Temporary Regulations Under the Interest and Dividend Tax Compliance Act of 1983; Backup Withholding
I M P O R T A N T
Officers * Partners * Proprietors
TO: All NASD Members and Other Interested Persons
During the past year, the Association has taken an active role in attempting to assist members in their obligation to comply with the complex requirements imposed by both the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA") and the Interest and Dividend Tax Compliance Act of 1983 (the "Act").
Among other things, the Association published three separate Notice to Members dealing with the new legislation. The latest notice, dated November 1983 (Notice to Members 83-65), contained temporary regulations under the Interest and Dividend Tax Compliance Act of 1983 along with explanations of the key provisions of the Act with respect to due diligence and certification procedures for Taxpayer Identification Numbers ("TIN") and new requirements with respect to backup withholding.
Shortly after the Association's notice, the IRS published additional temporary regulations under the Act which provided further guidelines concerning the application of these requirements to broker-dealers and other payors. These additional regulations were contained in the November 25 and December 20, 1983, and the January 3, 1984, editions of the Federal Register. What follows are the key provisions of these temporary regulations presented in a question and answer format.
These questions reflect those areas having the most significant impact on members and represent, for the most part, the most frequently asked questions concerning backup withholding.
26 CFR Part 35 a. 9999-2, November 25, 1983
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QUESTION |
APPLICABLE PROVISIONS |
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A-12 - Yes: Member must withhold on gross proceeds, as defined in the information reporting regulations if: |
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A-15 - Yes: OID is treated as a reportable payment of interest and as such is subject to backup withholding. |
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A-17 - Regulations require processing in 30 days. However, members may treat a TIN as having been received at any time within 30 days after it is provided. |
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A-18 - Yes: There is a 60-day grace period if the member is provided with an "Awaiting TIN Certification" as provided in the regulations. Form W-9 may be used for this purpose. The customer must also certify under penalty of perjury that he is not subject to backup withholding due to notified payee underreporting. |
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A-21 - Yes: Exempt recipients as defined in the original withholding regulations are exempt from backup withholding. Form W-9 includes a listing of such exempt payees. |
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A-22 - Yes: Form W-8 relating to exemptions for foreign persons will be issued by IRS. However, payors may use substitute forms if W-8 is not available. |
26 CFR Part 35 a. 9999-3 - December 20, 1983
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QUESTION |
APPLICABLE PROVISIONS |
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A-2 - A member is subject to the same requirements and penalties as an employer making a payment of wages, i.e., he is liable for the tax whether or not he has withheld. Additionally, he is subject to certain civil or criminal penalties. |
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A-21 - Tax-exempt interest is generally exempt from backup withholding. However, gross proceeds of a sale or redemption of a tax exempt bond is a reportable transaction and such proceeds would be subject to backup withholding. |
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A-22 - Yes: The "gross proceeds" of fund shares redeemed are reportable under the information reporting regulations and thus would be subject to backup withholding. |
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A-25 - A member has the option of withholding on gross proceeds at the time of sale or on the gain (if any) when such short sale is closed if such gain can be determined from the member's records. |
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A-28A - Yes: A member may execute a sale transaction without first having the required certification provided: (1) the customer furnishes a TIN before the sale, and (2) the customer does not withdraw the proceeds of the sale prior to providing such certification (or prior to application of backup withholding). The customer, at the option of the member, may be allowed 30 days after the date of sale to furnish the required certification. |
Supplementary Regulations to 26 CFR Part 35 a. 9999 - 3 - January 3, 1984
(Transitional rule with respect to withholding on gross proceeds by broker- dealers)
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QUESTION |
APPLICABLE PROVISION |
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A-28B - Yes, therefore the account will not be subject to backup withholding provided a TIN is obtained by the member prior to the sale. |
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A-28B - Yes: For "pre 1984" accounts, backup withholding may be waived on the gross proceeds of a sale for customers who have not furnished a TIN provided: (1) the customer furnishes a TIN to the broker within 30 days after the date of the sale, and (2) the customer does not withdraw the proceeds of the sale prior to the time his TIN is furnished to the broker (or the application of backup withholding). Proceeds may be invested in other properties during such 30-day period provided that 20% of the proceeds are held in cash in the customer's account. |
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Because of the complex nature of these regulations and the potential liabilities which could be incurred for non-compliance, members are urged to consult with their tax counsel or accountant as to their obligations under these rules. Once again, members are reminded that requests for tax rulings or specific interpretations of these regulations should be addressed directly to the IRS.
Please direct any questions concerning this notice to James M. Cangiano, Associate Director, Department of Policy Research, at (202) 728-8273.
Sincerely,
John T. Wall
Executive Vice President
Member and Market Services
Attachments
Federal register
Department of the Treasury
Internal Revenue Service
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 35a
[T.D. 7922]
Employment Taxes; Backup Withholding and Due Diligence Relating to Taxpayer Identification Numbers and Certification Requirements
AGENCY: Internal Revenue Service, Treasury.
ACTION: Temporary regulations.
SUMMARY: This document provides temporary regulations relating to backup withholding and due diligence relating to taxpayer identification numbers and certification requirements. Changes to the applicable tax law were made by the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 363%. These regulations affect payors and payees of, and brokers with respect to, reportable payments and provide them with the guidance necessary to comply with the law.
DATE: The temporary regulations are effective for payments made after December 31, 1983.
FOR FURTHER INFORMATION CONTACT: Diane Kroupa of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (202-566-3829).
SUPPLEMENTARY INFORMATION:
Background
On October 4, 1983, the Federal Register published temporary employment tax regulations under the Interest and Dividend Tax Compliance Act of 1983 (26 CFR Part 35a) under sections 3406 and 6676 of the Internal Revenue Code of 1954 (48 FR 45362). Those amendments were published to conform the regulations to the statutory changes enacted by the Interest and Dividend Tax Compliance Act of 1983 (97 Stat. 389). Section 3406 was added to the Internal Revenue Code of 1954 by section 104 of the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 371), and section 6676 of the Code was amended by section 105 of the Act (Pub. L. 98-67, 97 Stat. 380).
This document contains temporary regulations relating to the requirement to impose backup withholding on reportable payments and the exercise of due diligence by payors of reportable interest, dividends, and patronage dividends and brokers. This document adds new § 35a.9999-2 to part 35a, Temporary Employment Tax Regulations under the Interest and Dividend Tax Compliance Act of 1983, to Title 26 of the Code of Federal Regulations. In addition, this document amends Q-42 (relating to window transactions) of the question and answers published in the Federal Register on October 4, 1983 (48 FR 45362). Because these provisions are generally effective for payments made after December 31, 1983, there is a need for immediate guidance so that payors (iini payees can prepare to comply with these provisions.
It is expected that further temporary regulations with a cross-reference to a notice of proposed rulemaking, containing additional rules relating to backup withholding, will be published within a month. The temporary regulations contained in this document will remain in effect until superseded by final regulations on this subject.
These temporary regulations, presented in question and answer format, are intended to provide guidelines upon which payors and payees of reportable payments (including reportable interest dividend, and patronage dividend payments) may rely in order to resolve questions specifically set forth herein. However, no inference should be drawn regarding issues not raised herein or reasons certain questions, and not others, are included in these regulations.
Explanation of Provisions
These regulations provide additional guidance concerning the due diligence standard and provide general rules with respect to backup withholding. Most of the regulations address operational concerns of payors who must adapt their systems to begin withholding on payments made after December 3i, 1983.
With respect to due diligence, the regulations provide additional guidance concerning the application of the due diligence exception, the payments to which due diligence is applicable, and the form and timing of the required mailing of mailings. The regulations also specify when due diligence applies to trustees, custodians, and fiduciaries.
The regulations provide guidance concerning the application of backup withholding to payments subject to reporting under section 6041 (relating to rents, royalties, commissions, etc.), section 604lA(a) (relating to nonemployee compensation), section 6045 (relating to brokers and barter exchanges), and section 6050A (relating to certain fishing boat operators).
With respect to reportable interest or dividend payments, the regulations explain how withholding will apply to original issue discount and address how payors may choose not to withhold on minimal payments of interest and dividends.
Section 3400fg)(3) requires that an exemption from withholding shall be provided for the period of time during which a payee is awaiting receipt of a taxpayer identification number. The regulations prescribe certain requirements that a payee must comply with in order to qualify for the exemption. The Service has determined that it generally takss a person approximately 4 weeks to receive a taxpayer identification number. Thus, the regulations provide that a payee generally has 60 days in which to furnish a taxpayer identification number to the payor. Backup withholding is not imposed on payments made during that period, if a payee certifies in the manner required that he or she is waiting for receipt of a taxpayer identification number.
The regulations also provide rules related to the application of backup withholding to trusts and e-states. Finally, the regulations specify the record retention requirements for forms related to backup withholding.
With respect to the requirement to withhold under section 3406(a)(l) (B) or (C) when notified by the Service that a payee's taxpayer identification number is not correct or that the payee is subject to withholding due to a notified payee underreporting, payors will not be required to withhold on payments made to such payee until 30 days after temporary regulations are published in the Federal Register explaining how withholding will apply under section 3406(a)(l) (B) or (C).
Nonapplicability of Executive Order 12291
The Treasury Department has determined that these temporary regulations are not subject to review under Executive Order 12291 or the Treasury and OMB implementation of the Order dated April 29, 1983.
Regulatory Flexibility Act
No general notice of proposed rulemaking is required by 5 U.S.C. 533(b) for temporary regulations. Accordingly, the Regulatory Flexibility Act does not apply and no Regulatory Flexibility Analysis is required for this rule.
Drafting Information
The principal author of these regulations is Diane Kroupa of the Legislation and Regulations Division of the Office of the Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and the Treasury Department participated in developing the regulations on matters of both substance and style.
List of Subjects in 26 CFR Part 35a
Employment taxes. Income taxes. Backup withholding, Interest and Dividend Tax Compliance Act of 1983.
Adoption of Amendments to the Regulations
Accordingly Part 35a is amended as follows:
PART 35A—[AMENDED]
Paragraph 1. Section 35a.9999-2 is added immediately after § 35a.9999-l to read as follows:
§ 35a.9999-2 Questions and answers concerning due diligence and issues In connection with backup withholding.
The following questions and answers principally concern the backup withholding requirement with respect to reportable payments and the due diligence exception to the penalty on payors of reportable interest and dividend payments for failure to provide a payee's correct taxpayer identification number on certain information returns. These requirements are issued under the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 369):
Due Diligence
A penalty for failure to provide a correct taxpayer identification number will not be imposed merely because the payor fails to send the required mailing or mailings. Rather, a penalty will be imposed only in the case of an information return filed by a payor of reportable interest or dividends if the required mailing or mailings were not sent to the payee and the payor fails to include a taxpayer identification number or includes an incorrect number on the return filed with respect to the payee.
Requirement of Backup Withholding
If a payor pays amounts aggregating $600 or more to a payee during a calendar year (condition (a) above), the amount subject to withholding is: (1) The amount of the payment that causes the aggregate payments to the payee during the calendar year to total $600 or more (assuming that the payor made no payments during the preceding calendar year that were subject to either reporting under section 6041 or section 6041A(a), whichever is applicable, or backup withholding); and (2) the amount of any additional payments of a type subject to reporting under section 6041 or section 604lA(a), whichever is applicable, made to the payee before the payee provides a taxpayer identification number to the payor of after the Internal Revenue Service notifies the payor that the taxpayer identification number furnished by the payee is not correct. For example, if a payor made payments of $200 each on March 31, 1984, June 30, 1984, and September 30, 1984, to a payee, which were reportable undeF section 6041, the payments on March 31, and June 30 would not be subject to backup withholding, because the $600 threshold would not have been reached as a result of making either of those payments (assuming that payments made to the payee during 1983 did not aggregate $600 or more and were thus not subject to reporting). However, the payor would be required to withhold 20 percent of the $200 payment made on September 30, if the payee did not furnish a taxpayer identification number to the payor, or the Internal Revenue Service notified the payor that the number provided by the payee is incorrect, prior to the payment date (September 30). If the payor made a $50 payment of a type reportable under section 6041, on December 31, 1984, to the same payee, the payor would be required to withhold 20 percent of the $50 payment, if the payee had not provided a taxpayer identification number, or the Internal Revenue Service notified ths payor that the number provided by the payee is incorrect, prior to the date of payment (December 31).
If, in the preceding calendar year, a payor was required to file an information return with respect to payments to the payee under section 6041 or section 604lA(a) (condition (b) above), or a payor is required to impose backup withholding with respect to payments of a type that were reportable under such sections (condition (c) above), the payor is required to withhold 20 percent of any payment of a type reportable under section 6041 or section 604lA(a) made to the payee during the following year, regardless of the amount of the payment, if, prior to the date of the payment, the payee fails to provide a taxpayer identification number to the payor, or the Internal Revenue Service notifies the payor that the number provided by the payee was not correct. Assume, for example, that a payor made reportable payments under section 6041 to a payee that aggregated $600 or more during 1983, so that the payor was required to file an information return with respect to the payments for 1983. If the payor paid $300 to the payee on January 31, 1984, and the payment was of a type reportable under section 6041, the payor would be required to withhold 20 percent of the $300 payment, if, prior to January 31, 1984, the payee did not provide a taxpayer identification number to the payor, or the Internal Revenue Service notified the payor that the number provided by the payee was not correct. Moreover, because payments during 1984 to the payee, or a type subject to reporting under section 6041, would be subject to backup withholding, the payor would be required to withhold 20 percent of any payment of a type reportable under section 6041 that was made to the payee in 1985, unless the payee provided a taxpayer identification number prior to the payment date, or corrected the number provided, if the payor was notified by the Service that the previous number was not correct.
In making the determination of whether payments to a payee aggregate $600 or more during a calendar year or whether condition (b) or condition (c) applies to a payee, the payor must aggregate and take into account payments of the same kind made to the same payee. Payments that are reportable under section 6041 are not required to be aggregated with payments reportable under section 604lA(a). Payors may, in their discretion, aggregate: {1) Payments not of the same kind to the same payee, reportable under section 6041 and 604lA(a), and (2) payments reportable under section 6041 with payments reportable under section 6041A(a).
Special rules governing backup withholding with respect to commodity futures contracts, margin account transactions, and short sale transactions will be issued in the near future.
For example, assume that a payee, prior to 1984, held a readily tradable instrument and that a taxpayer identification number had been provided to the payor. Assume further, during 1984: (1) The payee acquired another readily tradable instrument of the same issue through a post-1983 brokerage relationship, (2) the broker notified the payor that the payee failed to certify that he was not subject to backup withholding due to notified payee underreporting, and (3) the payor, in accordance with its customary practice, combined in one account both readily tradable instruments of the same issue owned by the payee and made an aggregate payment with respect to both instruments in the account. In the circumstance, the payor would be required to withhold 20 percent of the aggregate payment made with respect to both of the instruments of the same issue owned by the payee.
A payor also has 30 days after delivery by a payee of an awaiting TIN certification (as defined in A-18, below) to treat the certificate as having been received.
Exceptions To Backup Withholding
A payee shall be treated as if he provided a certified taxpayer identification number for a period of 60 days following the day the payor receives a certificate signed under penalties of perjury (an "awaiting TIN certification"). (See A-17, above, for rules related to the day on which an awaiting TIN certification may be treated as having been received.) If the payor does not receive a taxpayer identification number within 60 days after the payee delivers the awaiting TIN certification to the payor, the payor must withhold 20 percent of all payments made to the payee, until the payee provides a taxpayer identification number to the payor. The awaiting TIN certification must contain statements: (1) That the payee has not been issued a taxpayer identification number, (2) that the payee has applied for a number or intends to apply for a number in the near future, and (3) that the payee understands that if the payee does not provide a taxpayer identification number to the payor within 60 days, the payor is required to withhold 20 percent of any payments made thereafter to the payee until a number is provided. Language that is substantially similar to the following will satisfy this requirement:
I certify, under penalties of perjury, that a taxpayer identification number has not been issued to me, and that I mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office (or I intend to mail or deliver an application in the near future). I understand that if I do not provide a taxpayer identification number to the payor within 60 days, the payor is required to withhold 20 percent of all reportabie payments thereafter made to me until I provide a number.
The foregoing certification, at the discretion of the payor, may be included on the same form as the certifications required by A-32 of § 35a.9999-l.
The payor may use Form W-9, as currently issued by the Internal Revenue Service, to satisfy the requirements of this A-18. If the Form W-9 is used, the payee should write "Applied For" in the space reserved for the taxpayer identification number. The payor also should inform the payee, in supplemental instructions or orally, "that if a taxpayer identification number is not received by the payor within 60 days, the payor is required to withhold 20 percent of all reportabie payments thereafter made to the payee until the payor receives a number from the payee." Future editions of the Form W-9 will contain the supplemental instruction.
A payee who seeks to qualify for the 60 day exemption from backup withholding also must certify, under penalties of perjury, that the payee is not subject to backup withholding due to notified payee underreporting, when required to do so by A-32 of § 35a.9999-1 or A-12 or A-13, above. Thus, a payee who establishes an account or acquires an instrument after December 31, 1983, will be subject to backup withholding irrespective of whether the payee certifies that the payee is waiting for receipt of a taxpayer identification number, if the payee fails to make the certification described in A-32 of § 35a.9999-l or A-12 or A-13, above, concerning notified payee underreporting.
When a payee who opens an account or acquires an instrument after December 31, 1983, and who qualifies for this 60 day exemption furnishes a taxpayer identification number to the payor, the payee is required to certify under penalties of perjury, in accordance with A-32 of § 35a.9999-l or A-12 or A-13, above, that the taxpayer identification number provided is correct. If no such certification is provided, the payor must institute backup withholding.
A special rule is provided for accounts that are established, or instruments that are acquired (in the case of reportabie interest or dividend payments) or relationships established (in the case of other reportabie payments) before January 1, 1984. All payees of such accounts, instruments, or relationships will be treated as if they are waiting for receipt of a taxpayer identification number, without any action on their part, until January 16, 1984. The payor must withhold 20 percent of any payment made after January 16, 1984, unless: (1) The payee has certified, as required by this A-18, that the payee is waiting for receipt of a taxpayer identification number or (2) the payor receives a taxpayer identification number from the payee. If, however, a payor has been provided with a Form W-9 (or substitute form) with an "Applied For" designation, by a payee of an account, instrument, or relationship established before January 1, 1984, the form will be valid for 60 days, notwithstanding the fact that the supplemental instruction referred to above was not provided to the payee.
Assume, for example, that the payee of an account established before January 1, 1984, delivered an awaiting TIN certification to the payor on December 30, 1983 and the payor processed the certification that day. The payor should not impose backup withholding on payments made to the payee prior to February 29, 1984, because the payee is treated under this A-18 as having provided a taxpayer identification number during that period.If the payor did not receive a number from the payee prior to February 29, the payor would be required to withhold 20 percent of any payment made to the payee on or after February 29, and before the payee provided a number. (See A-17, above, however, for the rules relating to the date on which the payor may be treated as having received the awaiting TIN certification or a taxpayer identification number.) As another example, assume that a payee of an account established before January 1, 1984, delivered an awaiting TIN certification to the payor on January 12, 1984 and processed it that day. The payor should not impose backup withholding on payments made between January 1 and January 12, because the payee would be treated during that period as if he had provided a taxpayer identification number under the rule set forth above. Moreover, backup withholding would not apply to payments made during the 60 days following January 12, because the payee on that date delivered an awaiting TIN certification. Backup withholding would begin only if the payor had not received a taxpayer identification number within that 60 day period. (See A-17, above, for the rules relating to the dates on which the payor may be treated as having received the certificate or the taxpayer identification number.)
The 60 day exemption applicable when a payee provides an awaiting TIN certification applies to payments made on readily tractable instruments only if the instrument is acquired directly from the payor (including a broker that holds the instrument in street name), unless the payee provides an awaiting TIN certification directly to the payor. Thus, if a broker opens a new account after 1983 and acquires a readily tradable instrument for a payee who has no taxpayer identification number, and the instrument is not held in street name, the broker must advise the payor that the payee failed to provide a taxpayer identification number under penalties of perjury, regardless of whether an awaiting TIN certification is provided to the broker. The payor in such a situation, however, must include in the notice sent to a payee (as required by A-39 of § 35a.9999-l) a statement informing the payee that, if the payee does not have a taxpayer identification number, the payee will be exempt from backup withholding for a period of 60 days following the payor's receipt of an awaiting TIN certification, provided that the payee signs an awaiting TIN certification and returns it to the payor. (See A-17, above, for the rules relating to the date on which the payor may be treated as having received the certificate.) An awaiting TIN certification, in a form permitted by this A-18, should be included with the notice. The form of the notice described in A-39 of § 35a.9999-l and this A-18 is set forth in the Appendix to this temporary regulation.
Neither the 60 day exemption nor the special presumption applicable to accounts, instruments, and relationships established before January 1, 1934 applies to window transactions, as defined a A-9, above, and Q-42 of § 35a.9999-l. Therefore, a payor is required to withhold 20 percent of any window transaction payment whenever a payee of such a payment does not provide a taxpayer identification number of the payor.
The annualization requirement of § 31.3452(d)-l of the Employment Taxes and Collection of Income Tax at Source Regulations shall not apply to window transaction payments. A payor may choose not to withhold on any window transaction payment that is less than $10. However, all window transaction payments made at the same time must be aggregated.
The $10 minimal payment exception does not apply to other reportable payments [i.e., payments other than reportable interest or dividends), except payments reportable under section 6045. Payments reportable under section 6045, like reportable interest and dividends, are subject to backup withholding, at the payor's option, only if the reportable amount exceeds $10.The annualization rule of § 31.3452(d)-l of the Employment Taxes and Collection of Income Tax at Source Regulations is inapplicable to payments reportable under section 6045.
Special rules are provided, however, with respect to trusts when a grantor is considered the owner of all or a portion of the trust (and there are included in . computing the grantor's tax liability those items of income attributable to that portion of the trust) (a "grantor trust"). The special rules applicable to such trusts do not affect payors of payments made to a grantor trust. Rather, the payments to the trust are subject to the general rules of backup withholding. Payments between a grantor trust and its grantors, however, are subject to the special rules, which differ depending on the number of grantors.
If a trust has ten or fewer grantors, payments of interest, dividends or other reportable amounts (except gross proceeds reportable under section 6045) made to the trust are considered payments of the same kind made by the trust (as payor) to each grantor (as payee), in proportion to each grantor's ownership ot the trust. Each grantor of such a trust is treated as having received his or her proportionate share of the reportable payment on the day the payment is received by the trust. Accordingly, any reportable payments made to the trust are treated as reportable payments made by the trust to the grantor or grantors and are subject to all applicable backup withholding requirements. If, for example, a grantor of a trust having 10 or fewer grantors had not provided a taxpayer identification number to the trust in the manner required, the trustee would be required to withhold and remit 20 percent of the reportable payment. In addition, the trustee of a grantor trust having ten or fewer grantors, established on or after January 1, 1984, may not certify either that the trust is not subject to backup withholding due to notified payee underreporting or that the taxpayer identification number provided is correct, unless each grantor has furnished the trustee with such a certification signed under penalties of perjury.
If a grantor trust has more than ten grantors, the trustee is required to treat payments of interest, dividends or other reportable payments (except gross proceeds reportable under section 6045) made to the trust as payments of the same kind made by the trust to each grantor, in an amount equal to the distribution made by the trust to each grantor, on the date on which the distribution to the grantor is paid or credited. The trust is thus treated as a payor of the same types of payments received by the trust, for the purpose of the backup withholding requirements. The trustee of such a trust is required to withhold 20 percent of amounts paid or credited to any grantor who is subject to backup withholding if: (1) The grantor fails to provide a taxpayer identification number to the trust, (2) the grantor fails to provide a certification required by A-32 of § 35a.9999-l, (3) the trust is required to impose backup withholding under the special rules applicable to readily tradable instruments (A-40 of § 35a.9999-l), or (4) the Internal Revenue Service notifies the trustee that the grantor provided an incorrect taxpayer identification number. If the reportable amount of the distribution is greater than the amount distributed, the trustee may, in its discretion subject the entire reportable amount to backup withholding.
For example, if a grantor trust having 100 grantors received a reportable interest payment of $100,000, which was of a type reportable under section 6049, and made a cash distribution of $900 to each grantor (after deducting certain expenses), the trustee would be required to withhold 20 percent of the $900 payment made to any grantor who was subject to backup withholding. Similarly, if a grantor trust having 100 grantors received an oil royalty payment of $100,000, which was of a type reportable under section 6041, and the trust made a cash distribution of $8,000 to each grantor (after deducting certain production related taxes and expenses), the trustee would be required to withhold 20 percent of the $8,000 payment made to any payee who had not provided a taxpayer identification to the trust. Because the certifications required by A-32 of § 35a.9999-l do not apply to payments of a type reportable under section 6041, grantors of the trust would not be subject to backup withholding if they failed to make such certifications.
In addition, the trustee of a grantor trust having more than ten grantors may certify that the trust's taxpayer identification number is correct and that the trust is not subject to backup withholding due to notified payee underreporting, without regard to the status of the individual grantors of the trust.
Foreign Persons
Record Retention
Appendix
Ths notice required by A-39 of § 35a.9999-1 and A-18, above, shall be substantially in the form provided below:
Recently, you purchased, [identify security acquired]. Because of the existence of one or more of the following conditions, payments of interest, dividends, and other reportable amounts that are made to you will be subject to backup withholding of tax at a 20 percent rate: [specify the condition or conditions applicable)
If conditional) or (2) applies, you may stop withholding by providing your taxpayer identification number on the enclosed Form W-9, signing the form, and returning.it to us. If you do not have a taxpayer identification number, but have (or will soon) apply for one,-you may so indicate on the Form W-9; in that case, you will not be subject to withholding for a period of 60 days, but you must provide us with your taxpayer identification number promptly after you receive it in order to avoid withholding after the end of the 60-day period. Certain persons, described on the enclosed Form W-9, are exempt from withholding. Follow the instructions on that form if applicable to you.
If condition (3) applies, and you do not believe you are subject to withholding due to notified payee underreporting, please contact your local Internal Revenue Service office.
If condition (4) applies, you may stop withholding by certifying on the enclosed. Form W-9 that you are not subject to backup withholding due to notified payee underreporting, signing the form, and returning it to us.
If more than one condition applies, you must remove all applicable conditions ta stop withholding.
Please address any questions concerning this notice to:
[Insert Payor Identifying Information]
(Do not address questions to the broker who purchased the securities for you.)
Par. 2. Question 42 (Q-42) of § 35a.9999-l is amended by removing the phrase "Treasury bills," in the question thereof.
There is a need for immediate guidance with respect to the provisions contained in this Treasury decision. For this reason, it is found impracticable to issue it with notice and public procedure, under subsection (b) of section 553 of" Title 5 of the United States Code of subject to the effective date limitation of subsection (d) of that section.
This Treasury decision is issued under the authority contained in section 3406 (a), (b), (c), (e), (g), (h), and (i), section 6041, section 6041A(a), section 6042(aj; section 6044(a), section 6045, section 6049 (a), (b), and (d), section 6103fq), section 6109, section 6302(c), section 6676, and section 7805 of the Internal Revenue Code of 1954 (97 Stat. 371, 37Z, 373, 376, 377, 378, 379; 26 U.S.C. 3406, (a), (b), (c), (e), (g), (h), and (i), 68A Stat. 745; 26 U.S.C. 6041, 96 Stat. 601; 26 U.S.C. 6041A(aJ, 96 Stat. 587; 26 U.S.C. 6042{a), 96 Stat. 587; 26 U.S.C. 6044(a), 96 Stat. 600. 26 U.S.C. 6045, 96 Stat. 592, 594, 26 U.S.C. 6049 (a), (b), and (d), 90 Stat. 1667, 26 U.S.C. 6103(q), 75 Stat. 828; 26 U.S.C. 6109, 68A Stat. 775, 26 U.S.C. 6302(c), 68A Stat. 917; 26 U.S.C. 7805) and in sections 104,105, and 108 of the Interest and Dividend Tax Compliance Act of 1983 (97 Stat. 369, 371, 380, and 383).
M. Eddie Heironimus,
Acting Commissioner of Internal Revenue.
Approved:
Ronald A. Pearlman,
Acting Assistant Secretary of the Treasury.
[FR. Doc. 83-31748 Filed 11-22-83; 3:39 pm]
BILLING CODE 4830-01-M
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 35a
[T.D. 7929]
Temporary Employment Tax Regulations Under the Interest and Dividend Tax Compliance Act of 1983; Backup Withholding
AGENCY: Internal Revenue Service, Treasury.
ACTION: Temporary regulations.
SUMMARY: This document provides temporary regulations relating to backup withholding. Changes to the applicable tax law were made by the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 369). These regulations affect payors and payees of, and brokers with respect to, reportable payments and provide them with the guidance necessary to comply with the law. This document also clarifies A-21 of § 35a. 9999-2 of the Temporary Employment Tax Regulation.
DATES: The temporary regulations are effective for payments made after December 31, 1933.
FOR FURTHER INFORMATION CONTACT: Yerachmiel Weinstein (at 202-566-3289 with respect to the foreign provisions), Bruce Jurist (at 202-566-3238 with respect to broker transactions), and Diane Kroupa (at 202-566-3590 with respect to all other provisions) of the Legislation and Regulations Division of the Office of Chief Counsel. Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, D.C. 20224.
SUPPLEMENTARY INFORMATION:
Background
On October 4, 1983, the Federal Register published Temporary Employment Tax Regulations under the Interest and Dividend Tax Compliance Act of 1983 (26 CFR Part 35a) under sections 3406 and 6676 of the Internal Revenue Code of 1954 (48 FR 45362). Those amendments were published to conform the regulations to the statutory changes enacted by the Interest and Dividend Tax Compliance Act of 1983 (97 Stat. 369). Section 3406 was added to the Internal Revenue Code of 1954 by section 104 of the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 371), and section 6676 of the Code was amended by section 105 of the Act (Pub. L. 98-67. 97 Stat. 380).
Additional temporary regulations relating to the requirement to impose backup withholding on reportable payments and the exercise of due diligence by payors of reportable interest, dividends, and patronage dividends and brokers were published in the Federal Register (48 FR 53104) on November 25, 1983.
This document, containing additional temporary regulations relating to the requirement to impose backup withholding, adds new § 35a.9999-3 to Part 35a, Temporary Employment Tax Regulations under the Interest and Dividend Tax Compliance Act of 1983. to Title 26 of the Code of Federal Regulations. Because these provisions are generally effective for payments made after December 31, 1983, there is a need for immediate guidance so that payors and payees can prepare to comply with these provisions.
The Internal Revenue Service intends to publish a notice of proposed rulemaking in the Federal Register in the near future that will provide comprehensive rules regarding backup withholding. All pertinent provisions of the temporary regulations with respect to backup withholding will be incorporated in the notice of proposed rulemaking. The notice of proposed rulemaking will provide the public an opportunity to comment on the regulations. A public hearing will be held. Notice of the time and place of the public hearing will be published in the Federal Register. The temporary regulations contained in this document and §§ 35a.9999-l and 35a.9999-2 will remain in effect until superseded by final regulations on this subject.
These temporary regulations, presented in question and answer format, are intended to provide guidelines upon which payors and payees of reportabie payments (including reportable interest, dividend, and patronage dividend payments) may rely in order to resolve questions specifically set forth herein. However, no inference should be drawn regarding issues not raised herein or reasons certain questions, and not others, are included in these regulations.
Explanation of Provisions
The regulations provide additional guidance concerning the application of backup withholding to payments subject to reporting under section 6041 (relating to rents, royalties, commissions, etc.), section 604lA(a) (relating to nonemployee compensation), section 6042 (relating to dividends), section 6044 (relating to patronage dividends), section 6045 (relating to brokers and barter exchanges), section 6049 (relating to interest and original issue discount), and section 6050A (relating to certain fishing boat operators). A payment must be subject to information reporting under one of those provisions before backup withholding can apply. Thus, if a payment is not subject to information reporting, backup withholding cannot apply to the payment. With respect to payments subject to reporting under section 6O4lA(a), these regulations provide that the exceptions currently applicable under section 6041 shall apply until regulations are issued under section 6041A (LR-214-82). For example, payments made to certain corporations engaged in providing medical and health care services are not excepted from information reporting under sections 6041 or 6041A and also are not excepted from backup withholding if a condition for imposing withholding exists with respect'to the payee.
In addition, these regulations provide that certain amounts that are subject to information reporting are not subject to backup withholding. For example, a premature withdrawal penalty with respect to a time savings account, a certificate of deposit or similar deposit, does not reduce the amount of interest that is subject to information reporting, but, in the payor's discretion, only the net payment is subject to backup withholding. In addition, the regulations describe certain categories of dividends that are not subject to backup withholding.
Payments of interest to a mortgage escrow account at a financial institution and interest earned on certain premiums paid with respect to an insurance policy are reportable payments and thus may be subject to backup withholding. While such payments were exempt from 10 percent withholding on interest and dividends, the underlying purpose of backup withholding is to ensure that payees' taxpayer identification numbers are provided on information returns in order to match the information with the payee's income tax return. Thus, such payments will be subject to backup withholding.
These regulations define "an obviously incorrect number", delineate how ofien withholding applies, and describe the penalties associated with backup withholding.
Special rules are provided with respect to readily tradable instruments. When a readily tradable instrument is acquired in a transaction between parties unrelated to the payor and without the assistance of a broker, no certification is required.
These regulations also provide special rules when an account is established directly with, or an instrument is acquired directly from, the payor. If acquisition is effected by means of electronic transfer, the payee, at the payor's option, is given 30 days after such acquisition to provide the required certifications before the payor is obligated to impose backup withholding or. any reportable interest and dividends, provided that the payee furnishes a taxpayer identification number to the payor at the time of the acquisition. The payor must, however, withhold 20 percent of the reportable amount if the payee withdraws any funds before the certifications are received. If the acquisition is by means of mail communication, the special rule applies with respect to acquistions before January 1, 1985.
The amount subject to backup withholding is generally the amount subject to information reporting. The amount subject to backup withholding with respect to patronage dividends and payments of certain fishing boat operators is limited generally to the amount paid in cash (or paid by qualified check in the case of Datronage dividends). Special rules are provided'to show the amount subject to backup withholding with respect to short sales, futures contracts, margin accounts, and foreign currency contracts.
In addition, the regulations explain that while withholding from an alternative source generally is not available to payors as under the now. repealed provisions of 10 percent withholding on interest and dividends, payors of payments in property may withhold from an alternative source if the payee is subject to backup withholding.
The regulations prescribe rules governing the confidentiality of the information the payor receives in connection with backup withholding. In addition, the penalty associated with wrongful disclosure is described.
The regulations explain when withholding under section 3406(a)(l) (A) and (D) is requried to stop. In general, if a payor is withholding because he has not received a taxpayer identification number or a required certification, the payor must stop withholding on the date that the payor receives a taxpayer identification number from the payee in the manner required or the date that the payor receives the required certification, as applicable. Under A-17 of § 35a.9999-2 a payor has 30 days in which to treat a taxpayer identification number or required certification as having been received.
The regulations also explain the circumstances in which erroneously withheld amounts may be refunded to the payee. In general, a payor may refund taxe3 to the payee if, due to the payor's error, the payor improperly withholds. A payor may not refund taxes withheld due to a payee's error or failure to provide a taxpayer. identification number or a required certification. For example, if a payor withholds because no taxpayer identification number has been received by the payment date, the payor may not refund the tax to the payee even though the payee subsequently furnishes the taxpayer identification number in the manner required to the payor before an information return is required to be made. In this situation, the payor properly withheld. A payor may only refund the tax if the payor has made an error in withholding.
The regulations provide that if a payor is required to withhold, the payor is required to make an information return and is required to furnish a statement to . the recipient showing the amount paid and the amount of tax withheld. Thus, the payor is required to make an information return whenever the payor imposes backup withholding even though the amount of the payment is less than the minimum amount that generally must be paid before an information return is required to be made.
The regulations also provide rules for determining whether a payor has exercised due diligence with respect to an account opened or an instrument acquired after December 31, 1983.
Several persons questioned whether various types of interest payments which are not subject to information reporting under section 6049 are, nevertheless, subject to backup withholding. If a payment is not subject to information reporting, it is not subject to backup withholding. These regulations generally do not change any information reporting responsibilities under section 6049. For example, interest which is exempt from taxation under section 103 (relating to certain governmental obligations) is not a reportable payment. If the holder of a tax exempt obligation provides written certification to the payor that the interest payment is exempt from taxation, the payor is not required to make an information return under § 1.6049-5(b)(l)(ii). Because such a payment is not subject to information reporting, the payor is not required to impose backup withholding. Similarly, interest paid by an individual on its own obligation (i.e., a mortgage) is not a reportable payment under § 1.6C49-5(b)(l)(i) and, accordingly, the individual has no backup withholding responsibilities. The result is the same irrespective of whether such interest is collected on behaif of the holder of the obligation by a middleman. Amounts paid with respect to repurchase agreements, however, are reportable under section 6049 and accordingly backup withholding applies to such reportable interest amounts. Thus, as with any account that is not a pre-1984 account, the payee is required to make the certifications described in A-32 of § 35a.9999-l with respect to repurchase agreements.
Clarification has also been requested with respect to the application of backup withholding to original issue discount. Answer 15 of § 35a.9999-2 restates that the amount of original issue discount includible in the holder's gross income is treated as a payment of interest under section 6049(d)(6) and § 1.6049-5(c). Original issue discount is, therefore, subject to backup withholding. Answer 15 of § 35a.9999-2 also provides that the rules of 10 percent withholding on interest and dividends shall apply for purposes of determining the amount of original issue discount subject to backup withholding. Thus, backup withholding only applies to original issue discount when a cash payment is made to the payee, such as a payment of stated interest, or at redemption of the obligation at maturity. When interest payments are made on a long-term registered obligation with original issue discount, backup withholding applies to the stated interest plus the amount of original issue discount includible in ths gross income of the holder during the calendar year (although the amount to be withheld cannot exceed the cash paid). In the case of a short-term obligation or a long-term obligation in bearer form, backup withholding with respect to original issue discount applies only at maturity of the obligation. At maturity of a long-term original issue discount obligation in bearer form, backup withholding applies only with respect to the amount of original issue discount includible in gross income of the holder for the calendar year in which the obligation matures.
If a person purchases an original issue discount obligation from another holder, the purchaser generally does not have to impose backup withholding. If, however, a broker was involved with respect to the sale of the obligation and was required to make an information return under section 6045, the broker would be required to impose backup withholding on the gross proceeds of the sale of the obligation. Similarly, if a person purchases a bond between interest payment dates, backup withholding generally only applies when the interest i3 paid. If however, a broker was involved with respect to the sale of the obligation and was required to make an information return under section 6045, the broker would be required to impose backup withholding on the gross proceeds of the sale of the obligation.
Clarification has also been requested with respect to readily tradable instruments. A payor may assume that the taxpayer identification number received from a broker with respect to a readily tradable instrument is furnished in the manner required unless and until the broker notifies the payor otherwise as required in A-41 of § 35a.9999-l. If the broker notifies the payor that the payee is subject to backup withholding, the payor generally is required to impose backup withholding and is required to notify the payee as provided in A-39 of § 35a.9999-l and A-18 of § 35a.9999-2 that backup withholding has commenced, or will commence. For purposes of backup withholding, the term readily tradable instrument includes shares in a mutual fund. For purposes of A-41 of § 35a.9999-l, the term "transfer instructions" includes account registration instructions transmitted by a broker with respect to acquisitions of shares in a mutual fund.
With respect to the manner of delivery of Forms 1099 of reportable interest or dividend payments made in 1984 and in subsequent years, a payor of such payments is required either to deliver personally an .official Form 1099 or to mail the form in a separate first-class mailing to the payee. If a payor of reportable interest or dividends made in 1984 does not personally deliver or mail the Form 1099 in a separate first-class mailing to the payee, the payor shall be considered to have failed to furnish the required statement to the payee, and the payor will be subject to a $50 penalty for each failure under section 6678. The only material that may be included in the separate mailing of Form 1099 is information relating to solicitation of the payee's correct taxpayer identification number. Payors may not include Form 1099 in the same envelope used to mail a payment such as where a United States savings bond is redeemed by mail. Payors are not required to send a separate Form 1099 for each interest or dividend payment but may aggregate payments made to a payee during a calendar year on one Form 1099. Payors will be allowed to use a substitute Form 1099 provided the specifications of the applicable Revenue Procedure are followed.
Nonapplicability of Executive Order 12291
The Treasury Department has determined that these temporary regulations are not subject to review under Executive Order 12291 or the Treasury and OMB implementation of the Order dated April 29, 1983.
Regulatory Flexibility Act
No general notice of proposed rulemaking is required by 5 U.S.C. 553 (b) for temporary regulations. Accordingly, the Regulatory Flexibility Act does not apply and no Regulatory Flexibility Analysis is required for this rule.
Drafting Information
The principal authors of these regulations are Diane Kroupa, Bruce Jurist, Pam Olson, and Yerachmiel Weinstein of the Legislation and Regulations Division of the Office of the Chief Counsel, Internal Revenue Service. Personnel from other offices of the Internal Revenue Service and the Treasury Department participated, however, in developing the regulations on matters of both substance and style.
List of Subjects in 26 CFR Part 35a
Employment taxes, Income taxes, Backup withholding, Interest and Dividend Tax Compliance Act of 1983.
Adoption of amendments to the regulations. Accordingly, Part 35a is amended as follows:
Paragraph 1. Section 35a.9999-3 is added immediately after § 35a.9999-2 to read as follows:
§ 35a.9999-3 Questions and answers concerning backup withholding.
The following questions and answers principally concern the backup withholding requirement with respect to reportable payments. These requirements are issued under the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 369):
In General
Requirement to Withhold
Amounts are considered paid, however, upon withdrawal or crediting. If a bank credits interest on savings accounts only on the last day of each month or when the account is closed, then backup withholding applies at the time interest is paid on the last day of each month and when the account is closed.
When bonds are sold between interest payment dates, the portion of the sales price representing interest accrued to the date of sale is not considered to be a payment of interest for purposes of section 6049, but will be considered a reportable payment under section 6045. Therefore, if the gross proceeds of the sale are subject to backup withholding under A-12 of § 35a.9999-2, 20 percent of the sales price, including the portion representing accrued interest, will be subject to backup withholding.
In the case of stock for which the record date is earlier than the payment date, the dividend is considered paid on the payment date. For example, if a corporation declares a dividend on September 1 to the record holders as of September 12, and the dividends are payable on October 12, backup withholding applies on October 12 (the payment date). In the case of a corporate reorganization, if a payee is required to exchange stock held in the former corporation for stock in the new corporation before the dividends which have been paid with respect to the stock in the new corporation will be provided to the payee, the dividend is considered paid on the payment date without regard to when the payee actually exchanges the stock and receives the dividend.
If a payor (such as a money market fund) computes interest or dividends daily but credits the interest or dividends on the last day of each month, then backup withholding applies on the last day of each month. If a payor computes and credits interest or dividends daily, backup withholding applies daily.
With respect to any reportable payment other than reportable interest or dividends, backup withholding applies at the time the payment is made or in the case of a transaction reportable under section 6045 when the amount subject to backup withholding is determined. Except in the case of forward contracts, regulated futures contracts, and security short sales, the amount subject to backup withholding in the case of a transaction reportable under section 6045 is determined on the date of the sale or exchange. See § 1.6045-1 (d)(4) and (f)(3) of the Income Tax Regulations for the applicable sale or exchange date and A-23 through A-25 and A-27 for special rules applicable to forward contracts, regulated futures contracts, security short sales, and issuer payment of debt securities. The date by which the payor is required to make an information return is irrelevant for purposes of determining when the payment is made and thus subject to backup withholding.
In the case of a middleman required to withhold tax, rules similar to § 31.3453(b)-l (b) of the Employment Taxes and Collection of Income Tax at Source Regulations shall apply. In the case of a United States savings bond, see § 1.6049-4(d)(9) of the Income Tax Regulations.
Payments and Amounts Subject to Backup Withholding
Backup withholding shall apply to the amount of any dividend available to the shareholder, or credited to the shareholder's account. At the discretion of the payor, backup withholding need not be applied: (1) To any excess of trie fair market value of the shares of stock received by the shareholder or credited to the shareholder's account over the purchase price of such shares (including additional shares acquired by the shareholder at a discount in connection with the dividend distribution) or (2) to any fee which is paid by the payor in the nature of a broker's fee for purchase of the stock or service charge for maintenance of the shareholder's account. The payor must, however, treat such excess amounts and fees on a consistent basis for each calendar year. Thus, the payor is not required to impose backup withholding on any amount in excess of the actual cash value of the dividend declared which the payee would have received had the payee not been a participant in the dividend reinvestment plan.
The foregoing exceptions do not apply to backup withholding on gross proceeds reportable under section 6045.
If a payee (whose relationship with or membership in a cooperative was established after December 31, 1983) fails to certify that the payee is not subject to backup withholding due to notified payee underreporting, the amount subject to backup withholding is the amount of any payment reportable under section 6044 that is paid in money or by qualified check, but only if 50 percent or more of the reportable amount is paid in money or by qualified check. Therefore, in the case where there has been a payee certification failure, if a payment is made 50 percent or more in cash and by qualified check, the payor is required to withhold 20 percent of the amount of the cash and qualified check. If less than 50 percent of the payment is paid in cash or by qualified check, no amount is subject to backup withholding. For example, if a cooperative pays a patronage dividend consisting of $350 in cash, $250 by a qualified check, and $400 in a qualified written notice of allocation, 20 percent of $600 (the amount paid in money and by qualified check) is required to be withheld if there is a payee certification failure. If $100 were paid in cash, $250 by a qualified check, and $650 in a qualified written notice of allocation, however, the payment would not be subject to backup withholding even though there is a payee certification failure because less than 50 percent of the patronage dividend is paid in cash or by qualified check.
Amounts Subject to Reporting Under Section 6041 or 604l A(a)
The provisions of § 31.3452(c)-l of the Employment Taxes and Collection of Income Tax at Source Regulations shall apply for the purpose of determining whether a payee to whom a payment is made is subject to information reporting and backup withholding. For example, during 1984, payor K, in the course of its trade or business makes a payment of rent of $700 to R Inc. for the use of premises owned by R Inc. Under § 1.6041-3(c) of the Income Tax Regulations payments to a corporation are not subject to information reporting (except in the ca3e of certain payments not relevant here). Under § 31.3452(c)-l(b)(2) of the Employment Taxes and Collection of Income Tax at Source Regulations, K may treat R Inc. as a corporation because its name contains the unambiguous expression of corporate status, "Inc." Because the payment of rent to R Inc. is not subject to information reporting, it is not subject to backup withholding. If, however, K made the payment of rent to S Company, K would not be authorized to treat S Company as a corporation because "company" is not an unambiguous expression of corporate status. See § 31.3452(c)-l(b)(2) of the Employment Taxes and Collection of Income Tax at Source Regulations. Accordingly, K would be required to make an information return with respect to the payment under sections 6041 and withhold 20 percent of the payment to S Company, if S Company did not furnish a taxpayer identification number to K.
For purposes of information reporting and backup withholding, (1) the reportable gambling winnings is the amount paid with respect to the amount of the wager reduced, at the option of the payor, by the amount of the wager, and (2) amounts paid with respect to identical wagers are treated as paid with respect to a single wager for purposes of calculating the amount of proceeds from a wager. The determination of whether amounts paid with respect to a single wager are identical shall be made under the rules of § 31.3402(q)-(l,)(c)(l)(ii) of the Employment Taxes and Collection of Income Tax at Source Regulations. In addition, until further regulations are issued, gambling winnings in excess of $6OO are reportable only if the payout is based on betting odds of 300 to 1, or higher. The applicability of the odds requirement to information reporting and backup withholding is being studied by the Service and is subject to change in further regulations. Notwithstanding the odds requirement, winning from bingo, keno, and slot machines are subject to backup withholding if reportable under § 7.6041-1 of the temporary Income Tax Regulations.
Definition of a pre-1974 Account
If a shareholder is enrolled before January 1, 1984, in a dividend reinvestment program to purchase additional shares of the corporation sponsoring the program, the shares acquired through the program are considered a pre-1984 account, in the discretion of the payor. In the case of a qualified employee trust that distributes instruments in kind, any instrument distributed from the trust will be considered a pre-1984 account with respect to employees who were participants in the plan before January 1, 1984. Similarly, when a payor offers participants in a plan the opportunity to purchase stock of the payor after a specified time using the money that the payee invested during that period of time, the stock so purchased after December 31, 1983, shall be considered a pre-1984 account with respect to participants in the plan who either owned shares or invested money in the plan before January 1, 1984.
An instrument with respect to which a broker is the payor is a pre-1984 account if the brokerage account in which the instrument is held is not a "post-1983 account." Answer 41 of § 35a.9999-l describes generally the manner of determining whether a brokerage relationship is a post-1983 account. In addition, a brokerage relationship will not be treated as a post-1983 account if (i) a broker redeems or repurchases securities which were acquired by the seller prior to January 1, 1984, and (ii) either (A) the issuer of the securities is the broker obligated to make an information return under section 6045 or (B) the broker was obligated during 1983 to redeem the securities.
Brokerage Accounts and Transactions
The payor must include the amount withheld and the amounts subject to withholding, in addition to the amounts otherwise reportable under section 6045, on the Form 1099-B filed with respect to a customer who is subject to backup withholding. The determination of whether the customer is subject to backup withholding should be made at the time of (1) the cash or property withdrawals or (2) the relevant year-end, whichever is applicable.
For purposes of § 1.6045-l(c)(5)(i) (c) and [d], unrealized profit in a foreign currency contract is determined by comparing the contract price to the broker's price for similar contracts at the close of business of the relevant year. Appropriate additions will be made to § 1.6045-l(c) of the Income Tax Regulations in the near future. For rules determining the amount subject to backup withholding under § 1.6045-l(c)(5), see A-23.
Special Rules With Respect to Readily Tradable Instruments
The special.rule described in the preceding paragraph shall also supply to acquisitions that are effected before January 1, 1985, by mail communication. With respect to accounts or instruments acquired by mail or after January 1, 1985, the payor is required to impose backup withholding on the reportable interest or dividend payments if the payee has not provided the required Certifications at the time that the first reportable payment is made.
Foreign Transactions
In accordance with the foregoing, the Service will amend § 1.6045-l(g) of the Income Tax Regulations to indicate that a foreign person need make no express representations to a broker concerning the application of section 877 or section 6013 (g) or (h) (although a person with respect to whom a section 6013 (g) or (h) election is in effect may not make the representation in (1) above that he is not a resident of the United States). These amendments will apply with respect to substitute forms prepared by the broker, as well as to the Form W-8 (which is being developed by the Service for use under the requirements both of § 1.6049-5(b)(2)(iv) and § 1.6045-l(g)(l) of the Income Tax Regulations). Subject to A-32, all other provisions of § 1.6045-l(g) of the Income Tax Regulations will remain in effect.
Section § 1.6049~5(b)(2) of the Income Tax Regulations will be amended to reflect the modifications made by this A-33.
For purposes of section 6O41(a). a foreign branch of a United States bank may treat a person as being neither a citizen nor a resident of the United States if the bank has evidence in its records to such effect (provided it does not have actual knowledge that the evidence is false). Such evidence may include a written indication from the payee (e.g., appearing on an account application form) that the payee is neither a citizen nor a resident of United States or an affidavit from an employee of the United States bank stating that the employee knows that, or that the payee has represented orally that, he is neither a citizen nor a resident of the United States. The mere fact, however, that the payee has provided an address outside the United States is insufficient evidence to establish for this purpose that the payee is neither a citizen nor a resident of the United States.
Foreign source interest payments made on deposits outside the United States by foreign branches of United States banks to United States persons, although reportable payments under section 6041(a), will not be subject to backup withholding beginning January 1, 1984. However, the issue of whether backup withholding should be applied with respect to such payments is presently under further consideration. If backup withholding is subsequently determined to be appropriate, such will be provided in future regulations. Backup withholding, in that case, would apply no earlier than July 1, 1984, and would apply on a prospective basis only. Payments of interest on deposits of United States persons with foreign branches of foreign banks similarly will not be subject to backup withholding beginning January 1, 1984.
If the first payee named on the account, but not every joint payee, provides the verification of foreign status referred to in this A-35, backup withholding shall commence unless any one of the joint payees has provided a taxpayer identification number to the payor in the manner otherwise required in §§ 35a.9999-l and 35a.9999-2. This is contrary to the general rule of section 3406(h)(3), which would require backup withholding to commence unless a taxpayer identification number is obtained from the first payee listed in the payment.
Payments of dividends to United States persons by a foreign corporation which are not exempt from information reporting under § 1.6042-3(b)(l) (relating to payments by a foreign corporation that is not engaged in business in the United States and that does not have an office or place of business or a fiscal or paying agent in the United States) will nevertheless not be subjact to backup withholding beginning January 1, 1934. However, the issue of whether backup withholding should be applied with respect to such payments is presently under further consideration. If backup withholding is determined to be appropriate, such will be provided in future regulations. Backup withholding, in that case, would apply no earlier than July 1, 1984, and would apply on a prospective basis only.
Subject to the foregoing provisions concerning the receipt of wire and other electronic transfers, a bank or similar financial institution is generally considered to complete the acts necessary to effect payment of interest on its deposits at the branch or office at which it credits the interest to the account of the payee or at which payment is made in cash. However, in no event shall interest be considered to be paid for purposes of section 6049 at a branch or office of the financial institution unless all the following conditions are met: (1) The branch or office is a permanent place of business which is regularly maintained, occupied, and used to carry on a banking or similar financial business, (2) the business is conducted by at least one employee of the branch or office who is regularly in attendance at such place of business during normal business hours, and (3) the branch or office receives deposits of funds from the public and in addition also engages in one or more of the other activities listed in 5 1.864-4(c)(5)(i) of the Income Tax Regulations.
In the case of a coupon bend (including a certificate cf deposit with detachable interest coupons), the acts necessary to effect payment of interest are considered to be completed within the United States either if: (1) A coupon is presented to a payor or middleman within the United States (regardless of whether the funds paid are credited to an account of the payee maintained outside the United States); or (2) the coupon is presented at an office of a payor or middleman outside the United States but the interest on the coupon is credited to an account of the payee maintained with another office of the payor or middleman within the United States. The application of the provisions of this A-37 will be illustrated by examples to be published in future regulations.
Refund of Erroneously Withheld Amounts
If a payor withholds from a payee after the payee provides a taxpayer identification number or required certification to the payor but before the payor has processed the number or required certification (i.e., prior to the time that the payor is treated as having received the number or certification under A-17 of § 35a.9999-2), the payor may, in its discretion, treat the amount withheld as an amount erroneously withheld and refund it to the payee. If a payor withholds, however, because the payor has not received a taxpayer identification number or required certification and the payee subsequently provides a taxpayer identification number or the required certification to the payor, the payor may not refund the tax to the payee because the payor properly imposed backup withholding. The amount withheld is a credit against tax then the payee may take into account in computing estimated tax payments and may claim on the payee's income tax return.
If the payor has not deposited the amount of the tax prior to the time that the refund is made to the payee, the payor shall not deposit the amount of the tax improperly withheld. If the amount of the improperly withheld tax has been deposited prior to the time that the refund is made to the payee, the payor may adjust any subsequent deposit of tax collected under chapter 24 of the code which the payor is required to make in the amount of the tax which has been refunded to the payee. A payor shall not report on a Form 1099 as tax withheld any amount of tax which the payor has refunded to a payee.
When Backup Withholding Stops
Confidentiality
Miscellaneous
A payor also will be considered to have exercised due diligence with respect to a readily tradable instrument that is not a pre-1984 account if the payor (1) uses a taxpayer identification number furnished by a broker or (2) records on its books a transfer to which the payor was not a party. In addition, a payor with respect to an account or instrument that is not a pre-1984 account will be considered to have exercised due diligence if the payee has complied with the requirements of A-18 of § 35a.99.99-2 (exception for a payee who is waiting for receipt of a taxpayer identification number), provided that the payor imposes backup withholding if the payee fails to provide a taxpayer identification number in the manner and within the period required by A-18 of § 35a.9999-2.
When a broker notifies the payor that a payee failed to cerfity or furnish a taxpayer identification number, the payor will be considered to have exercised due diligence if the payor: (1) Imposes backup withholding if the payee did not certify his taxpayer identification number to the payor, (2) provides notice to the payee as provided in A-39 of § 35a.9999-l and A-18 of § 35a.9999-2, and (3) encloses a postage paid reply envelope.
In addition, to have exercised due diligence, a payor mu3t use the same care in processing a certified taxpayer identification number provided by a payee that a reasonably prudent payor would use in the course of the payor's business in handling account information, such as account numbers and account balances. With respect to window transactions (a3 defined in A-42 of § 35a.9999-l and A-9 of § 35a .9999-2), a payor shall be considered to have exercised due diligence only if it uses the taxpayer identification number provided by the payee. If no number is provided, the payor will not be considered to have exercised due diligence.
§35a.9999-2 [Amended]
Par. 2. In FR Doc. 83-31748, found at page 53111 (Nov. 25, 1983) the second sentence of A-21 of § 35a.9999-2 is amended to provide as follows: Backup withholding also is not required with respect to any other reportable payment made to an exempt recipient described in § 31.3452(c)-l (b) through (p) of the Employment Taxes and Collection of Income Tax at Source Regulations, except in the case of (1) payments with respect to barter exchange transactions reportable under section 6045, and (2) payments reportable under sections 6041, 6041A, and 6050A.
There is a need for immediate guidance with respect to the provisions contained in this Treasury decision. For this reason, it is found impracticable to issue it with notice and public procedure under subsection (b) of section 553 of Title 5 of the United States Code or subject to the effective date limitation of subsection (d) of that section.
This Treasury decision is issued under the authority contained in section 3406 (a), (b), (c), (e), (g), (h), and (i), section 6041, section 6041 A(a), section 6042(a), Secton 6044(a), section 6045, section 6049 (a], (b). and (d), section 6103(q), section 6109, section 6302(c), section 6676, and section 7805 of the Internal Revenue Code of 1954 (97 Stat. 371, 372, 373, 376, 377, 378, 379, 26 U.S.C. 3406 (a), (b), (c), (e), (g), (h), and (i); 68A Stat. 745, 26 U.S.C. 6041; 96 Stat. 601, 26 U.S.C. 6041A(a); 96 Stat. 587, 26 U.S.C. 6042(a); 96 Stat. 587, 26 U.S.C. 6044(a); 96 Stat. 600, 26 U.S.C. 6045; 96 Stat. 592, 594, 26 U.S.C. 6049 (a), (b), and (d); 90 Stat. 1685, 26 U.S.C. 6103(q); 75 Stat. 828, 26 U.S.C. 6109; 68A Stat. 775, 26 U.S.C. 6302(c); 68A Stat. 917, 26 U.S.C. 7805) and in sections 104,105, and 108 of the Interest and Dividend Tax Compliance Act of 1983 (97 Stat. 369, 371, 380, and 383).
Roscoe L. Egger, Jr.,
Commissioner of Internal Revenue.
Approved: December 16, 1983.
John E. Chapoton,
Assistant Secretary of the Treasury.
[FR Doc 83-33848 Filed 12-16-83: 4:53 pm]
BILLING CODE 4830-01-M
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 35a
[T.D. 7933]
Temporary Employment Tax Regulations Under the Interest and Dividend Tax Compliance Act of 1983; Backup Withholding
AGENCY: Internal Revenue Service, Treasury.
ACTION: Temporary regulations.
SUMMARY: This document supplements the temporary regulations relating to backup withholding. Changes to the applicable tax law were made by the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 369). These regulations affect brokers with respect to reportable gross proceeds and provide them with the guidance necessary to comply with the law.
DATE: The temporary regulations are effective for payments made after December 31, 1983.
FOR FURTHER INFORMATION CONTACT: Diane Kroupa of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, D.C. 20224, 202-566-3590, not a toll-free call.
SUPPLEMENTARY INFORMATION:
Background
On October 4, 1983, the Federal Register published Temporary Employment Tax Regulations under the Interest and Dividend Tax Compliance Act of 1983 (26 CFR Part 35a) under sections 3406 and 6676 of the Internal Revenue Code of 1954 (26 CFR Part 35a.9999-l; 48 FR 45362). Additional temporary regulations were published in the Federal Register on November 25, 1983 (26 CFR Part 35a.9999-2; 48 FR 53104) and on December 20,19S3 (26 CFR Part 35a.9999-3; 48 FR 56330). Those regulations were published to conform the regulations to the statutory changes enacted by the Interest and Dividend Tax Compliance Act of 1983 (97 Stat. 369). These regulations supplement 26 CFR Part 35a.9999-3 (December 20, 1983). by adding Question (Q) and A-28B.
These temporary regulations, presented in question and answer format, are intended to provide guidelines upon which brokers may rely in order to resolve questions specifically set forth herein. However, no inference should be drawn regarding issues not raised herein or reasons certain questions, and not others, are included in these regulations.
Explanation of Provisions
These regulations provide transition rules applicable to backup withholding en gross proceeds reportable by brokers under section 6045. In summary, the regulations provide that, for purposes of backup withholding on gross proceeds, the written certification requirement for post-1983 accounts may be delayed, at the broker's option, until March 31, 1984. Thus, a customer who opens an account after December 31, 1983, and who consummates a sale prior to April 1, 1984, will not be subject to backup withholding, provided that he furnishes a taxpayer identification number to the broker prior to the sale.
In addition, until March 31, 1984, a broker may give customers with pre-1984 accounts, who have not furnished taxpayer identification numbers, 30 days after a sale to provide their numbers, without being subject to backup withholding. Until such a customer provides a number, however, the customer is not permitted to withdraw the cash proceeds from the account. If no number is furnished within 30 days after the sale, the broker must withhold 20 percent of the reportable gross proceeds on the 31st day.
Nonapplicabiiity of Executive Order 12291
The Treasury Department has determined that these temporary regulations are not subject to review under Executive Order 12291 or the Treasury and OMB implementation of the Order dated April 29, 1983.
Regulatory Flexibility Act
No general notice of proposed rulemaking is required by 5 U.S.C. 553(b) for temporary regulations. Accordingly, the Regulatory Flexibility Act does not apply and no Regulatory Flexibility Analysis is required for this rule.
Drafting Information
The principal author of these regulations is Diane Kroupa of the Legislation and Regulations Division of the Office of the Chief Counsel, Internal Revenue Service. Personnel from other offices of the Internal Revenue Service and the Treasury Department participated, however, in developing the regulations on matters of both substance and style.
List of Subjects in 26 CFR Part 35a
Employment taxes, Income taxes, Backup withholding. Interest and Dividend Tax Compliance Act of 1983.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR Part 35a is amended as follows:
PART 35a—[AMENDED]
Section 35a.9999-3 is amended by adding new Question Q-28B and Answer A-283 immediately after A-28A of that section. These added provisions read as follows:
§ 35a.9999-3 Questions and answers concerning backup withholding.
* * * * *
Second, until April 1, 1984, the gross proceeds from a sale made through a pre-1984 account, by a customer who has not provided a taxpayer identification number, will not.be subject to backup withholding, at the broker's option, provided that (1) the customer furnishes his number to the broker within 30 days after the date of the sale, and (2) the customer does not withdraw the proceeds of the sale prior to the time his taxpayer identification number is furnished to the broker (or backup withholding is applied). For purposes of the preceding sentence, an investment of the cash proceeds shall be considered a withdrawal by the customer; however, investment of the proceeds in other property shall be permitted if, at all times during the 30-day period, at least 20 percent of all gross proceeds reportable under section 6045 are held in cash within the customer's account by the broker. If the customer does not furnish his taxpayer identification number within 30 days after the date of sale, the broker must withhold 20 percent of all reportable gross proceeds on the 31st day after the date of the sale.
If, with respect to forward contracts, regulated futures contracts, security short sales, or issuer payment of debt securities, the broker applies backup withholding on a date other than the sale date (see A-23 through A-25 and A-27], the rules of this A-28B shall apply as if any date on which the broker determines whether backup withholding applies were a sale date.
* * * * *
There is a need for immediate guidance with respect to the provisions contained in this Treasury decision. For this reason, it is found impracticable to issue it with notice and public procedure under subsection (b) of section 553 of Title 5 of the United States Code or subject to the effective date limitation of subsection (d) of that section.
This Treasury decision is issued under the authority contained in section 3406 (a), (b), (c). (e), (g), (h), and (i) and section 6045 of the Internal Revenue Code of 1954 (97 Stat. 371, 372, 373, 376, 377. 378, 379, 26 U.S.C. 3406 (a), (b), (c), (e), (g). (h). and (i); 96 Stat. 600, 26 U.S.C. 6045) and in section 104 of the Interest and Dividend Tax Compliance Act of 1983 (97 Stat. 369, 371).
Roscoe L. Egger, Jr.,
Commissioner of Internal Revenue.
Approved:
Ronald A. Pearlman,
Acting Assistant Secretary of the Treasury.
December 29, 1983.
[FR Doc. 83-34234 Filed 12-29-83: 4:48 pm]
BILLING CODE 4630-01-M
* Backup withholding need not be imposed until March 31, 1984 (See discussion of January 3, 1984, ruling which follows).