of the taxpayer’sdollar-value inventory pools accountedfor using the IPIC method.

(B) Selection of a BLS table and appro-priate month—(1) In general. An inven-tory price index computed using the IPICmethod is computed with reference to theconsumer or producer price indexes forspecific categories of inventory itemslisted in the “CPI Detailed Report” or“PPI Detailed Report” published by theBLS for the appropriate month. A tax-payer may elect to use either the prelimi-nary or final indexes published by theBLS for the appropriate month providedthat the chosen indexes are used consis-tently from year to year. A taxpayer thatelects to use final indexes must use pre-liminary indexes for the appropriatemonth for any taxable year in which itfiles its original federal income tax returnbefore the BLS publishes final indexes.

(2) BLS table selection. Manufactur-ers, processors, wholesalers, jobbers, dis-tributors, and retailers not using the retailinventory method must select indexesfrom Table 6 (Producer price indexes forcommodity groups, subgroups, productclasses, and individual items) of the “PPIDetailed Report,” unless the taxpayer candemonstrate that the selection of an index

from another table of the “PPI DetailedReport” would be more appropriate. Re-tailers using the retail inventory methodmust select indexes from Table 3 (Con-sumer Price Index for all Urban Con-sumers (CPI-U): U.S. city average, de-tailed expenditure categories) of the “CPIDetailed Report.”

(3) Appropriate month. In the case of aretailer using the retail inventory method,the appropriate month is the last month ofthe retailer’s taxable year. In the case ofall other taxpayers, the appropriate monthis a month most appropriate to the tax-payer’s method of determining the cur-rent-year cost of each dollar-value inven-tory pool under paragraph (e)(2)(ii) of thissection. A taxpayer not using the retail in-ventory method may annually select anappropriate month for each dollar-valueinventory pool or make an election of arepresentative appropriate month (repre-sentative month). An election of a repre-sentative month is a method of accountingand must be used for the taxable year ofthe election and all subsequent taxableyears, unless the taxpayer obtains the con-sent of the Commissioner as provided in§1.446-1(e) to change or revoke its elec-tion. The election of a representativemonth must be clearly set forth on Form970. See paragraph (e)(3)(iv)(A) of thissection.

(C) Selection of an index category—(1)In general. The inventory items in eachdollar-value pool should be classified ac-cording to the most detailed listings in theappropriate tables of the “CPI DetailedReport” or the “PPI Detailed Report.”The selection of a consumer or producerprice index category for a specific item tocompute an inventory price index underthe IPIC method is a method of account-ing. However, the selection of a new con-sumer or producer price index categoryfor a specific item as a result of revisionsto the “CPI Detailed Report” or the “PPIDetailed Report” is a change in underly-ing facts and not a change in method ofaccounting. Change in method of ac-counting rules relating to changes in se-lected indexes are in paragraph (e)(3)(iv)of this section.

(2) Index selection from the PPI De-tailed Report. Manufacturers, processors,wholesalers, jobbers, distributors, and re-tailers not using the retail inventorymethod must classify their inventory

items according to the detailed listings inthe appropriate table(s) of the “PPI De-tailed Report.” Each specific inventoryitem in the taxpayer’s inventory must beassigned to the most detailed index cate-gory listed in the appropriate tables (asdetermined under paragraph(e)(3)(iii)(B)(2) of this section) of the“PPI Detailed Report” that includes thatspecific inventory item. Manufacturersand processors must assign each raw ma-terial inventory item to the most detailedindex category that includes that raw ma-terial and each finished good inventoryitem to the most detailed index categorythat includes that finished good. Manu-facturers and processors must assignwork-in-process inventory items to themost detailed index category that includesthe finished good into which the item willbe manufactured or processed. For thispurpose, the term finished good means agood that is in a saleable state. For exam-ple, a gasoline engine manufacturer thatalso produces pistons for the engines mustassign finished pistons that have not yetbeen affixed to an engine block and thepiston work-in-process items to the mostdetailed index category that includes pis-tons. Finished pistons that have been af-fixed to an engine block must be assignedto the most detailed index category thatincludes the engine.

(3) Index selection from the CPI De-tailed Report. Retailers using the retailinventory method must classify their in-ventory items according to the detailedlistings in the appropriate tables of the“CPI Detailed Report.” Each specific in-ventory item in the taxpayer’s inventorymust be placed in the most detailed indexcategory listed in the appropriate table (asdetermined under paragraph(e)(3)(iii)(B)(2) of this section) of the“CPI Detailed Report” that includes thatspecific inventory item.

(D) Computation of an appropriateindex—(1) Double- extension IPICmethod. In the case of a taxpayer usingthe double-extension IPIC method, an ap-propriate index for a selected index cate-gory is the percent change in the pub-lished cumulative indexes for thatcategory for the index period between theappropriate or representative month of thecurrent taxable year (determined underparagraph (e)(3)(iii)(B)(3) of this section)and the month preceding the first day of

2000–23 I.R.B. 1235 June 5, 2000

the base year (the base month). The per-cent change in the published indexes isequal to the quotient of the published cu-mulative index for the appropriate or rep-resentative month of the current year di-vided by the published cumulative indexfor the base month.

(2) Link-chain IPIC method. In thecase of a taxpayer using the link-chainIPIC method, an appropriate index for aselected index category is the percentchange in the published cumulative in-dexes for that category during the indexperiod between the appropriate or repre-sentative month of the current taxableyear (determined under paragraph(e)(3)(iii)(B)(3) of this section) and theappropriate or representative month usedfor the immediately preceding taxableyear. The percent change in the publishedindexes is equal to the quotient of thepublished cumulative index for the appro-priate or representative month of the cur-rent year divided by the published cumu-lative index for the appropriate orrepresentative month used for the imme-diately preceding year (or, for the monthimmediately preceding the first day of thetaxable year, if such year is the first tax-able year in which the taxpayer uses dol-lar-value LIFO).

(3) Limitation on index period. A tax-payer electing to use a representativemonth under paragraph (e)(3)(iii)(B)(3) ofthis section must use an appropriate month,rather than the representative month, to de-termine the index period in the circum-stances described in this paragraph(e)(3)(iii)(D)(3) and other similar circum-stances. For example, if the first taxableyear in which the taxpayer uses the IPICmethod is also the first taxable year inwhich the taxpayer uses the dollar-valueLIFO method, the index period is the pe-riod between the month immediately pre-ceding the first day of the taxable year andan appropriate month for that taxable year.Likewise, in the case of a short taxableyear, the index period ordinarily is the pe-riod between the base month (double-ex-tension IPIC method) or the appropriate orrepresentative month used for the preced-ing taxable year (link-chain IPIC method)and the appropriate month for the short

taxable year. Similarly, if a taxpayer usingthe link-chain IPIC method is granted con-sent to change its method of determiningthe current-year cost of a dollar-value pooland its representative month, the index pe-riod is the period between the old represen-tative month used for the preceding taxableyear and the new representative month forthe year of change.

(E) Computation of a pool index—(1)Weighted average pool index. To com-pute an inventory price index for a dollar-value pool, a taxpayer must compute aweighted average pool index. A weightedaverage pool index is a weighted har-monic mean of the appropriate indexes(determined under paragraph(e)(3)(iii)(D) of this section) for each se-lected index category represented in thetaxpayer’s ending inventory. The formulafor computing a weighted harmonic meanis: Sum of weights / Sum of (Weight / Ap-propriate Index). The costs to be used incomputing a weighted harmonic mean arethe relative amount of current-year costs(or, in the case of a retailer using the retailinventory method, the relative retail sell-ing prices) in each index category repre-sented in the ending inventory of the pool.

(2) Double-extension IPIC method.Under the double- extension IPICmethod, an inventory price index com-puted for each pool is 1.0 plus a statedpercentage of the increase since the basedate in the weighted average pool indexdetermined under paragraph(e)(3)(iii)(E)(1) of this section. In thecase of an eligible small business as de-fined in section 474, the stated percentageis 100%. In the case of all other taxpay-ers, the stated percentage is 80%. Thus,the inventory price index for an eligiblesmall business is equal to the weightedaverage pool index determined underparagraph (e)(3)(iii)(E)(1) of this section.The inventory price index for all othertaxpayers is computed using the follow-ing formula: 1 + [ 0.8 * (weighted averagepool index - 1)].

(3) Link-chain IPIC method. Under thelink-chain IPIC method, an inventoryprice index for each pool is 1.0 plus astated percentage of the increase since thebase date in a cumulative index. In the

case of an eligible small business as de-fined in section 474, the stated percentageis 100%. In the case of all other taxpay-ers, the stated percentage is 80%. The cu-mulative index for each taxable year is theproduct of the weighted average poolindex determined under paragraph(e)(3)(iii)(E)(1) of this section multipliedby the cumulative index for the immedi-ately preceding taxable year. The cumu-lative index for the taxable year is com-puted using the following formula:(weighted average pool index * precedingyear’s Cumulative Index). The inventoryprice index for a taxable year of an eligi-ble small business is equal to the cumula-tive index for the taxable year. The in-ventory price index for a taxable year ofall other taxpayers is computed using thefollowing formula: 1 + [0.8 * (Cumula-tive Index for the taxable year - 1)].

(F) Examples. The following examplesillustrate the rules of this paragraph(e)(3)(iii):

Example 1. Double-extension Method. (i) Intro-duction. R is a retail furniture merchant with morethan $5,000,000 in average annual gross receipts forall relevant years. For the taxable year ending De-cember 31, 1996, R used the first-in, first-outmethod of identifying inventory and valued its in-ventory at cost. R’s inventory on December 31,1996, had a cost of $850,000.00. R elected to usethe dollar-value LIFO and double-extension IPICmethods for its taxable year ending December 31,1997. R determines the current-year cost of inven-tory items by reference to the actual cost of thegoods most recently purchased. R elected to pool itsinventory in accordance with the special IPIC pool-ing rules of paragraph (b)(4) of this section. R doesnot use the retail inventory method. All of R’s in-ventory items fall within the 2-digit commoditycode in Table 6 (Producer price indexes for com-modity groups, subgroups, product classes, and indi-vidual items) of the “PPI Detailed Report” for “fur-niture and household durables.” Therefore, R willmaintain a single inventory pool.

(ii) Select a BLS table and appropriate month forthe 1997 taxable year. R determines that the appro-priate month for the taxable year ending December31, 1997, is October. Because R is a retailer notusing the retail inventory method, R must select in-dexes from the “PPI Detailed Report.” The indexesin Table 6 of the “PPI Detailed Report” are appropri-ate for R’s inventory.

(iii) Select index categories for the 1997 taxableyear. R’s inventory items can be classified into fivedetailed categories listed in Table 6 of the “PPI De-tailed Report” published for October, 1997. The cat-egories and current-year cost of items in those cate-gories can be summarized as follows:

June 5, 2000 1236 2000–23 I.R.B.

Commodity Code Category Current-Year Cost

12120101 Living Room Table $111,924.00

12120211 Dining Room Table $159,578.00

12120216 Dining Room Chairs $ 98,639.00

12130101 Upholstered Sofas $332,488.00

12130111 Upholstered Chairs $218,751.00

$921,380.00

2000–23 I.R.B. 1237 June 5, 2000

(iv) Compute appropriate indexes for the 1997taxable year. Because R elected to use the double-extension IPIC method, R will compute appropriate

indexes in accordance with paragraph(e)(3)(iii)(D)(1) of this section (published cumula-tive index for October, 1997 divided by published

cumulative index for December, 1996). R computesthe appropriate indexes as follows:

Oct. ‘97 Dec. ‘96 AppropriateCategory Index Index Index

Living Room Table 172.4 169.2 1.018913

Dining Room Table 171.9 168.1 1.022606

Dining Room Chairs 172.8 169.7 1.018268

Upholstered Sofas 142.2 140.9 1.009226

Upholstered Chairs 134.1 132.5 1.012075

(v) Compute a weighted average pool index for the1997 taxable year. R must first compute a weighted

average pool index using the formula set forth in para-graph (e)(3)(iii)(E)(1) of this section (Sum of weights /

Sum of [Weight / Appropriate Index]). The weightedaverage pool index is computed as follows:

AppropriateCategory Weight Index Quotient

Living Room Table $111,924.00 1.018913 $109,846.47

Dining Room Table 159,578.00 1.022606 156,050.33

Dining Room Chairs 98,639.00 1.018268 96,869.39

Upholstered Sofas 332,488.00 1.009226 329,448.51

Upholstered Chairs 218,751.00 1.012075 216,141.10

Total $921,380.00 $908,355.80

Sum of Sum of Weighted AverageWeights (Weight/Appropriate Index) Pool Index

$921,380.00 $908,355.80 1.0143382

(vi) Compute an inventory price index for the1997 taxable year. R computes an inventory priceindex for the pool using the formula set forth inparagraph (e)(3)(iii)(E)(2) of this section. The in-ventory price index is 1.0114710 (1 + [0.8 *(1.0143382 - 1)]).

(vii) Determine the LIFO value of the pool for the1997 taxable year. R determines the total base-yearcost of its ending inventory by dividing the total cur-rent-year cost of the inventory items in the pool bythe inventory price index. The total base-year costof R’s ending inventory is $910,930.71 ($921,380 /1.011471). R compares the ending inventory atbase-year cost to the beginning inventory at base-

year cost and determines that the amount of the layerof increment for the taxable year in terms of base-year cost is $60,930.71 ($910,930.71 -$850,000.00). R multiplies the base-year cost of theincrement by the inventory price index computed forthe taxable year and determines that the LIFO valueof the increment is $61,629.65 ($60,930.71 *1.011471). Thus, the LIFO value of R’s inventory atthe end of the 1997 taxable year is $911,629.65($850,000 opening inventory + $61,629.65 incre-ment).

(viii) Select a BLS table and appropriate monthfor the 1998 taxable year. For the 1998 taxableyear, R must compute a new inventory price index

under the double-extension IPIC method to deter-mine the LIFO value of its dollar-value pool. R de-termines that the appropriate month for the taxableyear ending December 31, 1998, is November.

(ix) Select index categories for the 1998 taxableyear. The inventory items contained in R’s endinginventory can be classified into five detailed cate-gories listed in Table 6 of the “PPI Detailed Report”published for November, 1998. The categories andcurrent-year cost of items in those categories can besummarized as follows:


12120103 Living Room Desks $125,008.00


12120216 Dining Room Chairs $113,569.00



$951,743.00

(x) Compute appropriate indexes for the 1998taxable year. Because R uses the double-extensionIPIC method, R will compute an appropriate index

in accordance with paragraph (e)(3)(iii)(D)(1) ofthis section (published cumulative index for Novem-ber, 1998 divided by published cumulative index for

December, 1996). R computes the appropriate in-dexes as follows:

Nov. ‘98 Dec. ‘96 AppropriateCategory Index Index Index

Living Room Desks 172.6 160.3 1.076731





June 5, 2000 1238 2000–23 I.R.B.

(xi) Compute a pool index for the 1998 taxableyear. R must first compute a weighted average pool

index using the formula set forth in paragraph(e)(3)(iii)(E)(1) of this section (Sum of weights / (Sum

of [Weight / Appropriate Index])). The weighted aver-age pool index is computed as follows:


Living Room Desks $125,008.00 1.076731 $116,099.56





Total $951,743.00 $916,441.28


$951,743.00 $916,441.28 1.0385204

(xii) Compute an inventory price index for the1997 taxable year. R computes the inventory priceindex for the pool using the formula set forth inparagraph (e)(3)(iii)(E)(2) of this section. The in-ventory price index is 1.0308163 (1 + [0.8 *(1.0385204 - 1)]).

(xiii) Determine the LIFO value of the pool forthe 1998 taxable year. R determines the total base-year cost of its ending inventory by dividing thetotal current-year cost of the inventory items in thepool by the pool index. The total base-year cost ofthe ending inventory is $923,290.60 ($951,743.00 /1.0308163). R compares the ending inventory atbase-year cost to the beginning inventory at base-year cost and determines that the amount of the layer

of increment for the taxable year in terms of base-year cost is $12,359.89 ($923,290.60 -$910,930.71). R multiplies the base-year cost of theincrement by the pool index computed for the tax-able year and determines that the LIFO value of theincrement is $12,740.78 ($12,359.89 * 1.0308163).Thus, the LIFO value of R’s inventory at the end ofthe 1997 taxable year is $924,370.43 ($850,000.00base year layer + $61,629.65 1997 layer +$12,740.78 1998 layer).

Example 2. Link-chain Method. (i) Introduction.The facts are the same as Example 1, except that Ruses the link-chain IPIC method. The double-exten-sion IPIC method and the link-chain IPIC methodyield the same results for the first taxable year in

which the IPIC method is used. Therefore, this ex-ample only illustrates how R would compute an in-ventory price index and determine the LIFO value ofits dollar-value pool for the 1998 taxable year.

(ii) Select a BLS table and appropriate month forthe 1998 taxable year. R determines that the appro-priate index month for the taxable year ending De-cember 31, 1998, is November.

(iii) Select index categories for the 1998 taxableyear. R’s inventory items can be classified into fivedetailed categories listed in Table 6 of the “PPI De-tailed Report” published for November, 1998. Thecategories and current-year cost of items in thosecategories can be summarized as follows:


12120103 Living Room Desks $125,008.00


12120216 Dining Room Chairs $113,569.00



$951,743.00

(iv) Compute appropriate indexes for the 1998taxable year. Because R uses the link-chain IPICmethod, R will compute an appropriate index in ac-

cordance with paragraph (e)(3)(iii)(D)(2) of this sec-tion (published cumulative index for the November,1998 divided by published cumulative index for the

October, 1997). R computes the appropriate indexesas follows:

Nov. ‘98 Oct. ‘97 AppropriateCategory Index Index Index

Living Room Desks 172.6 162.0 1.065432





(v) Compute a pool index for the 1998 taxableyear. R must first compute a weighted average pool

index using the formula set forth in paragraph(e)(3)(iii)(E)(1) of this section (Sum of weights / Sum

of [Weight / Appropriate Index]). The weighted aver-age pool index is computed as follows:


Living Room Desks $125,008.00 1.065432 $117,330.81





Total $951,743.00 $928,437.87


$951,743.00 $928,437.87 1.0251014

2000–23 I.R.B. 1239 June 5, 2000

(vi) Compute an inventory price index for the1997 taxable year. R computes the inventory priceindex in accordance with paragraph (e)(3)(iii)(E)(3)of this section. R multiplies the weighted averagepool index by the prior year’s cumulative index toget the cumulative index for the taxable year. Be-cause 1997 was the first year in which R used thelink-chain IPIC method, the prior year’s cumulativeindex is equal to the 1997 weighted average poolindex. The cumulative index for 1998 is 1.0397995(1.0143382 * 1.0251014). R computes the inven-tory price index using the formula set forth in para-graph (e)(3)(iii)(E)(3) of this section. The inventoryprice index is 1.0318396 (1 + [0.80 * (1.0397995 -1)]).

(vii) Determine the LIFO value of the pool for the1998 taxable year. R determines the total base-yearcost of its ending inventory by dividing the total cur-rent-year cost of the inventory items in the pool bythe inventory price index. The total base-year costof the ending inventory is $922,374.95 ($951,743.00/ 1.0318396). R compares the ending inventory atbase-year cost to the beginning inventory at base-year cost and determines that the amount of the layerof increment for the taxable year in terms of base-year cost is $11,444.24 ($922,374.95 -$910,930.71). R multiplies the base-year cost of theincrement by the pool index computed for the tax-able year and determines that the LIFO value of theincrement is $11,808.62 ($11,444.24 * 1.0318396).Thus, the LIFO value of R’s inventory at the end ofthe 1998 taxable year is $923,438.27 ($850,000 baseyear layer + $61,629.65 1997 layer + $11,808.621998 layer).

(iv) Adoption or change of method—(A) Adoption or change to IPIC method.The use of an inventory price index com-puted using the IPIC method is a methodof accounting. A taxpayer permitted toadopt the dollar-value LIFO method with-out first securing the consent of the Com-missioner may also adopt the IPICmethod incident to that adoption withoutfirst securing the consent of the Commis-sioner. The IPIC method may be adoptedand used only if the taxpayer indicates ona Form 970, “Application to Use LIFOInventory Method,” or in such other man-ner as may be acceptable to the Commis-sioner, a listing of each dollar-value in-ventory pool, the type of goods included

in each pool, the consumer or producerprice index or indexes selected for eachpool, whether the taxpayer will use thedouble-extension IPIC method or thelink-chain IPIC method of computing aninventory price index, and if the taxpayermakes a one-time binding election of anappropriate representative month, the rep-resentative month. In the case of a tax-payer permitted to adopt the IPIC methodwithout requesting the Commissioner’sconsent, the Form 970 shall be attached tothe taxpayer’s income tax return for thetaxable year of that adoption. In all othercases, a taxpayer may change to the IPICmethod prescribed by this paragraph onlyafter first securing the consent of theCommissioner as provided in §1.446-1(e). In such cases, the Form 970 con-taining the information described abovemust be attached to a Form 3115, “Appli-cation for Change in AccountingMethod,” filed in accordance with§1.446–1(e). Taxpayers must maintainadequate books and records in order tosatisfy the requirements of §1.472–2(h),including adequate books and records ofthe use and computations of the IPICmethod. Notwithstanding the rules inparagraph (e)(1) of this section, a tax-payer that adopts or changes to the use ofan inventory price index computed usingthe IPIC method is not required to demon-strate that the use of any other method ofcomputing the LIFO value of a dollar-value inventory pool is impractical.

(B) Change in selected index. The se-lection of a consumer or producer priceindex category for a specific item to com-pute an appropriate index under para-graph (e)(3)(iii)(B) of this section is amethod of accounting. A taxpayer desir-ing to change the selection of such a con-sumer or producer price index must se-cure the consent of the Commissioner asprovided in §1.446–1(e).

(C) New base year—(1) Voluntarychange—(i) In general. In the case of ataxpayer using a method other than theIPIC method to determine the LIFO valueof a dollar-value inventory pool, any lay-ers of inventory increments previouslydetermined by that method and the LIFOvalue of those layers are retained if thetaxpayer voluntarily changes to the use ofthe IPIC method. In the case of a tax-payer changing the selection of an indexcategory for an inventory item, any layersof inventory increments previously deter-mined and the LIFO value of those layersare retained. Instead of using the earliesttaxable year for which the taxpayeradopted the LIFO method for any items inthe pool, the year of change is used as thenew base year in determining the LIFOvalue of the inventory pool for the year ofchange and later taxable years. The cu-mulative index as of the first day of theyear of change (the base date) is 1.00.The base-year costs of layers of incrementin the pool at the beginning of the year ofchange must be restated in terms of newbase-year cost, using the year of changeas the new base year, and the indexes forpreviously determined inventory incre-ments must be recomputed accordingly.The new base-year cost of a pool is equalto the total current-year cost of all theitems in the pool as determined pursuantto the taxpayer’s established method ofdetermining the total current-year cost ofitems making up the pool under paragraph(e)(2)(ii) of this section. See paragraph(f)(2) of this section for rules relating to achange to the dollar-value method fromanother method of pricing LIFO invento-ries.

(ii) Example. The following exampleillustrates the rules of this paragraph(e)(3)(iv)(C)(1):

Example. (i) X began using a dollar-value LIFOmethod other than the IPIC method in 1990 and main-

tains a single dollar-value pool. X is granted permis-sion to change to the IPIC method, beginning with the

taxable year ending December 31, 2000. X will con-tinue to use a single dollar-value pool under the IPIC

method. X’s beginning inventory as of January 1,2000, computed using its former method, is as follows:

June 5, 2000 1240 2000–23 I.R.B.

Base-YearCosts Index LIFO Value

Base layer $135,000 1.00 $135,000

1991 layer 20,000 1.43 28,600

1994 layer 60,000 1.55 93,000

1995 layer 13,000 1.59 20,670

1997 layer 2,000 1.61 3,220

Totals $230,000 $280,490

(ii) Under X’s method of determining the current-year cost of items, the current-year cost of the begin-ning inventory is $391,000. Thus, X’s new base-year cost as of January 1, 2000 is $391,000. X

allocates this new base-year cost to each LIFO layerbased on the ratio of old base-year cost of the layerto the total old base-year cost of the pool. To recom-pute the indexes for each of its LIFO layers, X di-

vides the LIFO value of each layer by the new base-year cost attributable to the layer. The new base-year costs, recomputed indexes, and LIFO value ofX’s inventory are as follows:


Base layer $229,500 0.588235 $135,000

1991 layer 34,000 0.841176 28,600

1994 layer 102,000 0.911765 93,000

1995 layer 22,100 0.935294 20,670

1997 layer 3,400 0.947059 3,220

Totals $391,000 $280,490

(2) Involuntary change—(i) In general.If a taxpayer uses a method of accountingother than the IPIC method to determinethe LIFO value of a dollar-value inventorypool and the Commissioner determinesthat the method does not clearly reflect in-come, the Commissioner may require thetaxpayer to change to the IPIC method. Ifa taxpayer is unable to provide a sufficientbasis, including information from its booksand records, to compute an adjustmentunder section 481, and the Commissionerrequires the taxpayer to change to the IPICmethod, the Commissioner will require the

taxpayer to change to the double-extensionIPIC method and implement the change ona cut-off basis without a new base year.Under the cut-off basis without a new baseyear, the Commissioner will determine theamount of any increment in terms of base-year cost for the year of change by com-paring the total base-year cost of the begin-ning inventory under the taxpayer’smethod and the total base-year cost of theending inventory under the double-exten-sion IPIC method described in this para-graph (e)(3) and value any increment sodetermined using the inventory price index

computed under the double-extension IPICmethod.

(ii) Example. The following exampleillustrates the rules of this paragraph(e)(3)(iv)(C)(2):

Example. (i) Y began using a dollar-value LIFOmethod other than the IPIC method in 1994 andmaintains a single dollar-value pool. Under Y’smethod of determining the current-year cost ofitems, the current-year cost of Y’s ending inventoryfor the 2000 taxable year is $348,160. Y’s begin-ning inventory as of January 1, 2000, computedusing its method, is as follows:


Base layer $105,000 1.00 $105,000

1995 layer 3,000 1.70 5,100

1996 layer 5,500 2.00 11,000

1997 layer 2,900 2.50 7,250

1998 layer 1,400 2.85 3,990

Totals $117,800 $132,340

(ii) Upon examination, it is determined that Y’sdollar- value LIFO method does not clearly reflectincome. If Y is unable to provide the examiningagent with a sufficient basis to compute a section481 adjustment arising from a change to a dollar-value LIFO method that does clearly reflect in-come, and the examining agent chooses to changeY to the IPIC method, the change will be imple-mented as follows. First, the examining agent willcompute an inventory price index under the dou-ble-extension IPIC method in accordance with thisparagraph (e)(3). For purposes of this example, as-

sume that the inventory price index computedunder the double-extension IPIC method is1.438793. Second, the examining agent will dividethe current-year cost of Y’s ending inventory by theinventory price index to determine the base-yearcost of Y’s inventory under the double-extensionIPIC method. The base-year cost is $241,980.60($348,160 / 1.438793). Third, the examining agentwill compare the base-year cost of the ending in-ventory determined under the double-extensionIPIC method to the base-year cost of the beginninginventory determined under Y’s method of ac-

counting to determine the amount of any incre-ment. The increment at base- year cost for the2000 taxable year is $124,180.60 ($241,980.60 -$117,800.00). Fourth, the examining agent willvalue the increment by multiplying the base-yearcost of the increment by the inventory price index.The LIFO value of the increment is $178,670.18($241,980.60 * 1.438793). Finally, the examiningagent will reduce Y’s cost of goods sold and in-creases Y’s gross income for the 2000 taxable yearby the increase in the LIFO value of the 2000 end-ing inventory, or $178,670.18.

(v) Effective date—(A) In general. Therules of this paragraph (e)(3) and para-graphs (b)(4) and (c)(2) of this section areapplicable for taxable years beginning onor after the date these regulations are pub-lished in the Federal Register as finalregulations.

(B) Change in method of accounting.Any change in a taxpayer’s method of ac-counting necessary to comply with thisparagraph (e)(3) or paragraphs (b)(4) or(c)(2) of this section is a change in methodof accounting to which the provisions ofsection 446 and the regulations thereunderapply. For the first taxable year beginningon or after the date these regulations arepublished in the Federal Register as finalregulations, a taxpayer is granted the con-sent of the Commissioner to change itsmethod of accounting to a method re-quired or permitted by this paragraph(e)(3) and paragraphs (b)(4) and (c)(2) ofthis section. A taxpayer that wants tochange its method of accounting underthis paragraph (e)(3)(v) must follow theautomatic consent procedures in Rev.Proc. 99–49 (1999–52 I.R.B. 725)(see§601.601(d)(2) of this chapter). However,the scope limitations in section 4.02 ofRev. Proc. 99–49 do not apply. In addi-tion, if the taxpayer’s method of account-ing for its LIFO inventories is an issueunder consideration at the time the appli-cation is filed with the national office, theaudit protection of section 7 of Rev. Proc.99–49 does not apply. If a taxpayerchanging its method of accounting underthis paragraph (e)(3)(v)(B) is under exam-ination, before an appeals office, or beforea federal court with respect to any incometax issue, the taxpayer must provide acopy of the application to the examiningagent(s), appeals officer or counsel for thegovernment, as appropriate, at the sametime it files the application with the na-tional office. A change under this para-graph (e)(3)(v)(B) must be made using acut-off basis and new base year in accor-dance with paragraph (e)(3)(iv)(C)(1) ofthis section. Because a change under thisparagraph (e)(3)(v)(B) is made on a cut-off basis, a section 481(a) adjustment isnot required. However, a taxpayer chang-ing its method of accounting under thisparagraph (e)(3)(v)(B) must comply withthe requirements of section 10.04(3) of theAPPENDIX of Rev. Proc. 99–49 (con-cerning bargain purchases).

* * * * *(h) Inventories received in certain non-

recognition transactions—(1) In general.Except as provided in paragraph (h)(3) ofthis section, if inventories are received ina transaction described in paragraph(h)(2) of this section, then for purposes ofdetermining future increments and liqui-dations the transferee must use the year ofthe transfer as the base year and the cur-rent-year cost (determined under thetransferor’s method of accounting) of theinventories received as the new base-yearcost of such inventories. Likewise, thetransferee must use the current-year cost(determined under the transferee’smethod of accounting) of its beginning in-ventory, if any, as the new base-year costof the beginning inventory for purposes ofdetermining future increments and liqui-dations. The total new base-year cost ofthe transferee’s beginning inventory isequal to the new base-year cost of the in-ventories received and the new base-yearcost of the beginning inventory. The cu-mulative index as of the first day of theyear in which the inventory is received(the base date) is 1.00. The base-yearcosts of any layers of increment in thepool, as determined after the transfer,must be restated in terms of new base-year costs and the indexes for all such lay-ers must be restated in terms of the newbase year index. See paragraph(e)(3)(iv)(C)(1) of this section for an ex-ample of this computation.

(2) Transactions to which this para-graph (h) applies. A transaction is de-scribed in this paragraph (h) if—

(i) The transferee determines its basisin the inventories, in whole or in part, byreference to the basis of the inventories inthe hands of the transferor;

(ii) The transferor used the dollar-valueLIFO method to account for the trans-ferred inventories;

(iii) The transferee uses the dollar-value LIFO method to account for the in-ventories in the year of the transfer; and

(iv) The transaction is not described insection 381(a).

(3) Anti-avoidance rule. The rule inparagraph (h)(1) of this section will notapply to a transaction entered into withthe principal purpose to avail the trans-feree of a method of accounting thatwould be unavailable to the transferor (orwould be unavailable to the transferor

without securing consent from the Com-missioner). In determining the principalpurpose of a transfer, consideration willbe given to all of the facts and circum-stances. However, a transfer is deemedmade with the principal purpose to availthe transferee of a method of accountingthat would be unavailable to the transferorwithout securing consent from the Com-missioner if the transferor acquired inven-tory in a bargain purchase within the fivetaxable years preceding the year of thetransfer and used a dollar-value LIFOmethod to account for that inventory thatdid not treat the bargain purchase inven-tory and physically identical inventory ac-quired at market prices as separate items.Inventory is deemed acquired in a bargainpurchase if the actual cost of the inven-tory (or, if appropriate, the allocated costof the inventory) was less than or equal to50 percent of the replacement cost ofphysically identical inventory. Inventoryis not considered acquired in a bargainpurchase if the actual cost of the inven-tory (or, if appropriate, the allocated costof the inventory) was greater than orequal to 75 percent of the replacementcost of physically identical inventory.

(4) Effective date. The rules of thisparagraph (h) are applicable for transferson or after the date these regulations arepublished in the Federal Register as finalregulations.



(Filed by the Office of the Federal Register on May18, 2000, 8:45 a.m., and published in the issue of theFederal Register for May 19, 2000, 65 F.R. 31841)

Partnership Options andConvertible Instruments

Notice 2000–29

PURPOSE

This notice invites public comment onthe federal income tax treatment of theexercise of an option to acquire a partner-ship interest, the exchange of convertibledebt for a partnership interest, and the ex-change of a preferred interest in a partner-ship for a common interest in that partner-ship.

2000–23 I.R.B. 1241 June 5, 2000

BACKGROUND

In a variety of situations, partnershipsissue options or convertible debt that allowthe holder to acquire by purchase or conver-sion an equity interest in an entity classifiedas a partnership for federal tax purposes.Partnerships also issue convertible preferredpartnership interests that allow a partner toacquire a materially different interest in thepartnership upon conversion. Often, theseinstruments are exercised or convertedwhen the partnership interest to be receivedis more valuable than the sum of considera-tion previously transferred to the partner-ship plus any consideration transferred uponexercise or conversion. In addition, con-vertible preferred partnership interests oftenare converted at a time when the partnershipinterest to be received is more valuable thanthe interest being converted (disregardingthe value of the conversion right). Taxpay-

ers have noted significant uncertainties as tothe federal income tax consequences ofusing such instruments and have expresseda need for guidance.

REQUEST FOR PUBLIC COMMENT

The Internal Revenue Service and theTreasury Department request commentson the tax consequences to the recipientof the partnership interest as well as to thepartnership upon the exercise of a partner-ship option or conversion of a debt or pre-ferred equity interest in that partnership.

Taxpayers may submit comments inwriting to:

Internal Revenue ServiceAttn: CC:DOM:CORP:R (Notice2000–29, Room 5226)P.O. Box 7604Ben Franklin StationWashington, D.C. 20044

Alternatively, taxpayers may submitcomments electronically at: [email protected]

All comments should be received bySeptember 15, 2000. The comments sub-mitted will be available for public inspec-tion and copying.

DRAFTING INFORMATION

The principal author of this notice isAudrey W. Ellis of the Office of AssistantChief Counsel (Passthroughs and SpecialIndustries). For further information re-garding this notice contact Ms. Ellis at(202) 622-3060 (not a toll-free call).

June 5, 2000 1242 2000–23 I.R.B.

Supplemental Information onRevenue Procedure 2000–12for Prospective QualifiedIntermediaries

Announcement 2000–48

AGENCY: Internal Revenue Service(IRS), Treasury

Revenue Procedure 2000–12, 2000–4I.R.B. 387 sets forth a qualified interme-diary (QI) withholding agreement thatgoverns the withholding and informationreporting obligations of certain financialinstitutions. This announcement providesguidance for financial institutions that areconsidering the qualified intermediaryregime.

The QI system is a significant step for-ward for both taxpayers and the IRS. Itdoes, however, represent a paradigm shiftto greater self-regulation. Treasury andthe IRS believe that it is appropriate toallow the greatest self-regulation undercircumstances in which Treasury and theIRS have the greatest confidence thatsuch self-regulation will be effective. Inpursuit of that objective, Treasury and theIRS considered allowing QI status onlyfor businesses operating in jurisdictionswith which the United States has a bilat-eral tax treaty or tax information ex-change agreement. In response to tax-payer comments, however, that approachwas not adopted. Taxpayers requestedthat the QI system have the broadestscope possible, so that financial institu-tions can potentially act as qualified inter-mediaries in all jurisdictions in whichthey do business. In an attempt to balancethese competing concerns, Treasury andthe IRS intend to permit financial institu-tions to act as qualified intermediaries inaccordance with the provisions of this an-nouncement.

QI Agreements in Countries Without KYCRules.

As noted above, Treasury and the IRSbelieve it is appropriate to permit the self-

regulation envisioned by the QI systemonly under circumstances in which Trea-sury and the IRS have confidence thatsuch self-regulation may be effective.Because Treasury and the IRS regardknow-your-customer (KYC) rules as avital component of adequate self-regula-tion, the IRS generally will not extend theQI system to any country that does nothave KYC rules or has unacceptable KYCrules. The IRS will, however, permit abranch of a financial institution (but not aseparate juridical entity affiliated with thefinancial institution) located in such acountry to act as a qualified intermediaryif the branch is part of an entity organizedin a country that has acceptable KYCrules and the entity agrees to apply itshome country KYC rules to the branch.As is the case with any violations of theQI agreement by the branch, failure to ob-tain adequate documentation will causethe entity to be in default of its agreementand may cause the agreement to be termi-nated.

Heightened Enforcement of QI Agreementin Specified Tax Haven and SecrecyJurisdictions.

Treasury and the IRS believe that self-regulation is most likely to be effective injurisdictions that are characterized by ad-equate transparency and a willingness toprovide tax information to the IRS. Ac-cordingly, the IRS will apply more rigor-ous oversight to financial institutions ortheir branches in jurisdictions that are taxhavens or bank secrecy jurisdictions andshow an unwillingness to cooperate withthe United States to reform their practicesrelating to transparency and the provisionof tax information (“specified tax havensand secrecy jurisdictions”). It will do so,for example, by imposing increased ormore rigorous audit requirements and/orstricter enforcement standards (includinga more rigorous approach to defaults) onbusinesses operating in such jurisdictions.The IRS will begin immediately makingdeterminations of which jurisdictionsmeet these criteria, but may not have

made all such determinations prior to en-tering into QI agreements. As such, QIsshould not assume that, because they havean agreement covering a business in aparticular jurisdiction, such jurisdictionwill not later be identified as a specifiedtax haven or secrecy jurisdiction. Any en-hanced audit requirements or stricter en-forcement standards will, however, be im-posed only on agreements entered into orrenewed after identification of the juris-diction as a specified tax haven or secrecyjurisdiction.

Certification Prior to Renewal.

As stated above, Treasury and the IRSbelieve that self-regulation is most likelyto be effective in jurisdictions that arecharacterized by adequate transparencyand a willingness to provide tax informa-tion to the IRS. A QI agreement generallyhas a duration of six calendar years. Afterthe six year period, the agreement may berenewed upon the signatures of both theQI and the IRS. It is expected that theIRS will agree to renew a QI agreementor, in the case of new agreements that be-come effective on or after January 1,2004, enter a new agreement for QIs in aparticular country only if the IRS receivesa certification from the Treasury Depart-ment that the country has effective rulesand/or procedures for providing tax infor-mation to the United States for both civiltax administration and criminal tax en-forcement purposes (including, for exam-ple, under an income tax treaty or a tax in-formation exchange agreement), or hastaken significant steps towards achievingsuch effective provision of information.

2000–23 I.R.B. 1243 June 5, 2000

Part IV. Items of General Interest

June 5, 2000 1244 2000–23 I.R.B.

Announcement of the Disbarment and Suspension of Attorneys,Certified Public Accountants, Enrolled Agents, and Enrolled ActuariesFrom Practice Before the Internal Revenue Service

Under Section 330, Title 31 of theUnited States Code, the Secretary of theTreasury, after due notice and opportunityfor hearing, is authorized to suspend ordisbar from practice before the InternalRevenue Service any person who has vio-lated the rules and regulations governingthe recognition of attorneys, certifiedpublic accountants, enrolled agents or en-rolled actuaries to practice before the In-ternal Revenue Service.

Attorneys, certified public accountants,enrolled agents, and enrolled actuaries areprohibited in any Internal Revenue Service

matter from directly or indirectly employing,accepting assistance from, being employedby or sharing fees with, any practitioner dis-barred or under suspension from practice be-fore the Internal Revenue Service.

To enable attorneys, certified public ac-countants, enrolled agents and enrolledactuaries to identify such disbarred or sus-pended practitioners, the Director of Prac-tice will announce in the Internal RevenueBulletin the names and addresses of prac-titioners who have been suspended fromsuch practice, their designation as attor-ney, certified public accountant, enrolled

agent or enrolled actuary, and the date ofdisbarment or period of suspension. Thisannouncement will appear in the weeklyBulletin for five successive weeks or aslong as it is practicable for each attorney,certified public accountant, enrolled agentor enrolled actuary so suspended or dis-barred and will be consolidated and pub-lished in the Cumulative Bulletin.

After due notice and opportunity forhearing before an administrative lawjudge, the following individuals has beendisbarred from ffifther practice before theInternal Revenue Service:

Name Address Designation Effective Date

Kolesar, Gary N. Patchogue, NY CPA October 27, 1999

Announcement of the Consent Voluntary Suspension of Attorneys,Certified Public Accountants, Enrolled Agents, and Enrolled ActuariesFrom Practice Before the Internal Revenue Service

Under 31 Code of Federal Regulations,Part 10, an attorney, certified public ac-countant, enrolled agent or enrolled actu-ary, in order to avoid the institution orconclusion of a proceeding for his disbar-ment or suspension from practice beforethe Internal Revenue Service, may offerhis consent to suspension from such prac-tice. The Director of Practice, in his dis-cretion, may suspend an attorney, certi-fied public accountant, enrolled agent orenrolled actuary in accordance with theconsent offered.

Attorneys, certified public accountants,enrolled agents and enrolled actuaries areprohibited in any Internal Revenue Ser-

vice matter from directly or indirectly em-ploying, accepting assistance from, beingemployed by or sharing fees with, anypractitioner disbarred or suspended frompractice before the Internal Revenue Ser-vice.

To enable attorneys, certified public ac-countants, enrolled agents and enrolled ac-tuaries to identify practitioners under con-sent suspension from practice before theInternal Revenue Service, the Director ofPractice will announce in the Internal Rev-enue Bulletin the names and addresses ofpractitioners who have been suspendedfrom such practice, their designation as at-torney, certified public accountant, en-

rolled agent or enrolled actuary, and dateor period of suspension. This announce-ment will appear in the weekly Bulletin atthe earliest practicable date after such ac-tion and will continue to appear in theweekly Bulletins for five successiveweeks or for as many weeks as is practica-ble for each attorney, certified public ac-countant, enrolled agent or enrolled actu-ary so suspended and will be consolidatedand published in the Cumulative Bulletin.

The following individuals have beenplaced under consent suspension frompractice before the Internal Revenue Ser-vice:

Date of Name Address Designation Suspension

Quann, Warren Elk Grove, CA Attorney Indefinitefrom

March 1, 1999

Helms, W. Richard Western Springs, IL Attorney March 1, 1999to

August 31, 2002

2000–23 I.R.B. 1245 June 5, 2000

Dillahunty, Larry L. St. Petersburg, FL Attorney March 1, 1999to

February 28, 2003

Friesen, Alan Lincoln, NE CPA March 8, 1999 to

July 7, 2002

Cummins, Richard L. Torrance, CA CPA March 20, 1999 to

March 19, 2002

Potter, Thomas C. Oneonta, NY CPA April 16, 1999 to

October 15, 2000

Jenkins, Gordon Idaho Falls, ID Attorney May 1, 1999 to

October 31, 2002

Blair Jr., John D. Charleston, WV CPA June 1, 1999 to

May 31, 2002

Caudle, Larry Anchorage, AK Attorney June 21, 1999 to

December 31, 2001

Schorr, Harvey Voorheese, NJ CPA July 1, 1999 to

December 31, 2001

Fernandez, Michael J. Camillus, NY CPA July 7, 1999 to

July 6, 2000

Polking, William G. Carol, IA Attorney September 27, 1999 to

September 26, 2000

Luxen, Robert J. Oak Lawn, IL CPA October 1, 1999 to

June 30, 2001

Underwood, Kenneth Chattanooga, TN CPA October 14, 1999 to

April 13, 2001

Vancho, John Greenwich, CT CPA November 1, 1999 to

October 31, 2001

Enkulenko, Thomas Moscow, PA CPA November 15, 1999 to

November 14, 2000

Moody, James E. Pittsburgh, PA CPA December 1, 1999 to

November 30, 2000

Patterson, Robert A. Marietta, GA CPA December 13, 1999 to

December 12, 2002

Hanson, Raymond L. Boise, ID CPA January 1, 2000 to

December 31, 2001

Wallach, Steven North Brook, IL CPA February 25, 2000 to

February 24, 2002

June 5, 2000 1246 2000–23 I.R.B.

Watkins Sr., Richard Washington, MO CPA March 15, 2000 to

September 14, 2002

Peltin, Ronald Escanaba, MI Enrolled March 15, 2000 Agent to

March 14, 2003

Arwood, B. Joe Chuckey, TN CPA March 20, 2000 to

June 19, 2001

Gazzola, Frank L. N. Mankato, MN CPA May 1, 2000 to

October 31, 2002

O’Hearn, James Bakersfield, CA Enrolled June 1, 2000 Agent to

May 31, 2002

Dooner Jr., William Toms River, NJ Enrolled June 1, 2000 Agent to

August 31, 2000

Announcement of the Expedited Suspension of Attorneys, CertifiedPublic Accountants, Enrolled Agents, and Enrolled Actuaries FromPractice Before the Internal Revenue Service

Under title 31 of the Code of FederalRegulations, section 10.76, the Directorof Practice is authorized to immediatelysuspend from practice before the InternalRevenue Service any practitioner who,within five years, from the date the expe-dited proceeding is instituted, (1) has hada license to practice as an attorney, certi-fied public accountant, or actuary sus-pended or revoked for cause; or (2) hasbeen convicted of any crime under title 26of the United States Code or, of a felonyunder title 18 of the United States Codeinvolving dishonesty or breach of trust.

Attorneys, certified public accountants,enrolled agents, and enrolled actuaries are

prohibited in any Internal Revenue Servicematter from directly or indirectly employ-ing, accepting assistance from, being em-ployed by, or sharing fees with, any practi-tioner disbarred or suspended from practicebefore the Internal Revenue Service.

To enable attorneys, certified pubic ac-countants, enrolled agents, and enrolled ac-tuaries to identify practitioners under expe-dited suspension from practice before theInternal Revenue Service, the Director ofPractice will announce in the Internal Rev-enue Bulletin the names and addresses ofpractitioners who have been suspendedfrom such practice, their designation as at-torney, certified public accountant, enrolled

agent, or enrolled actuary, and date or pe-riod of suspension. This announcement willappear in the weekly Bulletin at the earliestpracticable date after such action and willcontinue to appear in the weekly Bulletinsfor five successive weeks or for as manyweeks as is practicable for each attorney,certified public accountant, enrolled agent,or enrolled actuary so suspended and willbe consolidated and published in the Cu-mulative Bulletin.

The following individuals have beenplaced under suspension from practice be-fore the Internal Revenue Service byvirtue of the expedited proceeding provi-sions of the applicable regulations:

Date of Name Address Designation Suspension

Moeller, David G. Golden Valley, MN Attorney Indefinite from

March 8, 1999

Dais, Robert E. Plano, TX CPA Indefinite from

March 15, 1999

Taylor, Donald J. Sequim, WA CPA Indefinite from

March 15, 1999

Thurson, Terrance N. Jacksonville, FL CPA Indefinite from

March 15, 1999

Hartman, Richard Merrick, NY Attorney Indefinite from

March 15, 1999

Mandel, Stewart I. Univ. Heigths, OH Attorney Indefinite from

March 15, 1999

Gowin, Dennis L. Falls Church, VA CPA Indefinite from

March 15, 1999

Kelly, Richard Lloyd Harbor, NY Attorney Indefinite from

March 16, 1999

Nagel, Maxine M. Renton, WA CPA Indefinite from

March 16, 1999

Cox, James L. Bedford, TX CPA Indefinite from

March 23, 1999

Shields, Morris R. Omaha, NE CPA Indefinite from

March 23, 1999

Stradone, Mark A. San Antonio, TX CPA Indefinite from

March 24, 1999

Anderson, David J. Minnetonka, MN CPA Indefinite from

March 28, 1999

Budenz, Lawrence J. Miamisburg, OH CPA Indefinite from

March 28, 1999

Hogan, Kelly M. Ogallala, NE Attorney Indefinite from

March 28, 1999

Fernez, Daniel J. Monroe, CT CPA Indefinite from

March 28, 1999

Fitsos, John Sacramento, CA Attorney Indefinite from

March 28, 1999

Schweitzer, Clifford A. Aberdeen, SD CPA Indefinite from

April 2, 1999

Magdalena, Lynn Joseph McAlester, OK CPA Indefinite from

April 2, 1999

Parrott, George Nashville, TN CPA Indefinite from

April 2, 1999

Elder Jr., Wilton K. Burlington, NC Attorney Indefinite from

May 6, 1999

Passero, Robert Seal Beach, CA CPA Indefinite from

July 8, 1999

2000–23 I.R.B. 1247 June 5, 2000

Stringham, Richard Columbia, MO CPA Indefinite from

July 8, 1999

Koseluk, Alexander F. Omaha, NE Attorney Indefinite from

July 19, 1999

Dotson, Marshall F. Jacksonville, NC Attorney Indefinite from

July 27, 1999

Schaffer, Clark D. Atlantic Beach, FL CPA Indefinite from

July 27, 1999

Zimmerman, Robert Alpharetta, GA CPA Indefinite from

January 17, 2000

June 5, 2000 1248 2000–23 I.R.B.

2000–23 I.R.B. i June 5, 2000

Revenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus,if an earlier ruling held that a principleapplied to A, and the new ruling holdsthat the same principle also applies to B,the earlier ruling is amplified. (Comparewith 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 in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previouslypublished ruling and points out an essen-tial 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 but notto B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling ismodified because it corrects a publishedposition. (Compare with amplified andclarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

Revoked describes situations where theposition in the previously published rul-ing is not correct and the correct positionis being stated in the new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the

new ruling does more than restate thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this casethe previously published ruling is firstmodified and then, as modified, is super-seded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling andthat list is expanded by adding furthernames in subsequent rulings. After theoriginal ruling has been supplementedseveral times, a new ruling may be pub-lished that includes the list in the originalruling and the additions, and supersedesall prior rulings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current use and for-merly used will appear in material published in theBulletin.

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—Grantor.

IC—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 Procedral 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.

Definition of Terms

June 5, 2000 ii 2000–23 I.R.B.

Numerical Finding List1

Bulletins 2000–1 through 2000–22

Announcements:

2000–1, 2000–2 I.R.B. 2942000–2, 2000–2 I.R.B. 2952000–3, 2000–2 I.R.B. 2962000–4, 2000–3 I.R.B. 3172000–5, 2000–4 I.R.B. 4272000–6, 2000–4 I.R.B. 4282000–7, 2000–6 I.R.B. 5862000–8, 2000–6 I.R.B. 5862000–9, 2000–9 I.R.B. 7332000–10, 2000–9 I.R.B. 7332000–11, 2000–10 I.R.B. 7392000–12, 2000–12 I.R.B. 8352000–13, 2000–11 I.R.B. 7712000–14, 2000–11 I.R.B. 7722000–15, 2000–12 I.R.B. 8372000–16, 2000–12 I.R.B. 8372000–17, 2000–13 I.R.B. 8462000–18, 2000–13 I.R.B. 8462000–19, 2000–19 I.R.B. 9732000–20, 2000–19 I.R.B. 9772000–21, 2000–19 I.R.B. 9832000–22, 2000–19 I.R.B. 9872000–23, 2000–19 I.R.B. 9922000–24, 2000–14 I.R.B. 8552000–25, 2000–14 I.R.B. 8552000–26, 2000–15 I.R.B. 8762000–27, 2000–15 I.R.B. 8762000–28, 2000–15 I.R.B. 8762000–29, 2000–15 I.R.B. 8772000–30, 2000–15 I.R.B. 8772000–31, 2000–15 I.R.B. 8772000–32, 2000–15 I.R.B. 8792000–33, 2000–15 I.R.B. 8782000–34, 2000–15 I.R.B. 8792000–35, 2000–16 I.R.B. 9222000–36, 2000–16 I.R.B. 9472000–37, 2000–16 I.R.B. 9472000–38, 2000–16 I.R.B. 9482000–39, 2000–16 I.R.B. 9482000–40, 2000–16 I.R.B. 9482000–41, 2000–16 I.R.B. 9492000–42, 2000–16 I.R.B. 9492000–43, 2000–17 I.R.B. 9572000–44, 2000–17 I.R.B. 9582000–45, 2000–18 I.R.B. 9622000–46, 2000–19 I.R.B. 9972000–47, 2000–21 I.R.B. 11182000–49, 2000–19 I.R.B. 9982000–50, 2000–19 I.R.B. 9982000–51, 2000–22 I.R.B. 11412000–52, 2000–22 I.R.B. 11422000–53, 2000–22 I.R.B. 1144

Court Decisions:

2066, 2000–15 I.R.B. 8672067, 2000–15 I.R.B. 863

Notices:

2000–1, 2000–2 I.R.B. 2882000–2, 2000–9 I.R.B. 7272000–3, 2000–4 I.R.B. 4132000–4, 2000–3 I.R.B. 3132000–5, 2000–3 I.R.B. 3142000–6, 2000–3 I.R.B. 315

Notices—continued:

2000–7, 2000–4 I.R.B. 4192000–8, 2000–4 I.R.B. 4202000–9, 2000–5 I.R.B. 4492000–10, 2000–5 I.R.B. 4512000–11, 2000–6 I.R.B. 5722000–12, 2000–9 I.R.B. 7272000–13, 2000–9 I.R.B. 7322000–14, 2000–10 I.R.B. 7372000–15, 2000–12 I.R.B. 8262000–16, 2000–12 I.R.B. 8262000–17, 2000–12 I.R.B. 8272000–18, 2000–13 I.R.B. 8452000–19, 2000–13 I.R.B. 8452000–20, 2000–14 I.R.B. 8512000–21, 2000–19 I.R.B. 9672000–22, 2000–16 I.R.B. 9022000–23, 2000–17 I.R.B. 9522000–24, 2000–17 I.R.B. 9522000–25, 2000–17 I.R.B. 9542000–26, 2000–17 I.R.B. 9542000–27, 2000–21 I.R.B. 11162000–28, 2000–21 I.R.B. 1116

Proposed Regulations:

REG–208280–86, 2000–8 I.R.B. 654REG–209135–88, 2000–8 I.R.B. 681REG–208254–90, 2000–6 I.R.B. 577REG–209601–92, 2000–12 I.R.B. 829REG–100276–97, 2000–8 I.R.B. 682REG–101492–98, 2000–3 I.R.B. 326REG–106012–98, 2000–2 I.R.B. 290REG–109101–98, 2000–16 I.R.B. 903REG–110311–98, 2000–11 I.R.B. 767REG–103831–99, 2000–5 I.R.B. 452REG–103882–99, 2000–8 I.R.B. 706REG–105089–99, 2000–6 I.R.B. 580REG–105279–99, 2000–8 I.R.B. 707REG–105606–99, 2000–4 I.R.B. 421REG–107872–99, 2000–16 I.R.B. 911REG–111119–99, 2000–5 I.R.B. 455REG–113572–99, 2000–7 I.R.B. 624REG–116048–99, 2000–6 I.R.B. 584REG–116567–99, 2000–5 I.R.B. 463REG–116704–99, 2000–3 I.R.B. 325REG–117162–99, 2000–15 I.R.B. 871REG–100163–00, 2000–7 I.R.B. 633REG–100291–00, 2000–16 I.R.B. 917REG–103735–00, 2000–11 I.R.B. 770REG–103736–00, 2000–11 I.R.B. 768

Railroad Retirement Quarterly Rate:

2000–9 I.R.B. 721

Revenue Procedures:

2000–1, 2000–1 I.R.B. 42000–2, 2000–1 I.R.B. 732000–3, 2000–1 I.R.B. 1032000–4, 2000–1 I.R.B. 1152000–5, 2000–1 I.R.B. 1582000–6, 2000–1 I.R.B. 1872000–7, 2000–1 I.R.B. 2272000–8, 2000–1 I.R.B. 2302000–9, 2000–2 I.R.B. 2802000–10, 2000–2 I.R.B. 2872000–11, 2000–3 I.R.B. 3092000–12, 2000–4 I.R.B. 3872000–13, 2000–6 I.R.B. 5152000–14, 2000–18 I.R.B. 960

Revenue Procedures—continued:

2000–15, 2000–5 I.R.B. 4472000–16, 2000–6 I.R.B. 5182000–17, 2000–11 I.R.B. 7662000–18, 2000–9 I.R.B. 7222000–19, 2000–12 I.R.B. 7852000–20, 2000–6 I.R.B. 5532000–21, 2000–19 I.R.B. 9712000–22, 2000–20 I.R.B. 10082000–23, 2000–21 I.R.B. 10182000–24, 2000–22 I.R.B. 11332000–25, 2000–21 I.R.B. 1033

Revenue Rulings:

2000–1, 2000–2 I.R.B. 2502000–2, 2000–3 I.R.B. 3052000–3, 2000–3 I.R.B. 2972000–4, 2000–4 I.R.B. 3312000–5, 2000–5 I.R.B. 4362000–6, 2000–6 I.R.B. 5122000–7, 2000–9 I.R.B. 7122000–8, 2000–7 I.R.B. 6172000–9, 2000–6 I.R.B. 4972000–10, 2000–8 I.R.B. 6432000–11, 2000–10 I.R.B. 7342000–12, 2000–11 I.R.B. 7442000–13, 2000–12 I.R.B. 7742000–14, 2000–12 I.R.B. 7792000–15, 2000–12 I.R.B. 7742000–16, 2000–12 I.R.B. 7802000–17, 2000–13 I.R.B. 8422000–18, 2000–14 I.R.B. 8472000–19, 2000–14 I.R.B. 8492000–20, 2000–16 I.R.B. 8802000–21, 2000–16 I.R.B. 8812000–22, 2000–16 I.R.B. 8802000–23, 2000–19 I.R.B. 9642000–24, 2000–19 I.R.B. 9632000–25, 2000–20 I.R.B. 10062000–26, 2000–22 I.R.B. 11242000–27, 2000–21 I.R.B. 1016

Tax Conventions:

2000–22 I.R.B. 1126

Treasury Decisions:

8849, 2000–2 I.R.B. 2458850, 2000–2 I.R.B. 2658851, 2000–2 I.R.B. 2758852, 2000–2 I.R.B. 2538853, 2000–4 I.R.B. 3778854, 2000–3 I.R.B. 3068855, 2000–4 I.R.B. 3748856, 2000–3 I.R.B. 2988857, 2000–4 I.R.B. 3658858, 2000–4 I.R.B. 3328859, 2000–5 I.R.B. 4298860, 2000–5 I.R.B. 4378861, 2000–5 I.R.B. 4418862, 2000–6 I.R.B. 4668863, 2000–6 I.R.B. 4888864, 2000–7 I.R.B. 6148865, 2000–7 I.R.B. 5898866, 2000–6 I.R.B. 4958867, 2000–7 I.R.B. 6208868, 2000–6 I.R.B. 4918869, 2000–6 I.R.B. 4988870, 2000–8 I.R.B. 6478871, 2000–8 I.R.B. 641

1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., published inInternal Revenue Bulletins 1999–27 through1999–52 is in Internal Revenue Bulletin 2000–1,dated January 3, 2000.

Treasury Decisions—continued:

8872, 2000–8 I.R.B. 6398873, 2000–9 I.R.B. 7138874, 2000–8 I.R.B. 6448875, 2000–11 I.R.B. 7618876, 2000–11 I.R.B. 7538877, 2000–11 I.R.B. 7478878, 2000–15 I.R.B. 8578879, 2000–16 I.R.B. 8828880, 2000–20 I.R.B. 1003

2000–23 I.R.B. iii June 5, 2000

June 5, 2000 iv 2000–23 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2000–1 through 2000–22

Announcements:

99–40Obsoleted by T.D. 8879, 2000–16 I.R.B. 882

99–50Modified by Rev. Proc. 2000–20, 2000–6 I.R.B. 553

99–59Superseded by Announcement 2000–47, 2000–21 I.R.B. 1118

2000–18Corrected by Announcement 2000–32, 2000–15 I.R.B. 878

Notices:


92–48Obsoleted by Notice 2000–11, 2000–6 I.R.B. 572



98–52Modified by Notice 2000–3, 2000–4 I.R.B. 413

98–61Modified and superseded by Rev. Proc. 2000–15, 2000–5 I.R.B. 447

99–8Obsoleted by Rev. Proc. 2000–12, 2000–4 I.R.B. 387


Proposed Regulations:

REG–209601–92Corrected by Announcement 2000–40, 2000–16 I.R.B. 948





Revenue Procedures:


89–9Superseded by Rev. Proc. 2000–20, 2000–6 I.R.B. 553




92–13Modified, amplified, and superseded by Rev. Proc. 2000–11, 2000–3 I.R.B. 309

92–13AModified, amplified, and superseded by Rev. Proc. 2000–11, 2000–3 I.R.B. 309




94–12Modified, amplified, and superseded by Rev. Proc. 2000–11, 2000–3 I.R.B. 309








99–2Superseded byRev. Proc. 2000–2, 2000–1 I.R.B. 73


Revenue Procedures—Continued:







99–20Supplemented by Rev. Proc. 2000–14, 2000–18 I.R.B. 960

99–22Obsoleted by (except as provided in section 5.02 of)Rev. Proc. 2000–21, 2000–19 I.R.B. 971





99–49Modified and amplified by Rev. Rul. 2000–4, 2000–4 I.R.B. 331 Rev. Rul. 2000–7, 2000–9 I.R.B. 712Notice 2000–4, 2000–3 I.R.B. 313



2000–8Modified by Rev. Proc. 2000–16, 2000–6 I.R.B. 518 Rev. Proc. 2000–20, 2000–6 I.R.B. 553



1 A cumulative list of current actions on previouslypublished items in Internal Revenue Bulletins1999–27 through 1999–52 is in Internal RevenueBulletin 2000–1, dated January 3, 2000.

2000–23 I.R.B. v June 5, 2000

Revenue Rulings:




76–79Distinguised by Rev. Rul. 2000–24, 2000–19 I.R.B. 963



88–36Modified by Rev. Rul. 2000–6, 2000–6 I.R.B. 512

89–89Obsoleted by Rev. Rul. 2000–2, 2000–3 I.R.B. 305

92–19Supplemented by Rev. Rul. 2000–17, 2000–13 I.R.B. 842

98–30Amplified and superseded by Rev. Rul. 2000–8, 2000–7 I.R.B. 617

Treasury Decisions:

8734Modified by T.D. 8856, 2000–3 I.R.B. 298

8804Modified by T.D. 8856, 2000–3 I.R.B. 298

8845Corrected by Announcement 2000–6, 2000–4 I.R.B. 428









Treasury Decisions—continued:







IndexInternal Revenue Bulletins2000–1 Through 2000–23

The abbreviation and number in paren-thesis following the index entry refer tothe specific item; numbers in roman anditalic type following the parenthesis referto the Internal Revenue Bulletin in whichthe item may be found and the pagenumber on which it appears.

Key to Abbreviations:Ann AnnouncementCD Court DecisionDO Delegation OrderEO Executive OrderPL Public LawPTE Prohibited Transaction

ExemptionRP Revenue ProcedureRR Revenue RulingSPR Statement of Procedural

RulesTC Tax ConventionTD Treasury DecisionTDO Treasury Department Order

EMPLOYEE PLANSAreas in which advance letter rulings and

determination letters will not be issuedfrom Associate Chief Counsel,Domestic (RP 3) 1, 103

Areas in which advance letter rulings anddetermination letters will not be issuedfrom Associate Chief Counsel,International (RP 7) 1, 227

Cafeteria plans, treatment of (TD 8878)15, 857; (REG–117162–99) 15, 871

Cash or deferred arrangements: Elective deferrals (RR 8) 7, 617Nondiscrimination (Notice 3) 4, 413Separation from service, transferred

employees (RR 27) 21, 1016Determination letters, issuing procedures

(RP 6) 1, 187Eligible rollover distributions, safe har-

bor explanations (Notice 11) 6, 572EPCRS, closing agreements (RP 16) 6, 518;

correction (Ann 17) 13, 846Full funding limitations, weighted aver-

age interest rate for: January (Notice 8) 4, 420 February (Notice 2) 9, 727March (Notice 18) 13, 845April (Notice 25) 17, 954May (Notice 27) 21, 1116

Letter rulings, determination letters andinformation letters issued by AssociateChief Counsel (RP 1) 1, 4

Letter rulings, information letters, etc.(RP 4) 1, 115

Master and prototype plans, unified pro-cedures (RP 20) 6, 553

Minimum funding standards: Amortization bases (RR 20) 16, 880Waiver of the 100 percent tax (RP 17)

11, 766Mortality tables (Ann 7) 6, 586New comparability plans, nondiscrimina-

tion (Notice 14) 10, 737New technologies in retirement plans,

distribution notices and consents (TD8873) 9, 713

Proposed Regulations:26 CFR 1.125–1, amended; 1.125–2,

amended; 1.125–4, amended; taxtreatment of cafeteria plans(REG–117162–99) 15, 871

26 CFR 1.411(d)–4, amended; specialrules regarding optional forms ofbenefit under qualified retirementplans (REG–109101–98) 16, 903

Qualified retirement plans: Eligible rollover distributions, relief

from disqualification of (TD 8880) 20, 1003

Optional forms of benefit (REG–109101–98) 16, 903

Remedial amendment period (TD 8871) 8, 641

Regulations:26 CFR 1.125–4, added; 1.125–4T,

amended; tax treatment of cafeteriaplans (TD 8878) 15, 857

26 CFR 1.401(a)(31)–1, amended;1.402(c)–2, amended; 1.403(b)–2,amended; relief from disqualifica-tion for plans accepting rollovers(TD 8880) 20, 1003

26 CFR 1.401(b)–1T, removed; reme-dial amendment period (TD 8871)8, 641

26 CFR 1.402(f)–1, amended;1.411(a)–11, amended; new tech-nologies in retirement plans (TD8873) 9, 713

Reporting requirements, section 457plans (Ann 1) 2, 294

Technical advice to district directors andchiefs, appeals offices, from Associate

Chief Counsel (RP 2) 1, 73Technical advice to IRS employees (RP

5) 1, 158User fees, request for letter rulings (RP

8) 1, 230

EMPLOYMENT TAXElectronic filing; magnetic media:

Form 1040NR (RP 24) 22, 1133Information reporting seminars for

2000 (Ann 47) 21, 1118Publication 1220, Specifications for

Filing Forms 1098, 1099, 5498, andW-2G, Magnetically orElectronically (RP 25) 21, 1033

Electronically filed information returns,due dates (REG–105279–99) 8, 707

EmTrac program requirements, food andbeverage industry (Notice 21) 19, 967

EPCRS, closing agreements (RP 16) 6,518; correction (Ann 17) 13, 846

Forms:Electronic filing; magnetic media:

1040 NR (RP 24) 22, 11331098, 1099, 5498, and W-2G, speci-fications for filing forms electroni-cally or magnetically (RP 25) 21, 1033

W-2 and W-3, specifications for privateprinting of paper substitutes (RP 23)21, 1018

Information reporting:Election workers (RR 6) 6, 512

New technologies in retirement plans,distribution notices and consents (TD8873) 9, 713

Proposed Regulations:26 CFR 31.3402(q)–1, revised;

31.6053–3, revised; 31.6071(a)–1,revised; extension of due date forelectronically filed informationreturns (REG–105279–99) 8, 707

Publication 1220, Specifications forFiling Forms 1098, 1099, 5498, and

W-2G, Magnetically orElectronically (RP 25) 21, 1033

Qualified retirements plans:Eligible rollover distributions, relief

from disqualification of (TD 8880)20, 1003

Railroad retirement, quarterly ratebeginning January 1, 2000, 9, 721

Regulations:26 CFR 31.3405(c)–1, amended; relief

June 5, 2000 vi 2000–23 I.R.B.

EMPLOYEE PLANS—cont.

EMPLOYEE PLANS—cont.

from disqualification for plansaccepting rollovers (TD 8880) 20,1003

26 CFR 35.3405–1, redesignated as35.3405–1T, revised; 35.3405–1,added; new technologies in retire-ment plans (TD 8873) 9, 713

Substitute for Forms W-2 and W-3, forprivate printing and general rules andspecifications (RP 23) 21, 1018

Tips:Tip rate determination agreement

(TRDA): Food and beverage industry (Ann

23) 19, 992Generic agreement (Ann 20) 19, 977

Tip reporting alternative commitment(TRAC) agreement:Cosmetology and barber industry

(Ann 21) 19, 983Food and beverage industry (Ann

22) 19, 987Generic agreement (Ann 19) 19,

973

ESTATE TAXGuaranteed annuity interests and unitrust

interests (REG–100291–00) 16, 917Interest rates; special use value of farm

real property (RR 26) 22, 1124Marital / charitable deduction, valuation

of property; administration expenses(Ann 3) 2, 296

Proposed Regulations:26 CFR 1.170A–6, amended;

20.2055–2, amended; 25.2522(c)–3,amended; guaranteed annuity inter-ests and unitrust interests(REG–100291–00) 16, 917

QTIP elections, individual retirementaccounts and testamentary trusts (RR2) 3, 305

Valuation tables (Ann 25) 14, 855

EXCISE TAXCoal exports, nontaxable sale (Notice 28)

21, 1116Gasoline and diesel fuel dye injection

systems, partial withdrawal ofREG–209735–95 (Ann 42) 16, 949

Imported substances, tax on (Ann 43) 17,957

Kerosene tax; aviation fuel tax; taxable

fuel measurement and reporting; taxon heavy trucks and trailers; highwayuse tax (TD 8879) 16, 882; correction(Ann 53) 22, 1144

Minimum funding standards, waiver of(RP 17) 11, 766

Prepaid telephone cards (TD 8855) 4, 374Regulations:

26 CFR 40.6011(a)–1, amended;41.0–1, revised; 41.02–2, –3,removed; 41.4481–1T, 1.4481–1,–2, amended; 41.4481–1T, removed;41.4482(a)–1, amended;41.4482(b)–1, amended;41.4482(b)–1T, removed;41.4482(c)–1, amended; 41.4483–1,revised; 41.4483–2, –3, amended;41.4483–5, removed; 41.4484–1,removed; 41.6001–1, –2, amended;41–6011(a)–1, revised;41.6071(a)–1, amended;41.6081(a)–1, removed; 41.6091–1,revised; 41–6101–1, revised;41.6109–1, revised; 41.6151(a)–1,revised; 41.6161(a)(1)–1, removed;41.6302(b)–1, removed; 41.7805–1,removed; Part 47, removed; 48.0–2,amended; 48.4041–21, amended;48.4052–1, added; 48.4081–1,amended; 48.4081–1T, removed;48.4081–2, –3, –6, –7, –8, amended;48.4081–9, removed; 48.4082–1,amended; 48.4082–2, –3, revised;48.4082–4, –5, amended;48.4082–6, –7, added; 48.4082–6T,–7T, –8T, –9T, –10T, removed;48.4083–1, amended; 48.4091–3T,redesignated as 48.4091–3, amend-ed; 48.4101–3T, removed;48.4101–1, –2, amended;48.4102–2T, removed; 48.4221–1,amended; 48.4222(b)–1, amended;48.6416(b)(2)–1, –2, amended;48.6420–7, removed; 48.6420(c)–2,removed; 48.6421–2, amended;48.6427–8, –9, amended;48.6427–10T, –11T, removed;48.6427–10, –11, added; 48.6715–1,amended; 145.4051–1, amended;145.4052–1, amended; kerosene tax;aviation fuel tax; taxable fuel mea-surement and reporting; tax onheavy trucks and trailers; highwayuse tax (TD 8879) 16, 882; correc-tion (Ann 53) 22, 1144

26 CFR 49.4251–4, added; 602.101,amended; prepaid telephone cards(TD 8855) 4, 374

Return filing and deposits (Ann 5) 4,427

EXEMPT ORGANIZATIONSAreas in which advance letter rulings and

determination letters will not be issuedfrom Associate Chief Counsel,Domestic (RP 3) 1, 103

Charitable split dollar insurance, report-ing requirements (Notice 24) 17, 952

Information letters available for publicinspection (Ann 2) 2, 295

Letter rulings, information letters, etc.(RP 4) 1, 115

List of organizations classified as privatefoundations (Ann 8) 6, 586; (Ann 52)22, 1142

Private foundation disclosure rules (TD8861) 5, 441

Proposed Regulations:26 CFR 1.170A–9(e)(6)(i), amended;

1.509(a)–3(f)(1), amended;1.512(a)–1(e), amended; 1.513–4,withdrawn; 1.513–4, added; taxationof tax-exempt organizations’ incomefrom corporate sponsorship(REG–209601–92) 12, 829; correc-tion (Ann 40) 16, 948

Regulations:26 CFR 1.513–7, added; travel and

tour activities of tax-exempt organi-zations (TD 8874) 8, 644; correction(Ann 29) 15, 877

26 CFR 301.6104(d)–1, removed;301.6104(d)–2, redesignated as301.6104(d)–0, revised;301.6104(d)–3, redesignated as301.6104(d)–1, amended;301.6104(d)–4, redesignated as301.6104(d)–2, amended;301.6104(d)–5, redesignated as301.6104(d)–3, amended; privatefoundation disclosure rules (TD8861) 5, 441

Revocations: (Ann 15) 12, 837(Ann 39) 16, 948

Sponsorship payments, taxation of(REG–209601–92) 12, 829; correction

2000–23 I.R.B. vii June 5, 2000

EMPLOYMENT TAX—cont.

EXCISE TAX—cont.

EXCISE TAX—cont.

(Ann 40) 16, 948Technical advice to district directors and

chiefs, appeals offices, from AssociateChief Counsel (RP 2) 1, 73

Technical advice to IRS employees (RP5) 1, 158

Travel tours, taxation of (TD 8874) 8,644; correction (Ann 29) 15, 877

User fees, request for letter rulings (RP8) 1, 230

GIFT TAXGuaranteed annuity interests and unitrust

interests (REG–100291–00) 16, 917Proposed Regulations:

26 CFR 1.170A–6, amended;20.2055–2, amended; 25.2522(c)–3,amended; guaranteed annuity inter-ests and unitrust interests(REG–100291–00) 16, 917

INCOME TAXAccounting period change, automatic

consent (RP 11) 3, 309Acquisitions, recognition of gain on dis-

tributions (Ann 10) 9, 733Adequate disclosure of gifts (Ann 6) 4,

428Advance pricing agreements (Ann 35)

16, 922Allocation of partnership debt, nonre-

course liabilities (REG–103831–99) 5,452

Amortization of intangible property (TD8865) 7, 589; correction (Ann 37) 16, 947

Appeals, test of arbitration procedure(Ann 4) 3, 317

Areas in which advance letter rulings anddetermination letters will not be issuedfrom Associate Chief Counsel,International (RP 7) 1, 227

Asset acquisitions, allocation of purchaseprice (TD 8858) 4, 332

Automobile owners and lessees (RP 18)9, 722

Barter exchanges, information reporting(Notice 6) 3, 315

Business expenses:ISO 9000 costs (RR 4) 4, 331 Substantiation (TD 8864) 7, 614; cor-

rection (Ann 26) 15, 876

Traveling expenses, per diemallowances (RP 9) 2, 280

Canadian banking legislation, repeal,deferral of termination (Notice 7) 4,419

Closely-held real estate investment trust,estimated tax payments, penalty relief(Notice 5) 3, 314

Contribution in aid of construction, defi-nition (REG–106012–98) 2, 290

Credits:Low-income housing credit:

Compliance monitoring (TD 8859)5, 429; correction (Ann 27) 15,876

Resident population estimates(Notice 13) 9, 732

Satisfactory bond; “bond factor”amounts for the period Januarythrough March 2000 (RR 22) 16,880

Puerto Rico and possession tax credit,termination of (TD 8868) 6, 491

Research credit, controlled group(REG–105606–99) 4, 421

Debt instrument (RR 12) 11, 744Depletion, treatment of delay rental

(REG–103882–99) 8, 706Depreciation:

MACRS property, involuntary conver-sion or like-kind exchange (Notice4) 3, 313; correction (Ann 9) 9, 733

Determination of underwriting income,non-life insurance companies (TD8857) 4, 365

Disclosure of return information, Censusof Agriculture (TD 8854) 3, 306;(REG–116704–99) 3, 325

Electronic filing; magnetic media: Form 1040NR (RP 24) 22, 1133Information reporting seminars for

2000 (Ann 47) 21, 1118Publication 1220, Specifications for

Filing Forms 1098, 1099, 5498, andW-2G, Magnetically orElectronically (RP 25) 21, 1033

Electronically filed information returns,due dates of (REG–105279–99) 8, 707

Equity options with flexible terms, specialrules and definitions (TD 8866) 6, 495

Estimated taxes:Closely-held real estate investment

trust, penalty relief (Notice 5) 3,314

Date deemed paid (CD 2066) 15, 867

Filing requirements:Northeastern taxpayers, due dates

(Notice 17) 12, 827Financial asset securitization investment

trusts, general (REG–100276–97;REG–122450–98) 8, 682; correction(Ann 38) 16, 948

Foreign corporations:Exclusion of shipping income

(REG–208280–86) 8, 654; correc-tion (Ann 45) 18, 962

Information reporting (TD 8850) 3,265

Stock transfer rules:General provisions (TD 8862) 6, 466Nonrecognition (TD 8863) 6, 488;

(REG–116048–99) 6, 584Foreign currency:

Gains and losses, qualified businessunits (Notice 20) 14, 851

Hyperinflation; definition(REG–116567–99) 5, 463; (TD8860) 5, 437

Foreign partnerships:Information reporting (TD 8850) 3,

265U.S. persons with reportable event,

reporting requirement (TD 8851) 2,275

Foreign persons, distributions to (Ann24) 14, 855

Forms:1040NR, electronic filing, magnetic

media (RP 24) 22, 11331098, 1099, 5498, and W-2G, specifi-

cations for filing forms magneticallyor electronically (RP 25) 21, 1033

SS-4, interim waiver of signature (Notice 19) 13, 845

Fringe benefits:Aircraft valuation (RR 13) 12, 774Qualified transportation

(REG–113572–99) 7, 624; correc-tion (Ann 41) 61, 949

Guaranteed annuity interests and unitrustinterests, definition of (REG–100291–00) 16, 917

Guidance priority list (Notice 10) 5, 451Information letters available for public

inspection (Ann 2) 2, 295Information reporting:

Barter exchange (Notice 6) 3, 315Discharges of indebtedness, penalties

for (Notice 22) 16, 902Foreign partnerships and foreign cor-

June 5, 2000 viii 2000–23 I.R.B.

EXEMPT ORGANIZATIONS—cont.

INCOME TAX—cont.

INCOME TAX—cont.

porations (TD 8850) 3, 265Innocent spouse, equitable relief (RP 15)

5, 447Installment agreements, limitation of fail-

ure to pay penalty (REG–105279–99)8, 707

Installment sales (Notice 26) 17, 954Insurance companies:

Differential earnings rate, tentative(Notice 16) 12, 826

Prevailing state assumed interestrates (RR 17) 13, 842

Interest:Investment:

Federal short-term, mid-term, andlong-term rates for:

January 2000 (RR 1) 2, 250 February 2000 (RR 9) 6, 497March 2000 (RR 11) 10, 734April 2000 (RR 19) 14, 849May 2000 (RR 23) 19, 964

Rates:Underpayment and overpayment,

quarter beginning April 1, 2000(RR 16) 12, 780

International operation of ships and/oraircraft, Kingdom of Saudi

Arabia, 22, 1126Inventory:

LIFO:Price indexes, department stores:

November 1999 (RR 3) 3, 297December 1999 (RR 10) 8, 643January 2000 (RR 14) 12, 779February 2000 (RR 21) 16, 881March 2000 (RR 25) 20, 1006

Last known address, definition of (Ann49) 19, 998

Letter rulings, determination letters andinformation letters issued by AssociateChief Counsel (RP 1) 1, 4

Major disaster and emergency areas,losses (RR 15 ) 12, 774

Medical conference expenses, deductibil-ity of (RR 24) 19, 963

Methods of accounting; inventories,small taxpayers (RP 22) 20, 1008

Mortgage credit certificates, medianincome figures (RP 21) 19, 971

Nonconventional source fuel credit,inflation adjustment factor and refer-ence price (Notice 23) 17, 952

Nonqualified preferred stock, exchangesand distributions (REG–105089–99) 6,580

Partnerships:Adjustments following sales (Ann 13)

11, 771Allocation of basis adjustments among

partnership assets(REG–107872–99) 16, 911

Allocation of nonrecourse liabilities(REG–103831–99) 5, 452

Amortization of intangible property(REG–100163–00) 7, 633

Basis adjustments, residual method,valuation of partnership assetsincluding goodwill(REG–107872–99) 16, 911

Mergers and divisions(REG–111119–99) 5, 455

Qualified replacement property, trans-fer to (RR 18) 14, 847

Passive foreign investment companies:Marketable stock (TD 8867) 7, 620;

correction (Ann 30) 15, 877Qualified electing fund (TD 8870) 8,

647; correction (Ann 34) 15, 879Practice before the Internal Revenue

Service, governing regulations (Ann 51) 22, 1141

Pre-filing agreement pilot program(Notice 12) 9, 727

Presidentially declared disaster and com-bat zone, relief (REG–101492–98) 3,326; correction (Ann 16) 12, 837

Private foundations:Disclosure rules (TD 8861) 5, 442Organizations now classified as (Ann

8) 6, 586;(Ann 52) 22, 1142Proposed Regulations:

26 CFR 1.41–0, amended; 1.41–8,revised; credit for increasingresearch activities(REG–105606–99) 4, 421

26 CFR 1.118–2, added; contributionin aid of construction, definition(REG–106012–98) 2, 290

26 CFR 1.132–0, amended; 1.132–9,added; qualified transportationfringe benefits (REG–113572–99) 7,624; correction (Ann 41) 16, 949

26 CFR 1.170A–6, amended;20.2055–2, amended; 25.2522(c)–3,amended; lifetime charitable leadtrusts (REG–100291–00) 16, 917

26 CFR 1.197–2, amended; amortiza-tion of intangible property(REG–100163–00) 7, 633

26 CFR 1.337(d)–5T, added,

1.852–12, added; 1.857–11, added;certain asset transfers to regulatedinvestment companies and realestate investment trusts(REG–209135–88) 8, 681

26 CFR 1.354–1, amended; 1.355–1,amended; 1.356–7, added;1.1036–1, amended; treatment ofnonqualified perferred stock andother preferred stock in certainexchanges and distributions(REG–105089–99) 6, 580

26 CFR 1.367(b)–3, amended; stocktransfer rules (REG–116048–99) 6, 584

26 CFR 1.612–3, amended; depletion,treatment of delay rental(REG–103882–99) 8, 706

26 CFR 1.708–1, amended; 1.743–1,amended; treatment of partnershipmergers and divisions(REG–111119–99) 5, 455

26 CFR 1.752–3, amended; 1.752–5,revised; allocation of nonrecourseliabilities by a partnership(REG–103831–99) 5, 452

26 CFR 1.755–2, added; 1.755–2T,removed; allocation of basis adjust-ments among partnership assets(REG–107872–99) 16, 911

26 CFR 1.860E–1, amended;1.860H–0, –1, –2, –3, –4, –5, –6,added; 1.860I–1, –2, added;1.860J–1, added; 1.860L–1, –2, –3,–4, added; 1.861–9T, amended;1.861–10T, amended; financial assetsecuritization investment trusts; realestate mortgage investment conduits(REG–100276–97;REG–122450–98) 8, 682; correction(Ann 38) 16, 948

26 CFR 1.861–4, amended; source ofcompensation for labor or personalservices (REG–208254–90) 6, 577

26 CFR 1.883–0, added; 1.883–1,revised; 1.883–2, –3, –4, –5, added;exclusions from gross income offoreign corporations(REG–208280–86) 8, 654

26 CFR 1.988–1, revised; hyperinfla-tionary currencies, definition(REG–116567–99) 5, 463

26 CFR 1.6011–4, added; tax shelterdisclosure statements(REG–103735–00) 11, 770

26 CFR 1.6041–2, revised; 1.6041–6,

2000–23 I.R.B. ix June 5, 2000

INCOME TAX—cont.

INCOME TAX—cont.

INCOME TAX—cont.

revised; 1.6042–2, revised;1.6043–2, revised; 1.6044–2,revised; 1.6045–1, added; 1.6045–2,revised; 1.6045–4, revised;1.6047–1, revised; 1.6049–4,revised; 1.6049–7, revised;1.6050A–1, revised; 1.6050D–1,revised; 1.6050E–1, revised;1.6050H–2, revised; 1.6050J–1T,revised; 1.6050P–1, revised;1.6052–1, revised; 301.6651–1,amended; extension of due date forelectronically filed informationreturns; limitation of failure to paypenalty for individuals during peri-od of installment agreement(REG–105279–99) 8, 707

26 CFR 301.6103(j)(5)–1, added; dis-closure of return information;Census of Agriculture(REG–116704–99) 3, 325

26 CFR 301.6111–2, added; corporatetax shelter registration(REG–110311–98) 11, 767

26 CFR 301.6112–1, amended;requirements to maintain list ofinvestors in potentially abusive taxshelters (REG–103736–00) 11, 768;correction (Ann 44) 17, 958

26 CFR 301.7508–1, added;301.7508A–1, added; relief for ser-vice in combat zone and forPresidentially declared disaster(REG–101492–98) 3, 326; correc-tion (Ann 16) 12, 837

Publications:515, changes to Tables 1 and 2 (Ann

11) 10, 7391167, substitute forms, general

requirements (RP 19) 12, 7851212, supplemental information (Ann

14) 11, 7721220, Specifications for Filing Forms

1098, 1099, 5498, and W-2G,Magnetically or Electronically (RP25) 21, 1033

Circular 230 (Ann 51) 22, 1141Qualified intermediary withholding

agreements (RP 12) 4, 387; correction(Ann 50) 19, 998

Qualified mortgage bond, median incomefigures (RP 21) 19, 971

Qualified Zone Academy Bonds (RP 10)2, 287

Real estate investment trusts, asset trans-

fers to (TD 8872) 8, 639;(REG–209135–88) 8, 681

Real estate mortgage investment con-duits, safe harbor (REG–100276–97;REG–122450–98) 8, 682; correction(Ann 38) 16, 948

Recharacterizing financing arrangements,fast-pay stock (TD 8853) 4, 377; cor-rection (Ann 33) 15, 878

Regulated investment companies, assettransfers to (TD 8872) 8, 639;(REG–209135–88) 8, 681

Regulations:26 CFR 1.42–5, –6, amended; 1.42

–11, –12, –13, amended; 1.42–17,added; compliance monitoring andmiscellaneous issues relating to thelow-income housing credit (TD8859) 5, 429

26 CFR 1.62–2, amended; 1.62–2T,removed; 1.274–5, added;1.274–5T, amended; substantiationof business expenses (TD 8864) 7,614; correction (Ann 26) 15, 876

26 CFR 1.162–11, amended;1.167(a)–3, amended; 1.167(a)–6,amended; 1.167(a)–14, added;1.197–0, added; 1.197–2, added;amortization of goodwill and certainother intangibles (TD 8865) 7, 589;correction (Ann 37) 16, 947

26 CFR 1.337(d)–5, added, certainasset transfers to regulated invest-ment companies and real estateinvestment trusts (TD 8872) 8, 639

26 CFR 1.338–0, –1, –2, –3, removed;1.338–4, redesignated as 1.338–8;1.338–5, redesignated as 1.338–9;1.338–4T, –5T, –6T, –7T, –10T,added; 1.338(b)–1, added;1.338(b)–2T, –3T, removed;1.338(h)(10)–1, removed;1.338(i)–1, removed; 1.338(i)–1T,added; 1.1060–1T, revised; purchaseprice allocations in deemed andactual asset acquisitions (TD 8858)4, 332

26 CFR 1.367(a)–3, amended;1.367(b)–0, added; 1.367(b)–1, –2,revised; 1.367(b)–3, added;1.367(b)–4, revised; 1.367(b)–5, –6,added; 1.367(b)–7, –8, –9, removed;1.381(b)–1, amended; 7.367(b)–1,–2, –3, –4, –5, –6, –7, –8, –9, –10,–11, removed; 7.367(b)–12, amend-

ed; 7.367(b)–13, removed; stocktransfers rules (TD 8862) 6, 466

26 CFR 1.367(b)–3T, added; stocktransfer rules, (TD 8863) 6, 488

26 CFR 1.367(e)–1, –2, corrected;treatment of distributions to foreignpersons (Ann 24) 14, 855

26 CFR 1.401(b)–1, amended;1.401(b)–1T, removed; remedialamendment period (TD 8871) 8, 641

26 CFR 1.513–7, added; travel andtour activities of tax-exempt organi-zations (TD 8874) 8, 644

26 CFR 1.663(a)–1, amended;1.663(c)–1, amended; 1.663(c)–2,revised; 1.663(c)–3, amended;1.663(c)–4, redesignated as1.663(c)–5, amended; 1.663(c)–4,added; 1.663(c)–6, added; separateshares rule applicable to estates (TD8849) 2, 245; correction (Ann 28)15, 876

26 CFR 1.664–2, corrected; use ofactuarial tables in valuing annuities,interests for life or term of years,and remainder or reversionary inter-ests (Ann 25) 14, 855

26 CFR 1.743–1, 1.754–1, 1.755–1,corrected; adjustments followingsales of partnership interests (Ann13) 11, 771

26 CFR 1.871–14, revised; 1.1441–1,–4, –5, –6, –8, –9, revised;1.1443–1, revised; 1.6042–3,revised; 1.6045–1, revised;1.6049–5, revised; withholding oftax on certain U.S. source incomepaid to foreign persons; delay ofeffective date (TD 8856) 3, 298;correction (Ann 31) 15, 877

26 CFR 1.883–0, added; 1.883–1,revised; 1.883–2, –3, –4, –5, added;exclusions from gross income offoreign corporations(REG–208280–86) 8, 654; changeof date for public hearing (Ann 45)18, 962

26 CFR 1.936–11T, removed;1.936–11, added; termination ofPuerto Rico and possession taxcredit (TD 8868) 6, 491

26 CFR 1.988–0, amended; 1.988–2,amended; treatment of income andexpenses from certain hyperinfla-tionary currencies; nonperiodic pay-

June 5, 2000 x 2000–23 I.R.B.

INCOME TAX—cont.

INCOME TAX—cont.

INCOME TAX—cont.

ments (TD 8860) 5, 43726 CFR 1.1092(c)–1, added; equity

options with flexible terms (TD8866) 6, 495

26 CFR 1.1291–1T, redesignated as1.1291–1, revised; 1.1293–1T,redesignated as 1.1293–1, revised;1.1295–0, amended; 1.1295–1T,redesignated as 1.1295–1, amended;1.1295–3T, redesignated as1.1295–3, amended; general rulesfor making and maintaining quali-fied electing fund elections (TD8870) 8, 647; correction (Ann 34)15, 879

26 CFR 1.1296(e)–1, added; passiveforeign investment companies, mar-ketable stock (TD 8867) 7, 620; cor-rection (Ann 30) 15, 877

26 CFR 1.1361–0, –1; amended;1.1361–2, –3, –4, –5, –6, added;1.1362–0, amended; 1.1362–2,amended; 1.1362–8, added;1.1368–0, amended; 1.1368–2,amended; 1.1374–8, amended;301.6109–1, amended; subchapter Ssubsidiaries (TD 8869) 6, 498; cor-rection (Ann 36) 16, 947

26 CFR 1.1366–0, –1, added;1.1366–2, revised; 1.1366–3, –4, –5,added; 1.1367–0, –1, amended;1.1367–3, revised; 1.1368–0, –1, –2,–3, amended; 1.1368–4, revised;passthrough of items of an S corpo-ration to its shareholders (TD 8852)2, 253; correction (Ann 18) 13, 846;correction (Ann 32) 15, 878

26 CFR 1.1441–10, added; 1.7701(1)–0,added; 1.7701(1)–3, added;602.101(b), amended; recharacteriz-ing financing arrangements involvingfast–pay stock (TD 8853) 4, 377; cor-rection (Ann 33) 15, 878

26 CFR 1.6011–4T, added; tax shelterdisclosure statements (TD 8877) 11,747

26 CFR 1.6038–3, added; 1.6038–2,amended; 1.6038B–1, amended;1.6038B–2, amended; informationreporting with respect to certain for-eign partnerships and certain foreigncorporations (TD 8850) 2, 265

26 CFR 1.6046A–1, added; returnrequirement for U.S. persons acquir-ing or disposing of an interest in a

foreign partnership (TD 8851) 2,275

26 CFR 301.6103(j)(5)–1T, added;disclosure of return information;Census of Agriculture (TD 8854) 3,306

26 CFR 301.6104(d)–1, removed;301.6104(d)–2, redesignated as301.6104(d)–0, revised;301.6104(d)–3, redesignated as301.6104(d)–1, amended;301.6104(d)–4, redesignated as301.6104(d)–2, amended;301.6104(d)–5, redesignated as301.6104(d)–3, amended;602.101(b), amended; private foun-dation disclosure rules (TD 8861) 5,442

26 CFR 301.6111–2T, added; corpo-rate tax shelter registration (TD8876) 11, 753

26 CFR 301.6112–1T, amended;requirements to maintain list ofinvestors in potentially abusive taxshelters (TD 8875) 11, 761

Removal costs, capital expenditures (RR7) 9, 712

Reorganizations:Divisive mergers, definition (RR 5) 5,

436Solely for voting stock requirement

(Notice 1) 2, 288S corporations:

Passthrough items (TD 8852) 2, 253;correction (Ann 18) 13, 846; correc-tion (Ann 32) 15, 878

Subsidiaries (TD 8869) 6, 498; correc-tion (Ann 36) 16, 947

Section 911(d)(4) waiver; 1999 update(RP 14) 18, 960

Separate shares rules (TD 8849) 2, 245;correction (Ann 28) 15, 876

Short-term Treasury bills (Ann 14) 11,772

Sources of income, compensation forlabor or services (REG–208254–90) 6,577

Tax conventions:New treaties with Estonia, Latvia,

Lithuania, Venezuela; Publication 515 changes (Ann 11)10, 739

Shipping and aircraft agreement, Kingdom of Saudi Arabia, 22,1126

Treaties with Austria, Ireland, South Africa; Publication 515 changes (Ann11) 10, 739

United Kingdom; repeal of advancecorporation tax (RP 13) 6, 515

Tax liens, determination of property orrights to property (CD 2067) 15, 863

Tax shelters:Circular 230 (Ann 51) 22, 1141Confidential corporate, registration

(TD 8876) 11, 753;(REG–110311–98) 11, 753

Disclosure statements (TD 8877) 11,747; (REG–103735–00) 11, 770

Listed transactions (Notice 15) 12, 826Office of Tax Shelter Analysis (Ann

12) 12, 835Potentially abusive, list of investors

(TD 8875) 11, 761;(REG–103736–00) 11, 768; correc-tion (Ann 44) 17, 958

Technical advice to district directors andchiefs, appeals office, from AssociateChief Counsel (RP 2) 1, 73

Treasury bonds, call for redemption of(Ann 46) 19, 997

Valuation tables (Ann 25) 14, 855Variable annuity contracts, closing agree-

ments (Notice 9) 5, 449Withholdings:

Date deemed paid (CD 2066) 15, 867Qualified intermediary withholding

agreements (RP 12) 4, 387U.S. source income payments to for-

eign persons, delay of effective date(TD 8856) 3, 298; correction (Ann31) 15, 877

2000–23 I.R.B. xi June 5, 2000

INCOME TAX—cont.

INCOME TAX—cont.

INCOME TAX—cont.

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